Amazingly, the Senior Lecturer doesn’t understand Coase on the Firm

We’d all rather hope that someone trying to teach economics in he UK is up to date with one of the foundational pieces of the subject. Ronald Coase on why the firm exists.

The essential answer being that there are costs – and benefits – to doing everything within one organisation, costs and benefits to contracting out functions. The line we draw around the firm depends upon the specific costs and benefits of the specific activity at that specific time.

Ford uses steel. For uses headlights. Ford uses seat covers. Ford uses engines. Which of the four should Ford be making inside the firm of Ford and which should is subcontract out? Where should the line be between Ford and not-Ford?

Depends really. As far as I know the first is definitely subbed out, the second is too. The third didn’t used to be at least – there was a strike by the lady seat cover makers which is a milestone in equal pay gubbins. And engines are made by Ford.

This is the background. So, the Senior Lecturer:

The fact is that outsourced models only save by doing one of three things. Those are providing a worse service; cutting staff costs; or reducing commitment to service renewal (R&D, training, etc). All are fatal to the quality of outcomes over anything but the very short  term. And that’s precisely why this model has to come to an end.

Sigh.

Presumably the NHS is now going to start making its own mops – hey, hospital floors must be cleaned and contracting out doesn’t work. The sausages in the canteens will be made by the NHS. Because contracting out doesn’t work.

Yes, you’re right, Ritchie’s an idiot.

The question about outsourcing is only when is it better and when isn’t it? And it really was Coase who pointed out the basics here.

40 comments on “Amazingly, the Senior Lecturer doesn’t understand Coase on the Firm

  1. I guess he missed Friedman’s pencil story…

    Murphy has never moved on from crayons. You’d have to explain the pencil to him.

  2. What would be amazing is finding a single thing that Mr potatohead understood. So far we’ve ruled out economics, politics, law, statistics, sociology, history, philosophy, accounting, tax and science. Mayhap he is an undiscovered talent in something in the humanities?

  3. I’m a contract trainer. Firms buy my services when they need them and don’t when they don’t. They reduce the costs of employing me full time, which they don’t need and I get flexibility. Win, win,

    yes, he’s a cretin.

  4. Outsourcing has become more possible thanks to technology – hence the rise of the virtual corporation. It can be done badly when firms have not understood the Coasian requirements and outsource something that should be done in house. To claim outsourcing is only done for silly reasons really does show a fundamental lack of understanding of transaction cost economics.

  5. Most of Murphy’s career has been doing outsourced work, either as a consultant or previously in an accountancy firm. Is he really saying that all the work he did then was short-term and damaging to his clients?

    OK, it possibly was, but because it was him doing it and we’ve seen some of the strange gaps in his knowledge. But he’s now admitting it was damaging to his clients.

    All those reports he did, for the TUC etc., should have been done by their own in-house researchers? All the work he did for his clients when he had his own accountancy firm (OK, we’ll exclude the statutory audit, because that has to be external, but most of his work would have been preparing accounts and doing tax returns for his clients) – all damaging?

  6. Does he make is own steel, manufacture his own car, build his own house (having made the bricks of course), grow all his own food, weave his own cloth from his own sheep/cotton plantation, build his own computer and connect to his own communications network? It must be more efficient for him to do all that than sit on his large posterior while others do those things for him in return for money…………

  7. “there was a strike by the lady seat cover makers which is a milestone in equal pay gubbins.”

    Itself misunderstood. If you were a male sewing machinist, Ford paid the same as if you were female.

    On a similar but tangential point, around 98% or workers who die in accidents at work are men. Because generally they are doing more dangerous work. And you might expect more dangerous work to be paid more.

    Gender work death gap.

    Gender work pay gap.

  8. Outsourcing is one of those words like neo-liberal that the left use to mean whatever they want as long as it is negative

  9. On Ford making their own steel, they used to have a blast furnace at Dagenham for that very purpose.

    The fact they have since demolished it suggests that having tested the business model and found it wanting, it is indeed better to outsource.

