The Theory of the Firm: If Economics & Entrepreneurship Would Converse

Richard Stallman is largely considered the "founder" of open source software.

Richard Stallman is largely considered the “founder” of open source software. “Richard Matthew Stallman. Digital image. Wikipedia.org. Wikipedia Foundation Inc., n.d. Web.”

Given my background, I very often tend to straddle the line between economics and entrepreneurial literature. Even if one had little to no background in either field however, it requires relatively little thought or observation to discover how married at the hip these two fields truly are. Indeed in entry level microeconomics courses  we are taught about the theory of the firm. Various definitions of this exist and it has certainly evolved overtime of course. Interpretations range from such austere neoclassical concepts as “that firms exist and make decisions purely to maximize profits (or shareholder wealth)” to more modern ideas which add to that concepts of long and short term aims, corporate responsibility, innovation, etc. though most of those are found in industrial organization or business oriented scholarship.

Why the neoclassical (read as ~ pre-WWI) ideas are rarely accepted in their unbridled form probably should come as no surprise. Few theories that old in any field of scholarship are still accepted in their pure form today. The story of how that came to be is largely attributed to the works of John Maynard Keynes (1883 – 1946) and his post WWI economic proposals. More to the point, observation of how firms’ behavior are beginning to evolve today (key word = evolve) often runs in stark contrast to many of today’s well-accepted theories of firm behavior let alone those of old.

While the definition of “entrepreneurship” is fairly contested even within the field of research, if we consider entrepreneurship in the context of scholarship as at least incorporating the study of how individuals and firms innovate and evolve in the marketplace, then it has the potential to offer key insights into the theory of the firm. What is missing from the conversation in economics, though it is beginning to foster more discussion in entrepreneurial fields, are the behavioral changes and corresponding firm/entrepreneur motivations which stand almost as a 4th dimension to the 3D world of neoclassical thought.

If we accept the traditional theories as a universal truth, then what on Earth causes any entrepreneur to form a Benefit Corporation or B-Corp? Who in their right mind would take the time to create Wikipedia, let alone Wikileaks? What interest does homo economicus or a wealth maximizing firm have to create Bitcoin?  How can open source software, which provides a crystal clear opportunity for profit generation, possibly exist in a free market? Speak with almost any entrepreneur in renewable energy and the words “profit” or “wealth” are rarely uttered while “climate change” and other socially oriented value concepts dominate the conversation. Why do so many local microbreweries and cafes which are axiomatically in competition with one-another,  assist each other in forming their businesses? Why do some business owners, with little to no market incentive to do so, purposefully locate their manufacturing to more costly, higher wage, countries? How do companies on Kickstarter generate such activity? Why would health clinics form in the developing world which charge affluent customers for medical services then turn around those profits to provide free health care to the poor? While some may find ways to argue their place in traditional economic theories, in truth these ideas mesh with neoclassical economics no more than Noah’s Ark meshes with Geology. As is seen time and time again throughout history, rather than simply observe these phenomena those that feel they challenge established theory instead very poorly try to explain them using conventional wisdom.

So what does this imply exactly? The answer to that, is probably the most exciting takeaway one can get from reading research literature or blog posts for that matter. We simply do not know yet. How cool is that!? These concepts continue to evolve into our modern economy and economists, entrepreneurial scholars, and other academics are yet to fully analyze and understand them, let alone model them. Keep an eye on the forefront of economic research because while most people today emphasize sovereign debt, China’s inward shift, oil prices, and automotive sales, in the coming decades, I believe this field of economic research will begin to change the way we view and operate within the economy altogether.

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