MG458 61898

The emergence of managerial firm
Abstract
There are various theories of the emergence of firms. This essay will first explains how the firm emergence by historical view and then outline the attempt to develop management theory of is. By using the Coasean transaction cost theory and various theories such as principle and agency theory to explain the emergence of managerial firm.

Historical view of firms
Before nineteenth century, there are only corporate type entities such as Hudson Bay Company and the Dutch East India Company which were the important agents of empire. Exclusive rights were given to them to trade and conduct business represent by the government (Willman, 2014). After the industrial revolution took off in Britain, Pollard (1965) stated that there was no management in the revolution. Until the growth of factory in textile industry in England, the management seemed to emerge as an activity. The development is significant at that time and generated the ideas of monitoring, incentives and hierarchy which are the foundations of modern economic theory of firms. The railroad companies were the first modern organizations to develop ‘ extensive hierarchies of managerial and white collar staff’ (Gospel, 2007)。

Various theories of firm and the emergency of management theory
Transaction cost theories and the incomplete contracting approaches were the dominant paradigm in modern theories of the emergence of firm. Coase’s (1937) well-known answer for why firms is necessary if market is efficient is that integrated units, which resources are “directed” toward their best uses, may be cheaper to coordinate due to the “cost of using the price mechanism”—costs for “discovering what the relevant prices are” and “negotiating and concluding a separate contract for each exchange transaction which takes place on a market”. In a competitive market, economizing on these costs is necessary. Thus the main reason to estabilish firms is to avoid certain level of the transaction costs by discovering the relevant prices and the costs of negotiating and writing contracts. Coase (1937) also mentioned that the governments’ interactions such as taxes, price controls will increase the size of firm. This approach has recognized the connection between transaction cost and organizations and also argued that different ways of transactions leads to different cost structures in firms. Coase is the precursor of anti management theories of firms.

Another different theory of the firm is the coalitional or general equilibrium view. Each agents with unique preferences and abilities are treated as heterogeneous. A firm then becomes a coalition of such agents. In the 1960s, the neo-classical theory of the firm was challenged by alternatives theories such as the principal and agent theory. Managers have the incentive to maximise their own profit instead of the whole picture. Principals cannot infer whether the agent behave to maximize the shareholders profit or not. Thus Agency has been the concern of management theorists throughout the 20th century. Taylor was the first modern agency theorist and his work displays awareness of limitations of agency theorist. He argued that five principles were central to the scientific management. Taylor (1923) argued that scientific management is necessary to ensure the worker closely followed the rules under supervision and monetary incentives. Many management theorists emerged in 20t centry also argued that scientific principles is need to be apply to the management of firm and it will result in improvements in efficiency and productivity. In large scale firms in governments and religion, many management techniques such as the theory of resource allocation and human resource management had been developed in the need for scientific management.

Conslusion
The formation of management theories are mainly after the emergency of large corporation in 19th century. Large firms have the most influence on powerful economic and culture. Many economics argued that firms are only economic entities which are nexus of contracts. However, theorists has concerned about the agency throughout the twentieth century. Scientific management is necessary to improve the efficiency and productivity of large firms.

Reference
Pollard, S.(1965); The Genesis of Modern Management: A study of the Industrial Revolution in Great Britain, London, Penguin.
Coase, R. H. 1937. The Nature of the Firm. Economica, 4(16): 386‐405.
Gospel, H. (2007) “The management of Labor and human resources’, pp. 420-47
Nelson, R., and S. Winter. 1982. An Evolutionary Theory of Economic Change. Harvard
University Press: Cambridge, Massachusetts.
Williamson, O. E. 1975. Markets and hierarchies.