1937] THE NATURE OF THE FIRM 389 the supersession of the price mechanism,varies greatly from industry to industry and from firm to firm. It can,I think,be assumed that the distinguishing mark of the firm is the supersession of the price mechanism. It is,of course,as Professor Robbins points out,"related to an outside network of relative prices and costs,"1 but it is important to discover the exact nature of this relation- ship.This distinction between the allocation of resources in a firm and the allocation in the economic system has been very vividly described by Mr.Maurice Dobb when discussing Adam Smith's conception of the capitalist: "It began to be seen that there was something more important than the relations inside each factory or unit captained by an undertaker;there were the relations of the undertaker with the rest of the economic world outside his immediate sphere ...the undertaker busies himself with the division of labour inside each firm and he plans and organises consciously,"but."he is related to the much larger economic specialisation,of which he himself is metely one specialised unit.Here,he plays his part as a single cell in a larger organism,mainly unconscious of the wider role he fills." In view of the fact that while economists treat the price mechanism as a co-ordinating instrument,they also admit the co-ordinating function of the "entrepreneur,"it is surely important to enquire why co-ordination is the work of the price mechanism in one case and of the entrepreneur in another.The purpose of this paper is to bridge what appears to be a gap in economic theory between the assump- tion (made for some purposes)that resources are allocated by means of the price mechanism and the assumption (made for other purposes)that this allocation is dependent on the entrepreneur-co-ordinator.We have to explain the basis on which,in practice,this choice between alternatives is effected. Op.cit p 1. Capitalist Enterprise and Social Progress p.C Henderon,Supply and Demand ethState takes over the direction of industrythatiaplami it it is doing samething which was previously done by the price mechanism.What is usually not realised is that any business man in organising the relations between his depart- mencs is also dqing someching which could be organised through the price mechanism.Thece is therefore point in Mr.Durhin's answer to those who emphasise the probiems invalved in econdmic planaing that the same problems have to be solved by business men in the competitive systemm.(See "Econamie Caleulus in a Planned Econamy,"Ecaramic December,1936.)The important difference between theie two cases is that economic planning is imposed on industry while firms arise voluntarily because they represent a more effcienc method of organising produetion,In a competitive ay性trm、t止here is an“optimum" amount of planning【