Edited by Michael Dietrich and Jackie Krafft
Chapter 2: The Obscure Firm in the Wealth of Nations
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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