Table of Contents

Handbook on the History of Economic Analysis Volume III

Handbook on the History of Economic Analysis Volume III

Developments in Major Fields of Economics

Edited by Gilbert Faccarello and Heinz D. Kurz

Volume III contains entries on the development of major fields in economics from the inception of systematic analysis until modern times. The reader is provided with succinct summary accounts of the main problems, the methods used to address them and the results obtained across time. The emphasis is on both the continuity and the major changes that have occurred in the economic analysis of problematic issues such as economic growth, income distribution, employment, inflation, business cycles and financial instability. Each Handbook can be read individually and acts as a self-contained volume in its own right. It can be purchased separately or as part of a three-volume set.

Chapter 38: Theory of the firm

Élodie Bertrand

Subjects: economics and finance, history of economic thought


The marginalist or neoclassical theory of the firm conceptualizes it as a producer and analyses its behaviour similarly to that of the consumer: maximization (of profit) under constraint (of the production function). In particular, industrial organization focuses on firm equilibrium in different market structures, focusing more on the market than on the firm itself. From the 1970s onwards, “recent theories of the firm” opposed this view and claimed to answer questions such as the existence, boundaries, performance, internal organization or financing structure of the firm, referring to seminal works of the twentieth century, and especially to Ronald Coase (1937). However, not only had some of these issues already been addressed by economists since the eighteenth century, but the ascendancy of the marginalist theory of the firm since the 1930s has always been paralleled by critical alternative or complementary approaches. When Coase (and others) opened the “black box” of the neoclassical firm, the box itself was only recent and had been conceptualized by splitting away from the theory of the entrepreneur, de facto eliminating this central figure of classical economics. Three periods can be distinguished. From the end of the nineteenth century to the 1930s, economists dealing with firm-related issues increasingly concentrated on questions of equilibrium, putting aside the entrepreneur. They constructed a marginalist theory of the firm that would then become dominant. From the 1930s to the end of the 1960s, the marginalist controversy (see, for example, Mongin 1997) and other works – such as those by Coase, Joseph Schumpeter and Edith Penrose – questioned this theory and highlighted some essential aspects, including uncertainty, innovation and growth. They contributed to view the firm as an organization, and to reveal the different roles of the entrepreneur. The more recent development, since the 1970s, is ambiguous: two groups of recent theories of the firm, grounded on the contributions of the second period, can be identified. On the one hand, contractual theories of the firm explain the firm and its size by the need to facilitate transactions; ever more formalized, they have increasingly neglected the entrepreneur figure. On the other hand, evolutionary and competence-based theories, built on a fundamental questioning of rationality in a radically uncertain world, focus on the routines developed by firms and on the sphere of production in which the entrepreneur’s role is central.

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