The Theory of the Firm

It is impossible to study workers' control of firms without first saying what a firm is. I define a firm as a set of agents supplying inputs to a common production process, where the productive activities of the agents are coordinated through an authority structure and the resulting outputs are sold on a market. Inputs may include labor, physical assets, financial wealth, raw materials, land, or any other resource that can be owned by an individual or group. More will be said about the nature of authority structures later.

In principle, a firm might consist of one person or a household, but I am concerned only with enterprises in which groups of agents come together for the specific purpose of production. The condition that output be sold on a market rules out production activities directed solely toward household consumption. It can be argued that households produce labor itself, and that labor services are often sold on a market. However, I do not address “firms” of this kind.

I do not want to become committed to a purely technological view of the firm, so a common production process is deemed to exist whenever input suppliers are coordinated directly or indirectly by a common authority. In this context, indirect coordination means through a chain of authority relationships rather than by market contracting (this distinction will be discussed shortly).