Chapter 3: Entrepreneurship and the economics of the firm
What is the relationship between entrepreneurs and business firms? Do entrepreneurs need firms to carry out their function, and do firms need entrepreneurs to survive in the competitive market process? What exactly do entrepreneurs do inside firms – establish, finance, direct, control, operate? Does the entrepreneur disappear from stage once the firm is founded, handing things off to professional managers who do not merit the label “entrepreneur”? These questions strike simultaneously at the hearts of microeconomics and management research in entrepreneurship (cf. Shane and Venkataraman, 2000). And yet the study of entrepreneurship and the study of economic organizing lack contact. In fact, the modern theory of the firm virtually ignores entrepreneurship, while the literature on entrepreneurship often sees little value in the economic theory of the firm (Foss and Klein, 2005). This divide emerged as microeconomic analysis took important steps toward increased scientific rigor, which in effect left no room for dynamic elements such as entrepreneurs or entrepreneurship. The economic theory of the firm was subsumed into neoclassical price theory (O‘Brien, 1984) and reformulated using game theory and the economics of information (Foss and Klein, 2011). As a result, modern contributions to the theory of the firm (Williamson, 1975; 1985; 1996; Milgrom and Roberts, 1992; Hart, 1995) focus on solving given optimization problems and are therefore typically static and “closed.” They tend to avoid open-ended questions about where the problems come from or what is the origin of the firm. Indeed, the question of firm emergence in the market place is almost completely left out of the theoretical discourse on the firm.
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