  10. Lights outsourced: yes to eg Bosch, Hella, Valeo, Stanley

    Also outsourced: air-con/hvac, bearings, brakes, clutches, drveshafts, electrics, gearboxes, instruments, pistons, radiators, suspension, valves wheels & tyres

    Some eg Aston-Martin outsource engine

    Way, way back body panels and chassis/floorpan supplied by Pressed Steel Company

    A car factory is an assembler not a manufacturer.

  11. The fact is that outsourced models only save by doing one of three things. Those are providing a worse service; cutting staff costs; or reducing commitment to service renewal

    An interesting insight into his character. He is absolutely incapable of understanding that people can act in their own interests yet still produce a mutually beneficial outcome. It’s amazing really – he’s pushing 60, claims to be a “political economist” but doesn’t have the simplest understanding of how the real world actually works.

  12. Most of Murphy’s career has been doing outsourced work, either as a consultant or previously in an accountancy firm. Is he really saying that all the work he did then was short-term and damaging to his clients?

    He may not be saying that, but I’d bet coin of the realm that much of the work he did was damaging to his clients.

    There’s a reason he’s playing with choo-choos in Ely, and that reason isn’t that he’s in demand as a Chartered Accountant. Or anything else, for that matter…

  13. Coase wasn’t even correct when he invented his ‘ theory ‘ . To call it ‘ foundational ‘ is simple delusional. Murphy so far as I can tell wasn’t talking about the sort of outsourcing you refer to , but the give away privatisations that have at their heart corruption, inefficiency and fraud. Think again Worstall .

  14. ‘The sausages in the canteens will be made by the NHS.’

    NHS making sausages? Be afraid. VERY AFRAID!

    “Honey, try these solyent sausages; they are really tasty!”

  15. Murphy so far as I can tell wasn’t talking about the sort of outsourcing you refer to , but the give away privatisations that have at their heart corruption, inefficiency and fraud.

    John Boy, to which specific privatizations are you referring to? Without specifics one would be tempted to conclude you’re talking out your ass… Much as Murphy does.

  16. You lot all lose sight of his ability to get other people to give him money for whatever it is that he produces.

    So he’s good at that, correct?

    We might reach some place in our quest to understand the lure of socialism if we understood what it is that he’s good at.

    Get to work my big brained friends, figure that one out.

    Me, I’m in the UK from Canada for a visit and am off to drink warm beer, and plenty of it.

  17. Well, I guess he’s consistent.

    Everything within the state, nothing outside the state.

    That way there’s no outsourcing.

    Jesus. Does he realize that he’s basically saying that even vertical integration is undesirable? That everything – from extraction to final product, including the production of all the tools to do this, to the constructing the buildings your employees work in to generating the electricity – should be under the control of one single management group.

    Because anything else and you’re outsourcing something.

  18. Murphy has disproven Adam Smith. That deserves a nomination for the fake Nobel Prize that economists invented for themselves.

    In other news, organisations (and individuals; we generally don’t make our own shoes or bake our own bread) outsource fo three main reasons;
    Cost reduction
    Capability increase
    Capacity flexibility

    The weighting of each reason is the factor that varies. Cost reduction is nearly always the “table stakes” though.

  19. Unions don’t like outsourcing, unless they are a union that represents the workers doing the outsourcing, so maybe he’s just going round his old paymasters trying to curry favour and drum up some business

  20. Got to witness an interesting bun fight a few years ago when work was being moved around a group of companies, no job losses but different divisions had different unions representing workers so transferred workers had to move unions. Of course the one union was all for it (more compulsory dues) while the other union (losing members) fought it as if it was a lay-off plan

  21. NHS making sausages? Be afraid. VERY AFRAID!

    “Honey, try these solyent sausages; they are really tasty!”

    I wouldn’t worry, the NHS would be incompetent at that too.

  22. BniC said:
    “Unions don’t like outsourcing … so maybe he’s just going round his old paymasters trying to curry favour and drum up some business”

    Yes, but if the union gave him some work, that would be outsourcing. I’m almost hoping one of them pays him to write a report on the evils of outsourcing, just so that we can point that out.

