When Douglas Baird does a talk in a series called "Chicago's Best Ideas," he doesn't mess around. For his talk in the series on February 7, 2006, Douglas examined an idea that led to the only Nobel Prize ever awarded to a faculty member of an American law school - the one given to Ronald Coase in 1991 for his work on, among other things, the nature of the firm. Douglas's CBI (as we affectionately call the entries in this series) was a fascinating foray into Coase's research on and understanding of what a firm is and why it functions the way it does - research done when Coase was still an undergraduate. Douglas kept the full room riveted (no pun intended) by the mystery of why 1930s automobile companies bought and integrated some of their suppliers, but not others. Curious? You should be. Listen to the talk here.
As always, instructions for listening to this podcast are here. The blurb Douglas used for the publicity for his talk is below the fold.
In the fall of 1931, a twenty-year-old undergraduate left England to spend the year in the United States on a traveling fellowship. The trip was in lieu of a final year at the London School of Economics. His research project was both simple and topical. Lenin had boasted that he would turn the Soviet Union into one giant factory. This undergraduate wanted to write an essay explaining why such an ambition was doomed to fail. There were, of course, large firms. Henry Ford built the giant River Rouge Works. Iron ore began at one end, and cars emerged at the other. Nevertheless, it would seem that there had to be some natural limit on the size of an enterprise.
This undergraduate believed that by spending a year touring the United States to interview its entrepreneurs and economists, he would be able to show why factories could not become arbitrarily large. He soon discovered, however, that he had to be able to answer other questions as well. Why were large firms needed at all? What prevented production from taking place through transactions among arbitrarily small firms in the marketplace? Indeed, what was the difference between activity inside a firm and outside it? One could make no progress on his initial question or any of the others without first gaining some purchase on the nature of the firm. This task was quite beyond the reach of an ordinary undergraduate. Ronald Coase, however, was no ordinary undergraduate.
The paper Ronald Coase wrote on his return was The Nature of the Firm. It brought him the Nobel Prize 60 years later and contains the ideas essential to industrial organization and modern law and economics. This talk takes a look back at Coase's journey, what he learned, and the impact it has had.