The Legal Nature of the Firm and the Myth of the Firm-Market Hybrid

Abstract

Many past economists drew a sharp conceptual distinction between the firm and the market. For example, Smith and Marshall recognised the legal nature and structure of the firm, and saw it as having important economic consequences. However, since the 1970s, many economists and sociologists have argued that the boundaries of the firm are indistinct. Ideas emerged of ‘internal markets’ within firms, of the ‘quasifirm’, of ‘hybrid firms’ and of firms as ‘quasi-markets’. This article re-examines the formal, legal conception of the firm. It is argued that there is no good reason to abandon this conception, even in the light of relational contracting, networking, subcontracting and other developments. To avoid confusion, additional terms should be used such as ‘supplier network’ or ‘conglomerate’ to describe these phenomena, rather than abandoning a legally-based definition of the firm. With this clarified definition, ‘internal markets’ and ‘hybrid firms’ disappear from view.