If it was the division of labour that leads to increased productivity, labour could just as easily be divided between firms. The fact that pin factories, even with only ten men, still performed all 18 tasks, instead of specialising in just 10 tasks, is clear evidence that there is something special and coordinated about the tasks themselves that arise from the particular capital investments. The tools and machines are designed to be compatible with each other, and if part of the process is done outside the firm, each of the two firms would inevitably be tied to the same compatible capital equipment, and would therefore find gains by merging into a single firm.
Pointer from Mark Thoma.
According to Alchian and Demsetz, Murray’s first sentence is false. If the value of labor is in their combined product, rather than in each individual task, someone must manage the production process and allocate payments to individual workers. Remember, in an Alchian-Demsetz firm, marginal product is not defined.
I agree with Murray that if two firms have complementary capital then there is an incentive to merge, at least if one or both firms does not have a lot of other choices for partners in production. But what Murray sees as the gains from merging firms that use compatible capital equipment also would arise from merging firms whose workers who undertake complementary tasks in a production process.
There are also some products that can’t be sold or are difficult to sell half done. Maybe a PSST theory of the firm is figuring out which theories apply to your firm.
I was watching the NBA playoffs last night (Go Warriors!), and it occurred to me that a professional sports team may be an example of this kind of enterprise. Teams have a lot of organizational capital built up learning how to operate collectively and with synchronization, and the point is for the team to win, and individuals cannot win alone. The individuals all get paid different amounts, sometimes radically so.
However, it seems like assessing individual contributions to team performance and evaluating an athlete’s marginal productivity and figuring out how much people are worth and what to pay them is a more-or-less solved problem insofar as anyone can accomplish that in an environment with some serious fundamental uncertainties.
It’s not so much an issue of a manager trying to figure it all out in isolation. The competitive market environment is also providing additional information of other expert’s assessments in terms of the prices it takes to recruit and retain top talent.