Markets and organizations individualism and economic theory

Abstract

Economic theory depicts markets and organizations as opposite allocation mechanisms. Market allocation is based on mobility and organization on instruction. The paper argues that markets and organizations are complements in dynamic economies. A diversity of organizations gives meaning to mobility of capital and labor as it allows individual valuations of people and projects. This differs from both perfect competition and principal agent theory that do not allow for diversity among firms. Individualism spurs innovation, because it allows different views on future values. Investment outcomes will differ from expectation, but will strike stable expectation equilibrium, if diversity of opinion prevails. Collective opinion, by contrast, arrests productivity growth and causes booms and busts. The rise of individualism in late medieval England and the concept of the individualized corporation in our days are discussed. The effects of collective opinion on financial markets are sketched.