1. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 1 Lecture II The Problem of Economic Organization

2. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 2 Economies Efficient use of resources –Best use Action Driven by efficiency Decisions: Rational Boundaries or Passion? Transaction Costs –Coordination Costs –Motivation Costs

3. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 3 Coase Background: Theory is an organizing principle for thought, research, discussion, common language… Theory need be not “Correct or Incorrect” Note Demsetz for Class 3 GROUP DISCUSSION OF COASE ARTICLE Group 1-This article is interesting only as part of the history of Organizational Theory

4. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 4 Coase Discussion Group 2-This article was important in its ‘time’, but is largely irrelevant today. Group 3-This article is ‘cutting edge’ thinking with major implications and applications to management theory & practice today. Group 4-This article provides an intellectual framework & explains how that framework might frame our discussions in this course.

5. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 COASE Professor-By not considering the concepts in this article, the theory and practice of management cannot be effectively undertaken. Group 5-This article is misleading and express a contrary view that would be more appropriate for our discussions 5

6. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 6 Coase (continued) Outside The Firm – Price movements direct production – coordinated through a series of exchange transacti0ons on the “Market” (Explain sales at a financial loss) Inside the Firm – The entrepreneur “coordinator” directs production by bringing into being a system of relationships (Efficient v. Market) Essential for tolerance of complexity? Focus on “Efficiency” as a motivating force A firm as a conglomerate of contracts –Continuity – reduce complexity Impact of volatility and pace of change?

7. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 7 A Conceptual Framework (Insight Into Markets and Organizations?) Division of Labor Specialization Coordination OrganizationMarket Information

8. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 8 A Conceptual Framework (Continued) Issues: Price mechanism not sufficient to perform coordination function Organizations are formed to resolve information problems Technology facilities transparency of information – but individuals and organizations tend to hoard information for power and as a store of economic value (short life) Can we understand outsourcing in this context – Has information flow given us new control options?

9. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 9 Efficient market is expected to allocate scarce resources But: Do we need a more complex framework to understand valuation of and allocation of knowledge/information resources? (Intellectual Property, Communication and Analytical Tools, and Human Resources) Any insights from behavioral finance? Any insights from financial crisis? Markets

10. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 10 Not a pure economic problem – Sociology, Psychology, Management, Political Science, Anthropology and other disciplines provide insights and analytical tools. Qualitative and Quantitative Analysis Data v. Implicit Insight re. Decisions Markets (Continued)

11. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 11 Stagnation accelerated after 1950’s Has technology reversed this? Have we broken organizational gridlock? Consider rise of small & fall of large organizations Is group-work a solution? (anti-specialization) Has outsourcing moved the organizational gridlock to geographic areas willing to accept the problems? Where is productivity headed? The Pursuit of Productivity

12. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 12 Consider: 1.The industrial age, specialization and labor unions put restrictions on individual choice as they facilitated higher performance (output). Note: Unions look to regain ‘power’ 2.The service economy offers opportunities for individual skills and initiative Opportunity for controlling individual satisfaction (i.e. individual defines job/work) The Pursuit of Productivity (Continued)

13. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 13 3.Does this put the control of when and at what price goods and services will be exchanged in the hands of the knowledge worker? (Not unlike the historical craftsman) 4.Does the coordination problem take a primary significance? Is industry responding with mass customization? Does this lead to customer designed products and services? - Dell - Unix -……(Autos, UPS.Parts, Amazon The Pursuit of Productivity (Continued)

14. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 14 ORGANIZATIONS have used authority as a coordinating mechanism -- This becomes fuzzy as organization “stars” and “rain makers” are not the holders of authority on the organizational chart MARKETS have used a price mechanism – This becomes fuzzy with emotional or other ‘motivational’ decisions- Entrepreneurs? Organizations

15. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 15 Dealer Markets – inventory Auction Markets – match buyer/seller Specialist/Market Maker – Hybrid Electronic (Black Box Markets) All serve purpose of moving asset from willing seller to willing buyer at an agreed price(value) Multiple models (and Customized Modeling) Can be practical and efficient - Facilitated by technology Financial Markets as an Example of Complexity

16. Lecture 2 – ECON.S-1620 Prof. Charles Moran Copyright 2015 16 What is Efficient Price for MBA? Position Financial Analyst at Consulting Firm Fuzzy Job at.com with IPO Target -2 to 3 years Your own business model to deliver service value to new MBA’s (Social Enterprise) Compensation $100,000+ $50,000 + Options - 0 - Must raise capital Control Ownership