  23. Noel C,

    “The fact they have since demolished it suggests that having tested the business model and found it wanting, it is indeed better to outsource.”

    Sometimes this is about other developments. Maybe it made sense when they built it, but the world changes, and it isn’t. It’s like working from home is going to make HS2 look bloody ridiculous in 5 years time.

    Back in the 70s and 80s, there used to be a higher transaction and communication costs.

    I worked for a Building Society in the 1980s that ran its own vehicle pool. And back then, that made sense. You couldn’t send an invoice electronically. Payment meant someone going to a bank or posting a cheque. External companies couldn’t directly phone a desk. Almost no-one had email.

    You get things like direct dial phones, simple ways to do electronic invoicing and accounting, and you get outsource companies setting up. No-one runs their own vehicle pool.

  24. @BoM4

    Vehicle pools are still a Thing, my last employer had one. They were a multi-site organisation and the cars were to get people – particularly managers – between sites. Not sure why they didn’t structure the organisation to minimise movement of staff across sites though – as a result of centralisation, they had a lot of middle managers with responsibility that cut across sites, rather than having departments and management chains that were largely site-specific until the upper levels.

  25. MBE,

    So did someone there buy the vehicles and make sure they were maintained and all that? I can’t remember the last time I saw that. Most people go to a contractors to do that.

  26. @BoM4

    Yes, there was a Property Services department that did all that.

    Not really sure why though, the cars spend a lot of time doing nothing! Some of the managers with fancy cars they didn’t want to rack up a lot of miles on liked using the car pool for shunting themselves between sites, but most people didn’t bother. I’d be surprised if it was cheaper than taxis or hire-cars, and certainly if it was cheaper than subcontracting it out.

  27. MBE, my last employer retained white van provisioning and maintenance but company cars were outsourced. However the in-house supplier had to try to pay its way by offering servicing and maintenance for other van fleets and the managers’ cars. So the ante was upped in a way that fat Richard would disapprove of

  28. John, sure it probably wasn’t the type he meant but he still chose to speak out against it regardless. All too often we see someone who rates their opinion too highly because they don’t really understand what they’re talking about and if ever given the opportunity would do untold harm without realising it because at a superficial level it seemed a good idea.

    If nothing else it should make it fairly clear why his opinion on anything isn’t much use to anyone when he’s got about a deep an understanding of any subject as a puddle.

  29. Mr Potatohead would be well advised to look at and ponder the significance of what’s on the back of the current £20 note.

  30. Isn’t it delicious when someone pops up and pronounces
    “Coase wasn’t even correct when he invented his ‘ theory ‘ . To call it ‘ foundational ‘ is simple delusional”

    How about letting us know why it is delusional and incorrect? It seems insightful to me

  31. Agreed Ken…that is a very good summary. John Kay also covers it well in his book on markets. Another blow for the spud factor

  32. Diogenes

    This bit of the wiki piece is amusing about the privatisations –

    https://en.wikipedia.org/wiki/Ronald_Coase#Political_views

    My socialist sympathies gradually fell away and this process was accentuated as a result of being assigned in 1935 at LSE the course on the Economics of Public Utilities. I soon found out that very little was known about British public utilities and I set about making a series of historical studies on the water, gas, and electricity supply industries and of the Post Office and broadcasting.

    These researches taught me much about the public utility industries and they certainly made me aware of the defects of government operation of these industries, whether municipal or through nationalisation. These researches were interrupted by the war, when I joined the civil service, at first, for a short period, in the Forestry Commission, then responsible for timber production, and for the rest of the war, in the Central Statistical Office, one of the offices of the War Cabinet. This war-time experience did not significantly influence my views but I could not help noticing that, with the country in mortal danger and despite the leadership of Winston Churchill, government departments often seemed more concerned to defend their own interests than those of the country.[20]

  33. The stories from old GPO engineers about how they spent their days still make me squirm. Doing odd jobs in between calls and storing their tools in the exchanges. Closing roads and doing drag races for white vans when things were slack etc. No wonder it used to take a year to get a phone line

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