Firms, Organizations and Contracts: A Reader in Industrial Organization

By Peter J. Buckley; Jonathan Michie | Go to book overview

I. THEORY OF THE FIRM

Why do we need a theory of the firm? There are various possible answers which are not necessarily mutually exclusive, or even contradictory; the question as to why we need a theory of the firm might be seeking the answer to several different puzzles, each one of which needs to be answered differently. Perhaps the starting point should be to consider how the economic system in which we live can best be analysed, understood and explained. One simple-minded approach would be to start with individuals as rational agents who consume and who may take part in some productive activity, with the behaviour of actual economies then being determined by the sum of the actions of these individuals. This of course begs all sorts of questions regarding aggregation problems and externalities--whereby the outcomes for any one individual will not be determined solely by their choices regarding either consumption or production but will instead be influenced by the actions of other individuals and by the outcome at the 'macro' level of all individual decisions. But these complications need not concern us unduly here. Instead, let us focus on the single idea that the level of output for the economy--the national income--derives from the decisions of individuals to produce. How does this production take place? The answer is that it takes place largely within firms and other organizations. This latter distinction--between firms on the one hand and other organizations on the other--is explored in Sections II and III of this book. This opening Section leaves this distinction largely to one side and focuses instead on the question of the firm itself. If production takes place by individuals deciding to take part in such activity, and if this productive activity takes place largely within things called firms, then what is this thing, the 'firm'? The answer, as the collection of readings in this Section illustrates, is that the term covers a multitude of concepts. Indeed, in one of the seminal works in this area, The Theory of the Growth of the Firm ( Oxford University

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