An update to A good Christmas read

(Almost) Everything You Wanted To Know About The History of The Theory of Production/the Firm: But Were Afr... by Paul Walker on Scribd

A good Christmas read

(Almost) Everything You Wanted to Know About the History of the Theory of Production/the Firm: But Were Afr... by Paul Walker on Scribd

The history of the theory of the firm in one diagram: version 2

 

The history of the theory of the firm in one diagram

 

The theory of the firm and economic thought

To me, it appears there is a lack of engagement with the theory of the firm by historians of economic thought. Evidence for this lack of interest can be found in books on the history of economic thought. Students would meet little, if anything, on the theory of the firm in introductory texts. For example, Sandmo (2011) devotes none of its almost 500 pages to the theory of the firm, while Heibroner (1999), throughout its seven editions, discusses firms but does not discuss the theory of the firm. Backhouse (2002), another well-regarded introduction to the history of economic thought, does better in terms of coverage of the theory of the firm than either Sandmo (2011) or Heilbroner (1999) insofar as Backhouse devotes, roughly one page out of 369 to the history of the post-1970 developments in the theory of the firm.

The lack of coverage could just be a level thing since some graduate-level texts do better in terms of the discussion of the theory of the firm, see, for example, Blaug (1997: 355-7; 373-5; 395-6; 435-9.) Or is it a time thing, from an earlier era, Whittaker (1940) has a 40-page chapter on production.

But these are exceptions that prove the rule. Lack of enthusiasm for the firm or production does appear to be a problem of long-standing. In 1893 when Edwin Cannan published the first of three editions of his A History of the Theories of Production and Distributions from 1776 to 1848 he commented that “I have been able to obtain surprisingly little assistance from previous writers” (Cannan 1893: v).

Since then, sadly, little appears to have changed. There is still little assistance from the literature for those who are interested in the history of thought to do with production or the firm. In fact, in the more than one hundred years since Cannan wrote, there seems to have been only three additional books (in English at least) published that directly deal with the topic of the history of thought to do with either the theory of production or the theory of the firm: George Stigler published a revised version of his PhD thesis as Production and Distribution Theories: The Formative Period in 1941; in 1978 Philip L. Williams published his PhD thesis as The Emergence of the Theory of the Firm: From Adam Smith to Alfred Marshall and Paul Walker published A Brief Prehistory of the Theory of the Firm in 2018.

So why so little interest? Do historians of economic thought really think that production is so uninteresting and worthless a topic that they just ignore it? Or do they (and economists more generally) just think that the production in the economy is so unimportant that it need not be studied?

Refs.:

• Backhouse, Roger E. (2002. The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century, Princeton: Princeton University Press.
• Blaug, Mark (1997). Economic Theory in Retrospect, 5th edn., Cambridge: Cambridge University Press.
• Cannan, Edwin (1917). A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848, 3rd edn., London: P. S. King & Son.
• Heilbroner, Robert L. (1999). The Worldly Philosophers—The Lives, Times, and Ideas of the Great Economic Thinkers, 7th edn., New York: Simon & Schuster.
• Sandmo, Agnar (2011). Economics Evolving-A History of Economic Thought, Princeton: Princeton University Press.
• Stigler, George J. (1941). Production and Distribution Theories: The Formative Period, New York: The Macmillan Company.
• Walker, Paul (2018). A Brief Prehistory of the Theory of the Firm, London: Routledge.
• Whittaker, Edmund (1940). A History of Economic Ideas, New York: Longmans, Green and Co.
• Williams, Philip L. (1978). The Emergence of the Theory of the Firm: From Adam Smith to Alfred Marshall, London: The Macmillan Press.;

Who was Ronald Coase? - with Cento Veljanovski

From the IEA comes this video in which Syed Kamall interviews Cento Veljanovski about the work of Ronald Coase.

 

Foundations of Organisational Economics: Histories and Theories of the Firm and Production

This essay provides introductions to five of the major topics to do with the history of the theory of production and the theory of the firm. The first chapter is an introduction. The second considers the change from a normative approach to the theory of production to a largely positive approach. Before, roughly, the 17th century the main approaches to the theory of production were normative. The third looks at the relationship (or the lack of a relationship) between the division of labour and the theory of the firm. Even today the mainstream of economics does not emphasise the division of labour in the theory of the firm. In the fourth chapter, the development of the proto-neoclassical approach to production is examined. The development of theories of monopoly, oligopoly and perfect competition as well as the theory of input utilisation are discussed. The fifth chapter looks at Marshall’s idea of the representative firm. This was the main early neoclassical approach to the theory of industry-level production. Marshal wished to be able to construct an industry supply curve without having to assume all firms were identical. The sixth examines the challenges to the neoclassical model in the period 1940-1970. The last chapter is a short conclusion.

