Developments in Major Fields of Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 38: Theory of the firm
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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