The Firm in Economics and History: Towards an Historically Relevant Economics of the Firm

Introduction The basic sub-text or conjecture of this paper is that an adequate economics of the firm should be historically relevant. The terms " adequate " and " relevant " imply, in the current context, that theoretical frameworks allow explanation of historical developments rather than a rationalisation of these developments. Two possible implications follow from this conjecture. First, given the complexity of historical reality a single theoretical approach to the firm may be inadequate as a general framework to understand actual events. It follows, therefore, that a historically relevant economics of the firm may imply theoretical pluralism. The possible nature of this pluralism is explored in this paper. Secondly, and following on from the first point, if the importance of theoretical pluralism is accepted, different frameworks or approaches to the firm may be relevant in different historical circumstances. Among other things, pluralism might therefore imply a requirement for empirically driven theory. In our context empirically driven suggests that historical reality is an important motivator for the economics of the firm rather than being something that is interpreted as an end product.-2-To develop an economics of the firm consistent with these principles, it would seem to be necessary to echo the approach of Coase. He emphasised (1937, 386) that we require 'a definition of a firm … which is … realistic in that it corresponds to what is meant by the firm in the real world'. In reality the firm is obviously a technical unit i.e. it is a unit that transforms factor inputs into outputs. Following Machlup (1967), this involves how production and cost functions interact with demand on the market. But equally the firm is an institutional unit involving questions of basic definition, identity, internal structure and external boundaries (Hodgson, 2002). It follows that the firm in the " real world " , to echo Coase once again, is both technical and institutional. If this basic duality in the nature of the firm is accepted a fundamental analytical requirement is that technical and institutional theoretical aspects to the firm are not built on inconsistent principles. This consistency is required not only for theoretical-logical reasons, but also so that we can switch between technical and institutional views on the firms without creating conceptual problems. An inability to switch between definitions would introduce particular problems in the current context. It would undermine an ability to undertake an historical investigation of, for …