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our economic system. Within a firm, the description does
not fit at all. For instance, in economic theory we find
that the allocation of factors of production between different
uses is determined by the price mechanism. The price
of factor A becomes higher in X than in Y. As a result,
A moves from Y to X until the difference between the
prices in X and Y, except in so far as it compensates for
other differential advantages, disappears. Yet in the real
world, we find that there are many areas where this does
not apply. If a workman moves from department Y to
department X, he does not go because of a change in relative
prices, but because he is ordered to do so. Those who
1 J. M. Keynes, Essays in Biography, pp. 223-4.
8 L. Robbins, Nature and Significance of Economic S&cc, p. 63.
a This description is quoted with approval by D. H. Robertson, Confrol of Industry,
p. 85, and by Professor Arnold Plant, "Trends in Business Administration," ECONOMICA,
February, 1932. It appears in Allied Sbipping Control, pp. 16-17.
See F. A. Hayek, " The Trend of Economic Thinkmg," Ec o ~ omr c ~M, ay, 1933.
See P. A. Hayek, op. cit.
388 ECONOMICA [NOVEMBER
object to economic planning on the grounds that the problem
is solved by price movements can be answered by pointing
out that there is planning within our economic system
which is quite different from the individual planning
mentioned above and which is akin to what is normally
called economic planning. The example given above is
typical of a large sphere in our modern economic system.
Of course, this fact has not been ignored by economists.
Marshall introduces organisation as a fourth factor of
production; J. B. Clark gives the co-ordinating function
to the entrepreneur ; Professor Knight introduces managers
who co-ordinate. As D. H. Robertson points out, we find
<c islands of conscious power in this ocean of unconscious
co-operation like lumps of butter coagulating in a pail of
buttermilk."' But in view of the fact that it is usually
argued that co-ordination will be done by the price mechanism,
why is such organisation necessary ? Why are there these
c c islands of conscious power " ? 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 ~r o d u c t i o n .~I t is clear that these are alternative I
methods of co-ordinating production. Yet, having regard
Economica, New Series, Vol. 4, No. 16. (Nov., 1937), pp. 386-405.
S

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