A firm, therefore, consists of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur... As a firm gets larger, there may be decreasing returns to the entrepreneur function, that is, the costs of organising additional transactions within the firm may rise.

In my youth it was said that what was too silly to be said may be sung. In modern economics it may be put into mathematics.

Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production.

Ronnie had it right calling it Torture. That is a much more accurate description the way I see it.

In fact, a large part of what we think of as economic activity is designed to accomplish what high transaction costs would otherwise prevent or to reduce transaction costs so that individuals can negotiate freely and we can take advantage of that diffused knowledge of which Friedrich Hayek has told us.

If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, what would I do if I were a horse?

We must first note that economic factors are taken into account in a world in which ignorance, prejudice, and mental confusion, encouraged rather than dispelled by the political organization, exert a strong influence on policy making.