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1.
Prologue
We try to make sense - and sense has to be made - by inventing patterns and imposing them on selected phenomena and situations. Every system that we construct has a limited range of convenience, but the limits can never be known for certain, and may be unsuspected until we exceed them. Interpretative failure may then provoke the search for new patterns which seem to work where the old patterns do not; but we cannot reliably predict when this will happen, still less the content of our new knowledge, or the consequences of applying it. What we often find is that the acceptance of new patterns which appear to resolve significant difficulties is impeded by conflicts with well-established systems (especially those of wider scope such as universal theories of economic systems or established principles of running a business) which continue to provide comfort in other contexts that seem more important to us. This conception of the incentives and obstacles to the development of knowledge offers a valuable insight into the problems of change in both scientific and economic systems.
2.
Firms
Ronald Coase's work supplies an important example of this obstacle to inventing, accepting and applying new patterns. As he himself observed, 'the firm' was an unexplained element in a theory which demonstrated how economic systems were strictly regulated by markets that were governed by the basic data of preferences, resources and production possibilities. For Lionel Robbins, this was what mattered, and, as Coase (1991b: 53) noted, he deplored the waste of Marshall's abilities on the study of business practices. However Coase escaped Robbins' theoretical influence because he lacked the school qualifications required for the LSE economics programme, and took a commerce degree, where in two years he 'studied a great variety of subjects, devoting very little time to each and inevitably doing no systematic reasoning' (Coase, 1991a: 36-7). He therefore had no exposure to formal price theory: many years later, he observed that 'in 1932, when I formulated my ideas in "The Nature of the Firm", my analytical system, such as it was, came from [Arnold] Plant' (Coase, 1991b: 49). Plant, who had been appointed as a professor of commerce in 1930, was no less...