Markets and organizations: individualism and economic theory

Economic theory depicts markets and organizations as opposite allocation mechanisms. Market allocation is based on mobility and organization on instruction. The paper argues that markets and organizations are complements in economies that grow through innovation. Diversity of organizations lies at the heart of innovation and gives factor mobility real meaning. This differs from perfect competition and principal agent theory wherein firms behave identically. Individualism spurs innovation, because it allows the adoption of different opinions on investment projects. Investment outcomes will differ from expectation, but will strike stable expectation equilibrium, if diversity of opinion prevails. Collective opinion, by contrast, arrests productivity growth and causes booms and busts. The rise of individualism in late medieval England and the concept of the individualized corporation in our days are discussed. The effects of collective opinion on financial markets are sketched.