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[NOVEMBER
The Nature of the Firm
By R. H. COASE
ECONOMICtheory has suffered in the past from a failure
to state clearly its assumptions. Economists in building
up a theory have often omitted to examine the foundations
on which it was erected. This examination is, however,
essential not only to prevent the misunderstanding and
needless controversy which arise from a lack of knowledge
of the assumptions on which a theory is based, but also
because of the extreme importance for economics of good
judgment in choosing between rival sets of assumptions.
For instance, it is suggested that the use of the word “ firm ”
in economics may be different from the use of the term
by the “plain man.”l Since there is apparently a trend
in economic theory towards starting analysis with the
individual firm and not with the industry,2 it is all the
more necessary not only that a clear definition of the word
“firm ” should be given but that its difference from a
firm in the “real world,” if it exists, should be made clear.
Mrs. Robinson has said that “ t h e two questions to be
asked of a set of assumptions in economics are: Are they
tractable ? and : Do they correspond with the real world ? ”3
Though, as Mrs. Robinson points out, “ more often one set
will be manageable and the other realistic,” yet there may
well be branches of theory where assumptions may be
both manageable and realistic. It
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