December 27, 2020

How Come Firms in Market Economies Are Centrally Planned Internally?

In economics, the idealized free market’ allows people to trade goods and services for money. The claim is that the laws of supply and demand determine prices in a decentralized way, leading to an efficient allocation of resources without the oversight of a central planner like a government.

A key element of market economies are firms (for-profit companies). But it’s interesting that within firms, resources are not allocated to different departments or individuals via trade and the laws of supply and demand, but rather through a centralized budgeting process that is ultimately overseen by the executives. The marketing department doesn’t trade’ with the HR department, for example - what would that even look like?

What does this say about when central planning is and isn’t efficient? Have any firms experimented with creating an internal structure that replicates aspects of a free market? How might this work?