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 5: Veblen, Commons and the Theory of the Firm

Geoffrey M. Hodgson


Geoffrey M. Hodgson 5.1 INTRODUCTION The original institutional economics was a highly prominent school of economic thought in the United States between World War I and World War II (Rutherford, 1994, 2001; Yonay, 1998; Hodgson, 2004). It was a broad and heterogeneous movement, drawing its inspiration from Thorstein Veblen (1857–1929), John R. Commons (1862–1945) and several others. Among the myths peddled by critics is the idea that the original institutionalism was ‘atheoretical’ or ‘against theory’. Despite their prevalence, these allegations are relatively easy to refute by citing examples of theoretical developments – including growth accounting and rudiments of Keynesianism – that owe their origins to the original institutionalism (Rutherford, 2001; Hodgson, 2004). Veblen and Commons made a number of important statements – reviewed below – concerning the nature and behaviour of capitalist firms. Subsequent institutional economists made important contributions to the analysis of large or oligopolistic firms. Highlights include John Maurice Clark’s (1923) theory of ‘overhead costs’. Institutionalists also influenced Edwin Chamberlin’s (1933) theory of monopolistic competition (Cordell, 1972; Peterson, 1979) and Gardiner Means’s (1935, 1972) theory of administered prices (Goode, 1994; Lee and Downward, 1999). But we search in vain for a well-defined ‘theory of the firm’ within the old institutional economics. Instead we have a number of often overlooked insights. They endure alongside the more recent contribution of the ‘new’ institutional economics to transaction cost analysis and the theory of the firm. The contributions of Veblen and Commons emerged a few years after the publication of Marshall’s Principles in 1890....

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