Firms and markets in this framework are alternative mechanisms for allocating

Firms and markets in this framework are alternative

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action costs (Coase 1937; Williamson 1975, 1985). Firms and markets, in this framework, are alternative mechanisms for allocating labor and other resources and for coordinating production. When transactions are straightforward, are not repeated, and do not require investments in spe- cific assets to be carried out, arms-length transactions governed by prices established in markets are an efficient means of organizing production. However, where outcomes are uncertain, inter- actions are repeated, or transaction-specific investments are required, vertically integrated firms are more efficient than markets for coordinating production. Large, vertically integrated corpora- tions emerged early in the twentieth century to minimize firms’ transactions costs. In particular, it was economically efficient for firms to employ workers and carry out production activities in-house when the costs of bureaucratic monitoring and control of employees were less than the costs of specifying, monitoring, and enforcing contracts with contractors and supplier firms. Hierarchy is also a governance mechanism for managing the conflicting interests of employers and workers (Marglin 1975). In large, hierarchical firms, managers are able to exercise authority over workers and achieve their cooperation in production activities; workers gain the economic security of regular employment, wages, and advancement opportunities (Doeringer and Piore 1971; Jacoby 1985). 1 This section draws heavily on Bernhardt et al. (2016) and on Batt and Appelbaum (2017).
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518 Review of Radical Political Economics 49(4) In the 1970s and 1980s, technological innovations affecting production, transportation, and monitoring activities began to undermine the rationale for organizing production in vertically integrated firms. The rise of mass production technologies and a mass market for these goods in the early years of the twentieth century favored the emergence of large, vertically integrated firms to spread high fixed costs over a large volume of output and raise productivity (Chandler 1977, 1990). Managerial expertise and hierarchical organization proved essential for the internal coordination of production processes and for ongoing improvements in productivity (Helper and Sako 2010). The development of new flexible manufacturing technologies that enabled firms to produce a greater variety of goods in small batches (Piore and Sabel 1984) and new management approaches (Appelbaum and Batt 1994; Jaikumar 1986; MacDuffie 1995) undermined this ratio- nale for the vertically integrated firm. Increased competition as a result of product market deregulation and trade agreements put pressure on firms to reduce costs. Financial deregulation, the rising influence of institutional investors, and the emergence of new financial actors that focused on maximizing shareholder value increased the pressure to sell off assets and reduce headcount (Appelbaum and Batt 2014).
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  • Test, Eileen Appelbaum, Radical Political Economics

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