Friday 24 November 2023

Thinking about the theory of production/the firm

 J. B. Condliffe has pointed out that 

"[ ... ] economic activity and thoughts about it are as old a mankind'' (Condliffe 1974: 21)

and this is certainly true of thoughts to do with production and the firm. 

While thoughts about production were commonplace before, roughly, the 1500s, those thoughts were primarily normative in nature, they were about should questions rather than how questions. The questions were about what should be produced rather than how things are produced. After the 1500s a more positive approach to production was developed. In the beginning, this was a macro approach concerned with the production of the entire economy. During the 1800s an industry-level approach to production started to arise alongside the macro approach. By the 1930s the standard neoclassical textbook theory of production had been developed. But it was not until around 1970 that the theory of the firm, based on work from the 1920s and 1930s, began to supplement the various theories of production.

What concerns us here is the opportunities that were taken and those that were not in the development of the mainstream theory of the firm over the period 1920-2020. The 1920s are the earliest that ideas that have come to form parts of the contemporary economic theories of the firm were put forward. 

The models that form the basis of the contemporary mainstream theory of the firm, are those of Frank Hyneman Knight (Knight 1921), better known for his work on risk and uncertainty, and Ronald Harry Coase (Coase 1937), who is the major influence on the contemporary economic theory of the firm. We can think of these as the 'opportunities taken'.

We can also examine the missed opportunities in the theory of the firm: the division of labour, which has produced theories of firm-level production but not theories of the firm, the 'rationalisation debate' which gave rise to partial theories of the firm, and the work of Arnold Plant (Plant 1937), who is better known for his work on copyright and patents, also provided, intentionally or not, detail and content regarding several aspects of Coase's arguments where those facets were left underdeveloped by Coase, and Harold Malmgren (Malmgren 1961) who provided the first extensive elaboration of Coase's 1937 analysis. All these works have not been developed in the mainstream theories of the firm and thus can be seen as 'opportunities missed' in the history of thinking to do with the firm.

What is not clear is why approaches to the firm from inside the mainstream of economics would be ignored by economists. Those coming from the heterodox writers use non-mainstream ideas and methods and thus it is likely that the mainstream will overlook their work. But this is not true of those ignored authors from within the mainstream, Why were their ideas not developed?

So the history of the theory of the firm can be thought about as a set of opportunities taken and missed with the interesting question being, Why were some opportunities taken but others missed?.


Coase, R. H. (1937). 'The Nature of the Firm', Economica, n.s. 4 no. 16 November: 386-405.

Condliffe, J. B. (1974). Defunct Economists, Christchurch: Pegasus Press.

Knight, Frank H. (1921). Risk, Uncertainty and Profit, Boston: Houghton Mifflin Company.

Malmgren, H. B. (1961). 'Information, Expectations and the Theory of the Firm', Quarterly Journal of Economics, 75(3) August: 399-421.

Plant, Arnold (1937).'Centralise or Decentralise?'. In Arnold Plant (ed.), Some Modern Business Problems: A Series of Studies (pp. 3-33), London: Longmans, Green and Co.

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