Uncertainty and the nature of the firm: From Frank Knight and Ronald Coase to an evolutionary approach

In his article ‘The Nature of the Firm’ Coase Economica 4:386-405, (1937), Ronald Coase enquired why organisations such as firms exist in a specialised exchange economy. He concluded that the main reason to establish and grow a firm is to avoid some of the transaction costs of using the price mechanism. Earlier, a similar issue was considered, albeit not so explicitly, by Frank Knight in his book, ‘Risk, Uncertainty, and Profit’ Knight, (1921). According to Knight, the emergence and growth of a modern enterprise is associated with ‘the fact of uncertainty’. In this paper, we address the seminal Coasian question regarding the firm and compare his and Knight’s views on the nature of the firm in its relation to uncertainty.