If you created the world as a simple economic thought experiment, companies wouldn't exist. Instead, everybody would work for themselves, and they'd be constantly selling their labor (or the fruits of their labor, or use of their tools, or whatever) to the highest bidder. Wages would rise and fall every day (every hour! every second!) depending on supply and demand. That's how the market works, after all.
But the real world is full of big companies that work like centrally planned economies, with powerful managers telling employees in different divisions what to do, and workers earning wages that are mostly steady.
Why does this happen? As Matt Yglesias writes: "If markets are so great, what's with all the bosses and colleagues and meetings and internal office politics?"
Ronald Coase, the Nobel-prize-winning economist who died Monday at age 102, answered that question 81 years ago. The short version: The free market can be a huge hassle, and letting the market set prices for everything is is not always the most efficient approach.
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