Month February 2013

Earlier this week I attended an Urban Land Institute event about DC’s new development, The Yards on the Anacostia waterfront. This is a 42-acre area which was formerly a manufacturing center for the Navy. In 2003, Forest City Washington purchased the site from the General Services Administration for residential, retail, and office redevelopment. Generally I don’t have strong architectural preferences, but some of the former factories that now have glass curtain walls are looking very cool. During the presentation, I was reminded of Ronald Coase’s 1937 paper, “The Nature of the Firm.” This paper is about knowledge problems, within and outside of the firm. He explains that firms exist, rather than each worker serving as his own contractor, because firms reduce the transaction costs of contracting for individual projects. However, firms face knowledge problems similar to those that government bureaucracies face: In economic theory we find that the allocation of factors of production between different uses is determined by the price mechanism. The price of factor A becomes higher in X than in Y. As a result, A moves from Y to X until the difference between the prices in X and Y, except if so far as it compensates for other differential advantages, disappears. Yet in the real world, we find that there are many areas where this does not apply. If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so. Those who object to economic planning on the grounds that the problem is solved by price movements can be answered by pointing out that there is planning within our economic system which is quite different from the individual planning mentioned above and which is akin to what is normally called economic planning. In the case of The Yard, this […]