Alchian Demsetz (1972) - Production Information Costs And Economic Organization

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Alchian, Armen A. and Harold Demsetz (1972), "Production, Information Costs, and Economic Organization", The American Economic Review, Vol. 62, No. 5. (Dec.), pp. 777-795 pdf


The mark of a capitalistic society is that resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization and this leads to the demand for economic organizations which facilitate cooperation. When a lumber mill employs a cabinetmaker, cooperation between specialists is achieved within a firm, and when a cabinetmaker purchases wood from a lumberman, the cooperation takes place across markets (or between firms). Two important problems face a theory of economic organization - to explain the conditions that determine whether the gains from specialization and cooperative production can better be obtained within an organization like the firm, or across markets, and to explain the structure of the organization.