In addition, sometimes a technological
development will lower the cost of market
transactions while, at the same time, it
expands the role of the firm. When the
"putting out" system was used for weaving,
inputs were organized largely through
market negotiations. With the development
of efficient central sources of power,
it became economical to perform weaving
in proximity to the power source and to
engage in team production. The bringing
in of weavers surely must have resulted in
a reduction in the cost of negotiating
(forming) contracts. Yet, what we observe
is the beginning of the factory system
in which inputs are organized within
a firm. Why? The weavers did not simply
move to a common source of power that
they could tap like an electric line, purchasing
power while they used their own
equipment. Now team production in the
joint use of equipment became more important.
The measurement of marginal
productivity, which now involved interactions
between workers, especially through
their joint use of machines, became more
difficult though contract negotiating cost
was reduced, while managing the behavior
of inputs became easier because of the increased
centralization of activity. The
firm as an organization expanded even
though the cost of transactions was reduced
by the advent of centralized power.
The same could be said for modern assembly
lines. Hence the emergence of
central power sources expanded the scope
of productive activity in which the firm
enjoyed a comparative advantage as an
organizational form.