[nhaehnle]

This is pretty accurate, actually, and has been studied by economists, for whom this was a huge problem: If the free market is supposed to be so great, then why are firms not organized as markets internally? In fact, why do they exist in the first place? In a sense, the existence of firms is evidence that a free market is not the best organizing principle for everything.

You may want to start here: http://en.wikipedia.org/wiki/Theory_of_the_firm

[wpietri]

My personal theory is that this is mainly about the primate dominance dynamic. Markets really do work better, but too many people would rather be the alpha monkey to care about little things like organizational effectiveness.

Of course, to bring this back on topic, as a software guy I'm inclined to think it's a hardware problem.

[foocc]

Since you're referring to the Wikipedia page, you are probably aware that there is a reasonable economic answer related to transaction costs and asymmetric information:

"Instead, for Coase the main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism. These include discovering relevant prices (which can be reduced but not eliminated by purchasing this information through specialists), as well as the costs of negotiating and writing enforceable contracts for each transaction (which can be large if there is uncertainty). Moreover, contracts in an uncertain world will necessarily be incomplete and have to be frequently re-negotiated. The costs of haggling about division of surplus, particularly if there is asymmetric information and asset specificity, may be considerable."