The theory of the firm and country by country reporting


The one hundreth birthday of Ronald Coase seems to be a suitable time to consider what his theory of the firm means for a modern proposal: that for country by country reporting.

Coase pointed out that firms exist for some reason or other: the explanation is well laid out here in The Economist. The result is that, where a firm does exist (something which is an ever changing feast as the technologies which surround the formation of a firm or not change), we need to treat said firm as a whole. For the very reason for the existence of the firm is that the whole is more than simply the parts. In a crude sense, we can say that profits are higher if the activity is organised as a company than if it is organised as a set of mutually contracting but otherwise unconnected units. Except in those situations where it is not and thus a firm does not exist and everybody just mutually contracts.

Which brings us to the modern proposal for the accounting practices and taxation of multi-nationals, this so called "country by country reporting". In essence, the argument is that we should disregard the existence of the multi-national altogether. In both accounting and taxation terms it should be treated as simply a series of mutually contracting but otherwise independent entities.

Something which is, as Coase has pointed out, entirely a nonsense. For the very existence of the multi-national itself shows that there is more than just the contracting between independent parties. Value is being added by the form of organisation itself: we cannot therefore account for the value created, nor tax said value, by treating the whole simply as the independent parts.

It has to be said that this isn't the first time (and it's most unlikely to be the last) that the proponents of this and other such schemes have suggested plans which simply ignore the economics of what they wish to affect.

And as my favourite phrase goes, this is likely to end in tears before bedtime: for you can ignore economics but economics isn't going to ignore you.