The Nature of the Firm and the limits of Economics.

     

Ronald Coase

University of Chicago Law School

via Wikimedia Commons

https://tinyurl.com/26ffzfkp

This week's Economist includes an article by their Free Exchange columnist, regarding the "The Nature of the Firm," Ronald Coase's classic 1937 work. Despite the belief in the 1990s that economics could command a unified science of business, three decades later, it has not progressed in understanding the inner workings of firms. Neoclassical economic theory primarily focuses on markets and the allocation of scarce resources, but it does not account for the fact that much of the allocation of resources in economies occurs within firms, where employees are directed by administrative fiat rather than price signals. The theory that firms are profit-maximizers is also challenged by the reality of "bounded rationality," as no business could process all the information needed to extract maximum profit.

Economists have made strides in understanding firms through concepts such as team production, incomplete contracts, and the principal-agent problem. However, these theories still fall short of providing practical advice on corporate strategy. Economics often fails to capture the importance of corporate culture, shared values, and pride in the workplace, which are essential to a flourishing business. Moreover, economics is limited in its ability to address the specificity of business problems, as they require detailed knowledge of various fields outside the discipline. While economic ideas can offer some insights, the study of business remains an outpost that economics is unlikely to conquer fully.

It was beyond the scope of the article, but a government agency (or, as a shorthand, an "agency") can also be viewed as a firm responsible for providing public goods or services and implementing policies. Like traditional firms, government agencies coordinate resources and make decisions under the principle of "bounded rationality." The major difference is that these agencies differ in their objectives, as they aim to maximize social welfare and address market failures, rather than seeking profit maximization, but which I would note, makes the insights of the Free Exchange column even more trenchant. Further, because government agencies also face unique challenges in terms of bureaucracy, political influences, and accountability, their efficiency and decision-making processes are even less susceptible to an economics-based analysis. 

While apocryphally attributed to Twain, William S. Burroughs' advice to "write about what you know" leads me to look at my home in light of this. I note, over and over, that the critical issues my community encounters are almost always decided in an interchange and an interplay between firms and agencies. If anything, economics is something of a base meridian used to calibrate during the continuing conversations with multiple actors that are directed by fiat using bounded rationality to either pursue profit or improve social welfare, a problem only marginally susceptible to economics-based analysis. 

Almost all of the important questions instead require detailed knowledge of various fields outside of economics. Indeed, to the extent that economics is used after the point-of-reference stage, it is of limited utility by itself. The dozen other factors noted above, including but not limited to corporate culture, shared values, pride in a workplace, bounded rationality, team production, incomplete contracts, the principal-agent problem, political influence, bureaucracy, accountability, market failure, and social welfare, are generally the factors to address in any analysis of the (for lack of a better phrase) political economy of most local decision-making that I have encountered -- a nice checklist for future reference. 

Carriage Court in Santa Rosa.

"A mobile home park in West Miami, Florida"

By Dr Zak 

https://tinyurl.com/22c4uctp

In Wikipedia, CC BY-SA 3.0

https://tinyurl.com/2y9chhga 

Carriage Court, a mobile home park for seniors in Santa Rosa, it is reported today by the Press Democrat's Marisa Endicott, is being converted to an all-ages park by new management company Harmony Communities. The company claims that the change is necessary for the park to stay afloat and make a profit. However, residents are concerned about potential displacement and culture shift, as many of them rely on fixed incomes and have limited options if costs increase. The change comes in response to Santa Rosa's new mobile home rent control ordinance, which limits how much park owners can raise rent, according to Nick Ubaldi, regional manager for Harmony Communities. 

Residents are also worried about Harmony Communities' track record of litigation over evictions and rent increases. The company is involved in multiple lawsuits across the state and has a reputation for strict rule enforcement and eviction attempts. The Golden State Manufactured-home Owners League has noted that Harmony's "reputation is terrible." The director of communications for Harmony Communities identifies as a crude epithet, Heywood Jablóm, a false name and a classic sign of a bad actor. Indeed, Mariah Thompson, a staff attorney with California Rural Legal Assistance, noted that Harmony Communities will "often just see what they can get away with[.]” 

Mobile home parks, especially in American culture, are stereotypically viewed as lower-income housing for occupants living at or below the poverty line who have low social status. As Wikipedia notes, despite the advances in trailer home technology, the image survives. Residents, especially the elderly, can be targets for unscrupulous business practices. 

Here, Ubaldi is contending that an updated rent control ordinance, designed to protect senior citizens, is in fact the source of senior citizens' distress. This is an obvious attempt to reverse victim and offender, which is harmful to the democratic process, beyond the specific harm it inflicts on the residents of Carriage Court. Sowing confusion and undermining accountability only weakens the norms we all rely upon to effectively address our housing crisis, which is bad and getting worse. Ideas, like housing, are more of a public good, like a forest, than a commercial context, like a marketplace.  We all must recognize that public discourse is vulnerable to the same damage that can be suffered by the woods should the balance between individual advantage and long-term sustainability be violated callously.