1937] THE NATURE OF THE FIRM 393 appear to be why the allocation of resources is not done directly by the price mechanism. Another factor that should be noted is that exchange transactions on a market and the same transactions organised within a firm are often treated differently by Governments or other bodies with regulatory powers.If we consider the operation of a sales tax,it is clear that it is a tax on market transactions and not on the same transactions organised within the firm.Now since these are alternative methods of "organisation"by the price mechanism or by the entrepreneur-such a regulation would bring into existence firms which otherwise would have no raison d'atre.It would furnish a reason for the emergence of a firm in a specialised exchange economy.Of course,to the extent that firms already exist,such a measure as a sales tax would merely tend to make them larger than they would otherwise be. Similarly,quota schemes,and methods of price control which imply that there is rationing,and which do not apply to firms producing such products for themselves,by allowing advantages to those who organise within the firm and not through the market,necessarily encourage the growth of firms.But it is difficult to believe that it is measures such as have been mentioned in this paragraph which have brought firms into existence.Such measures would,however, tend to have this result if they did not exist for other reasons. These,then,are the reasons why organisations such as firms exist in a specialised exchange economy in which it is generally assumed that the distribution of resources is "organised"by the price mechanism.A firm,therefore, consists of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur. The approach which has just been sketched would appear to offer an advantage in that it is possible to give a scientific meaning to what is meant by saying that a firm gets larger or smaller.A firm becomes larger as additional transactions (which could be exchange transactions co-ordinated through the price mechanism)are organised by the entrepreneur and becomes smaller as he abandons the organisation of such transactions.The question which arises is whether it is possible to study the forces which determine the size of the firm.Why does the entrepreneur not organise one