Foundations of Organisation... by Paul Walker on Scribd

X-inefficiency

A basic assumption of the neoclassical model of production is that production is carried out in a technically efficient manner.(1) Leibenstein (1966) challenges this assumption. First, he argues that the empirical evidence suggests that producers typically do not achieve technical efficiency and he called this technical inefficiency, `X-inefficiency'.(2) Secondly, he argues, in terms of a theoretical explanation for this inefficiency, that there are four major reasons for X-inefficiency:

1. Labour contracts are incomplete. Such contracts do not and can not completely specify what is to be done by employees. The hiring of labour involves the hiring of time on the job but the intensity of effort is variable, that is, there are, in addition to incompleteness, moral hazard problems to contend with.(3)
   
2. Not all of the factors of production needed to achieve technical efficiency are markable and thus some of these factors may not be available to a producer. In particular, significant problems can arise when there are market imperfections in the market for management, meaning the quality of managers is hard to assess ex ante, that is, there are adverse section problems in the market for managers.
3. The production function is not completely specified nor completely known by the producer. Prior experience and ability to experiment are factors affecting the producer's knowledge of the production process. But if the producer does not fully understand the production function, it will struggle to achieve fully efficient production.
4. If there are strategic interactions between producers and uncertainty about competitors' reaction to a move by any given producer, then tacit collusion and imitation between producers can result and this could prevent producers from achieving fully efficient production. Put simply, competition matters for efficiency.

In later work, Leibenstein (1975, 1976), the theory of X-inefficiency has been expanded. It is noted that organisations are collections of individuals, each of whom has their own self-interest and whose efforts on behalf of the organisation are variable. Leibenstein emphasises the variability of effort by the individual rather than the mutuality of individuals' interests within the organisation. Individuals will pursue their own interests, which may (or may not) contribute to the interests of the organisation in its entirety. But there are constraints placed on the individual's actions by the organisation.

"The 'tightness' of these constraints depends upon the nature of the job being done, the system of payments (e.g. payment by results, payment by time, etc.), and the type of organization. Two important factors in determining the tightness of the constraint are likely to be the strength of the competition in the markets where the firm operates, and its degree of success" (Sawyer 1975: 131).

It is worth noting that the idea of X-inefficiency is related to the concept of `slack' noted in the sections above. It arises in this context due to the pursuit of self-interest by individuals, variations in their effort and incomplete monitoring of individuals. In the behavioural theory, it arises because of the bargaining processes within the organisation while in the managerial models it is due to the pursuit of self-interest by managers. But the presence of slack, for whatever reason, suggests the non-minimisation of costs and thus the non-maximisation of profits.

Notes.

(1) This section is based on Sawyer (1975: section 8.4)

(2) A more formal model of X-inefficiency is given in Crew (1975: 110-5).

(3) Hawkins (1973: 50) explains that human beings are different from other factors of production in important ways.

``Machines have a potential output which can be achieved by pressing the right switches. Human beings by contrast can adjust the quality and pace of their work in line with their own preferences. By supervision, by punishments and incentives, human effort can be varied. There is no reason why a shop-floor worker, or manager, should have a utility function which coincides with that of the firm as a whole or of its shareholders. Employees may maybe compelled to produce a minimum output - or lose their job. There may also be a maximum output of which they are capable given all the right sticks and carrots. But between these levels they can choose to vary the amount of time they spend on various activities, the pace at which they work and the quality of the work they do. There is no single-valued relationship between the number of man-hours purchased and the quality or quantity of effort that is expended in production. As a result, it is unlikely that every employee's choices will be exercised in such a way as to give maximum output per unit of input. So X-inefficiency almost always exists".

Refs.

• Crew, Michael A. (1975). Theory of the Firm, London: Longman.
• Hawkins, C. J. (1973). Theory of the Firm, London: The Macmillian Press.
• Leibenstein, Harvey (1966). 'Allocative Efficiency vs. X-Efficiency', The American Economic Review, 56(3) June: 392-415.
• Leibenstein, Harvey (1975). 'Aspects of the X-Efficiency Theory of the Firm', Bell Journal of Economics, 6(2) Autumn 1975: 580-606.
• Leibenstein, Harvey (1976). Beyond Economic Man, Cambridge Mass.: Harvard University Press.
• Sawyer, Malcom C. (1979). Theories of the Firm, London: Weidenfeld and Nicolson.

A very brief history of perfect competition

A brief chronology of the development of the idea of perfect competition. We start with Counot and end with Knight

A very brief history of perfect competition by Paul Walker on Scribd