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Theory of the firm

approach of price maximisation
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The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market.

The model shows institutions and market as a possible form of organization to coordinate economic transactions.
CONTENT : A - F , G - L , M - R , S - Z , See also , External links

Quotes

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Quotes are arranged alphabetically by author

A - F

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A firm is defined in economic theory as a market imperfection introduced to deal with transaction costs. And the sort of theory is that the imperfections, the firms, are kinda like little islands in a free market sea. But the problem with that is that the sea doesn't remotely resemble a free market, and the islands are bigger than the sea. ~ Noam Chomsky
  • [The decisionmaking role of the firm has progressed from the neoclassical standpoint of profit maximization to sales maximization, utility maximization, and satisficing. From the Operation Research point of view] ...the ideal picture is that someone, presumable the firm that hires the operations researcher, hands him, on a silver platter, an objective function. By talking to the engineers, or by looking into a few scientific laws, he determines the policy alternatives available and also the model
  • It is probable that when future historians of economic thought look back over this century, the thirties will appear as an era of rapid development in economic theory. Not only has there been unusual activity in monetary theory, theory of value. but extensive transformations have also been made in the basic theory of value. The outstanding publications in this field are, of course, Joan Robinson's Theory of Imperfect Competition and Chamberlin's Theory of Monopolistic Competition, the first produced in Cambridge, England, and the second in Cambridge, Massachusetts. These volumes mark the explicit recognition of the theory of the firm as an integral division of economic analysis upon which rests the whole fabric of equilibrium theory. General equilibrium is nothing more than the problem of the interaction of individual economic organisms, under various conditions and assumptions; as a necessary preliminary to its solution, an adequate theory of the individual organism itself is necessary.
    • Kenneth Boulding (1942) "The theory of the firm in the last ten Years" in: The American Economic Review. Vol. 32, No. 4, Dec., 1942. p. 791
 
Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market.
- Ronald Coase, 1937
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  • A firm is defined in economic theory as a market imperfection introduced to deal with transaction costs. And the sort of theory is that the imperfections, the firms, are kinda like little islands in a free market sea. But the problem with that is that the sea doesn't remotely resemble a free market, and the islands are bigger than the sea.
  • Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-coordinator, who directs production. It is clear that these are alternative methods of coordinating production. Yet, having regard to the fact that, if production is regulated by price movements, production could be carried on without any organization at all might we ask, why is there any organization?
    • Ronald Coase "The nature of the firm." Economica 4.16 (1937): p. 388
  • We believe that, in order to understand contemporary economic decision making, we need to supplement the study of market factors with an examination of the internal operation of the firm – to study the effects of organizational structure and conventional practice on the developments of goals, the formation of expectations, and the execution of choices.
  • The purpose of this book is to show how economic analysis can be used in formulating business policies. It is therefore a departure from the main stream of economic writings on the theory of the firm, much of which is too simple in its assumptions and too complicated in its logical development to be managerially useful. The big gap between the problems of logic that intrigue economic theorists and the problems of policy that plague practical management needs to be bridged in order to give executives access to the practical contributions that economic thinking can make to top-management policies.
    • Joel Dean, Managerial Economics, Prentice-Hall, 1951, Preface

G - L

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M - R

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  • Edith Penrose has been one of the most significant economists of the second part of the twentieth century. Her contribution to the theory of the firm has reinvented and productively developed the classical tradition in economics. It has informed the currently dominant resource/knowledge-based theory of the firm. Penrose's contribution, however, extends to a great variety of areas, to include industry organization, strategic management, international business, human resource management, economics of innovation and technological change, history, methodology, macroeconomics, and much more.
    • Christos Pitelis (ed.), The growth of the firm: the legacy of Edith Penrose. (2002).
  • I consider myself a mainstream researcher in the field of business policy, and the ideas I want to describe in this paper concern the foundations of a theory of business strategy that is rooted in economics. But is such a paper, whatever its merits, really appropriate at a conference entitled 'Non-traditional Approaches to Policy Research'? Surprisingly, it is. The use of economic theory to model and explicate business strategy, as it is understood within the field of business policy, is distinctly non-traditional.
    • Richard P. Rumelt, "Towards a strategic theory of the firm." Resources, firms, and strategies: A reader in the resource-based perspective (1997), p. 131; Lead paragraph

S - Z

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  • Around 1958, I became aware of H.A. Simon's seminal papers on bounded rationality and was immediately convinced by his arguments. I tried to construct a theory of boundedly rational multigoal decision making. Together with Heinz Sauermann, I worked out an "aspiration adaptation theory of the firm" which was published as a journal article in 1962... More and more I came to the conclusion that purely speculative approaches like that of our paper of 1962 are of limited value. The structure of boundedly rational economic behavior cannot be invented in the armchair, it must be explored experimentally.
  • BEHAVIORAL THEORIES OF THE FIRM: A turn from structure to internal processes was the theme of authors such as Richard Cyert and James March, Daniel Katz and Robert Kahn, and Karl Weick. Cyert, an economist, and March, a psychologist, emphasized internal competition for scarce resources, interest groups forming coalitions, conflict resolution, organizational learning, and among other concepts, the adaptive processes of decision making and performance feedback. Psychologists Katz and Kahn emphasized organizational roles, role conflict and ambiguity, the organization as an open input-output system, and circumstances when the hierarchy was preferable to participative styles. Weick, another psychologist, emphasized the organizing process rather than the organizational product and suggested that actions precede goals (goals are retrospective), that individual behaviors are interlocking, and so on.
  • All but one of those just mentioned was a psychologist by education, so it should not be surprising that their view of organization theory emphasizes internal processes and resembles the micro approach of organizational behavior. Another group of theorists, all but one educated as a sociologist, viewed organizations as a product of macro environmental forces. These behavioralists were Jeffrey Pfeffer and Gerald Salancik, Michael Hannan and John Freeman, and John Meyer and Richard Scott. Pfeffer (the only nonsociologist) and Salancik presented a resource-dependent theory that postulates that organizations require support from their external environment and can only survive to the extent that this support is forthcoming. Managers form coalitions to gather support in an open system of external relationships in which there are constraints that create either a munificent or scarce resource situation. Hannan and Freeman’s organizational ecology theory offers the idea that organizational survival is a process of adaptation and success, or fail to adapt and exit. The authors recognized the Darwinian nature of their theory, but have used it to study organizational populations such as labor unions and newspapers for population entries, adaptation, and mortality. The neo-institutional theory of Meyer and Scott (and others) holds that organizational environments are shaped by societal expectations that provide legitimacy to an organization’s existence. By conforming to cultural rules, such as custom or law, formal organizations are able to take on the prevailing view of society.

See also

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