Handbook on the Economics and Theory of the Firm
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Handbook on the Economics and Theory of the Firm

Edited by Michael Dietrich and Jackie Krafft

This unique Handbook explores both the economics of the firm and the theory of the firm, two areas which are traditionally treated separately in the literature. On the one hand, the former refers to the structure, organization and boundaries of the firm, while the latter is devoted to the analysis of behaviours and strategies in particular market contexts. The novel concept underpinning this authoritative volume is that these two areas closely interact, and that a framework must be articulated in order to illustrate how linkages can be created.
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Chapter 2: The Obscure Firm in the Wealth of Nations

Michael Best


Michael H. Best For the pattern is more than the sum of the threads; it has its own symbolic design of which the threads know nothing. (Arthur Koestler, in Faulks, 1996) 2.1 INTRODUCTION Adam Smith did not elaborate a theory of the firm. He did, however, go inside the workshop to explore production, which was the starting point of his economic masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations.1 Is there conceptual space within Smith’s economic landscape in which a nascent theory of the firm might be discovered? If so, what are its functions and characteristics? Three core concepts are central to Smith’s economic perspective, and so to characterizing a latent concept of the firm in Smith’s work. Behind each core concept is a dynamic process. First is the principle of the division of labor, which focuses attention on increasing differentiation of skills, improvement in the ‘arts’ (contemporary term for technical knowledge), and advances in the ‘productive power of labor’. Second is the ‘invisible hand’, a metaphor for the processes by which overall coordination or organizational order is achieved within a decentralized economic system. Third is capital accumulation. Smith articulated the links and feedback effects between profits and capital in the workshop and the growth in aggregate capital and national output. The chapter examines each of these with a view to characterizing the otherwise obscure functions and roles of the firm in Smith’s economic landscape. 2.2 THE PRINCIPLE OF INCREASING SPECIALIZATION Adam Smith begins the...

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