Theory of the Firm

Economists tend to use the word ‘firm’ to describe most workplaces, except charities and civil service. Simply put, if a group of people who want to work in the same field and have compatible skills work together under the umbrella of a ‘firm’, that speeds things up – they share certain resources, operate from a single location with a single brand, and divide up tasks between them to create a more efficient outcome.

Workplaces face many of the same choices individuals do in terms of how to interact with each other in the economy, particularly in relation to other workplaces involved in a similar sector to their own. They could compete on the open market, collaborate on similar projects, or merge into one, depending on the objectives of the owners.

In a lot of ways, firms have the same rights as people do. They can own property, make contracts, sue and be sued. Although governments can regulate companies, there’s often conflicts of interest among people who have worked across the public and private sector. Aware of their power and under pressure to do more for the community, companies increasingly have things like corporate social responsibility policies to use their power for good – but the fact that the decision to do this is in their hands, rather than in the hands of governments or voters, gives them a considerably large amount of power which we can only influence by choosing whether or not to consume their products.