937] THE NATURE OF THE FIRM 387 the margin.Our definition must,of course,"relate to formal relations which are capable of being conceived exactly. I It is convenient if,in searching for a definition of a firm, we first consider the economic system as it is normally treated by the economist.Let us consider the description of the economic system given by Sir Arthur Salter."The normal economic system works itself.For its current operation it is under no central control,it needs no central survey.Over the whole range of human activity and human need,supply is adjusted to demand,and production to consumption,by a process that is automatic,elastic and responsive."An economist thinks of the economic system as being co-ordinated by the price mechanism and society becomes not an organisation but an organism.The economic system "works itself."This does not mean that there is no planning by individuals.These exercise foresight and choose between alternatives.This is necessarily so if there is to be order in the system.But this theory assumes that the direction of resources is dependent directly on the price mechanism.Indeed,it is often considered to be an objection to economic planning that it merely tries to do what is already done by the price mechanism.5.Sir Arthur Salter's description,however,gives a very incomplete picture of our economic system.Within a firm,the description does not fit at all.For instance,in economic theory we find that the allocation of factors of production between different uses is determined by the price.mechanism.The price of factor becomes higher in X than in r.As a result, 4 moves from r to X until the difference between the. prices in X and r,except in so far as it 'compensates for other differential advantages,disappears.Yet in the real world,we find that there are many areas where this does not apply.If a workman moves from department r to department X,he does not go because of a change in relative prices,but because he is ordered to do so.Those who 【了.M.Keynes,Essays in Biography,Pp.223-4 L.Robbins,Narure and Significance of Economie Science,p.63. a This description is quoted with approval by D.H.Robertson,Comrol of Indusiry, p.85,and by Professor Arnold Plant,"Trends in Business Administration,"Ecoxomte: Februaty,1932.It appears in Allied Shipping Control,pp.16-17. See 'A.Hayek,The Trend of Econamic Thinking,"EcoxoNCA,3fay:1933. s See F.A.Hayek op.cit