Abstract

This paper grounds the theory of any type of firm in the science of control and communication described as cybernetics. It is also grounded in the physiological and neurological limitations of humans to receive, store, process and act upon data to coordinate their activities. To overcome limitations in the market failure theory of the firm identified by leading scholars, Transaction Byte Analysis is introduced. TBA is based on economising bytes rather than costs and is applicable to all types of organisations of any specie. TBA is shown to subsume Transaction Cost Economics and explain why firms exist as hierarchies or in other forms. Inconsistent and contrary behaviour in humans are recognised. Cybernetic laws show how to minimise these problems and allow people with limited ability to transact bytes to improve their ability and reliability to manage complexity in social institutions. TBA is used to provide answers to questions raised by Zingales in his search for “new foundations” to explain how different types firms arise in the new economy.