Abstract
Why do firms exist? The answer to this question has puzzled scholars since at least the 1930s. Given that the invisible hand of the market - with its emphasis on competition and prices - can efficiently co-ordinate among literally millions of people, why would it ever make sense to try to coordinate such exchanges through a firm - with its emphasis on bureaucracy, rules and managerial hierarchies? And yet, firms exist, and they can even prosper. As noted by D. H. Robertson (quoted in Coase 1937:388), firms in the economy exist as "islands of conscious power in [an] ocean of unconscious co-operation, like lumps of butter coagulating in a pall of buttermilk".