Giampaolo Garzarelli

We live in uncertain environments. Uncertainty derives in good measure from the limited cognition (dispersed and specific capabilities) of different economic actors. Consequently, knowledge differences lead to division of labor and to specialization throughout the economy. A firm is that entrepreneurial organ that utilizes such division of labor and specialization to achieve some more or less well-defined ends. As such, it is akin to a … [ Read more ]

Giampaolo Garzarelli

Markets tend to specialize in the coordination of knowledge that is intelligible to all (data about prices and quantities), while firms tend to specialize in the coordination of knowledge that is instead specific (capabilities of production) in order to achieve some ends.

Giampaolo Garzarelli

Transaction costs should be seen … as costs that arise primarily from imperfections in knowledge. …We may think of these dynamic transaction costs as the costs of bargaining with, coordinating with, informing, learning from, organizing, teaching, and persuading others: they are costs incurred for the search, organization and employment of the required capabilities when these are lacking. In light of this, it is not possible … [ Read more ]

Giampaolo Garzarelli, Frank Knight

Economic organization particularly matters ‘when different things are being done, in the furtherance of a common end, and in definite relations to each other, i.e., in coordination.’ Because there exist ‘some innate individual differences in human capacities and aptitudes’—i.e., differences in capabilities—‘the first in the list of gains from organization results from taking advantage of [these differences]. One … problem is to discover such differences … [ Read more ]

Giampaolo Garzarelli

A healthy firm … constantly strives to place capability and rights to act on that capability in the same hands—a co-location problem. Jensen & Meckling specify that there are generally two ways we might solve this problem of co-location. We could let knowledge move to those who have the rights to act; or we could let the rights to act move to those with knowledge. … [ Read more ]

The Organizational Approach of Capability Theory: A Review Essay

A look at a set of theoretical frameworks that attempt to go beyond the production function approach that dominates textbook discussions of economic organization, with a focus on the capability approach, drawing heavily on the work of Frank Knight and Hendrik Houthakker. (Knight identified the fundamental problem of economic organization as the search for and coordination of different capabilities that are dispersed throughout the larger … [ Read more ]