Why do firms exist? Strangely, no-one appears to have asked this question until a 27 year-old economist did so in 1937.
Ronald Coase published his answer in The Nature of the Firm, now considered a seminal text. He studied the circumstances that led entrepreneurs to hire people as employees instead of simply contracting jobs out to traders and came up with the answer we now simply refer to as transaction costs. People are hired when the various associated costs are lower than they would be otherwise.
Here's a similar sounding question, but one that is actually fundamentally different. What is the meaning / the purpose of business?
Coase needed to look no further than economics to explain why firms exist. Their existence is a binary thing. But any question seeking to address meaning and purpose encompasses philosophy, sociology, and politics.
Unavoidably, any answer is framed in terms of ... What's best? What's optimum? Why? How? And for whom?
The answer was in fact framed economically for a long time in terms known as shareholder value, and perhaps Coase's question and answer influenced this blinkered perspective. But we've found and are still finding that a different answer can lead to superior economics, and not just in terms of profitability but in terms of the triple bottom line – people, planet and profit.
Euler Partners' just published its sense Summer 2016 report, The meaning of business. Available here as PDF and also on Medium.com. If you're frustrated with today's typical responses to this question, and / or if you want to build sustainable business, you'll find the report provoking.
Image credit: By Leo Reynolds, CC BY-NC-SA 2.0
