The firm, property rights and methodological individualism: some lessons from J.S. Mill

In modern economics, the firm is a means of overcoming the inefficiencies generated by transaction costs and incomplete contracts. Its boundaries, therefore, are the means by which the efficiency of competition can be salvaged. Whether or not agents feel comfortable with the values which underlie various ownership structures remains outside this theory. Moreover, the working of different ownership structures is entirely based on the presumption that agents' motivation (as opposed to incentives) will remain constant. This, of course, is typical of methodological individualism where the analysis is one directional: from the agent to society. However, methodological individualism does not have to be confined to such narrow analytical conceptions. It would still be methodological individualism if social institutions would feedback into the behaviour (motivation) of agents. The main purpose of this paper is to show that a more socially conscious methodological individualism was employed in the analysis of the firm by classical economists like J.S. Mill. I will show that Mill was acutely aware of the significance of the proximity of ownership to the productivity of the operator. However, he was also aware of the function of the larger social context within which the operator worked. While Mill recognised the technological benefits of larger operations (corporations), he also recognised that in an environment where the system repeatedly fails the expectation of the larger body of workers, the gains from large enterprises may be completely undermined. Given Mill's general belief in the progress of humanity and in the possible improvement in the characteristics of individual members of society, he thought that in the future, such large enterprises may work well if ownership was given to all those engaged in the production process. While the work of J.S. Mill is clearly incomplete, he has rightly drawn attention to the neglected interrelationship between social arrangements and economic agents. In this respect, he offers a far more comprehensive insight into the possible cause and boundaries of the firm.