Abstract
Evolutionary economists have tended to assess firms and industries separately, neglecting the role of their interaction in the process of economic growth and development. We trace the separation of firms and industries to the introduction of population thinking in the discipline of industrial economics, including some broadly evolutionary analyses. If researchers conflate a population of firms with an industry, they introduce “thin” means of relating firms to one another and to industries. Despite his device of the ‘representative firm’, Marshall develops “thick” means of relating firms to industries by means of their internal and external organizations. Penrose avoids the notion of industry by focussing on heterogeneous and potentially mobile firms. Young and Steindl develop mundane explanations of firms’ relations within groups and locate the impetus for economic growth in a poorly understood environment. We conclude that evolutionary economists should revisit firms’ boundaries, not in the sense of explaining the existence of firms but in a relating and communicating sense in which boundaries signify the selective means of firms’ relationships.
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Notes
Callon (1998) provides a broadly cognitive and processual perspective on externalities, which of course, include external economies. Hence, externalities spill-over the boundaries of a particular social system because, as with Coase (1960), there is as yet no generally accepted way for agents to take these into their accounts and calculations.
The nascent systems theory is distinct from the clear parallels between Marshall’s references to Spencer, in integration and differentiation, which may be compared with Simon’s (1962) argument of complexity as a developing organizing form. The systems theory is in each organizing unit benefiting from its environment, and may be also benefitting its environment.
Firms focus their competitive efforts on selling their products to end users, drawing upon their external organization and so on their established marketing and market-making efforts. Marshall (1921, p. 270) describes these as the ‘marketing reputation and connection of a business’, which may be larger relative to earnings than its fixed capital. Heterogeneity in firms’ productive capabilities can be reflected further in heterogeneous products, although of course there are many ways of making comparable products. Consumers also cope with heterogeneous products in seeking to compare products.
In attempting to translate heterogeneous firms in an industry empirically into a population of firms, we know that the ordering should be in the basis of average costs. In which case, the representative firm is something of a lagging indicator, suitable also for static or equilibrium analysis. If Marshall’s emphasis were on growing firms ahead of the developing industry, surely more attention would be focussed on both the new entering firms and also on the exceptional long-lived firms that are enjoying internal economies, as indicated in the passage from Marshall, which we cite above. Metcalfe (2007b) provides an enlightening analysis of how the representative firm may be modelled to evolve in a manner capturing both the lagging and leading aspects of the concept.
Marshall recognizes that large firms can come to dominate industries: ‘The advantages which a large business has over a small one are conspicuous in manufacturing....But there is a strong tendency for large establishments to drive out small ones in many other industries’ (Marshall 1920, p. 297).
Once the firm is treated in isolation it makes no sense to speak of the competitiveness of the firm, for competitiveness is a relational concept. This point that is often lost in business school discussions developed from Penrose’s analysis of the growing firm. Rugman and Verbeke (2002) and Lockett and Thompson’s (2004) exchange is instructive in this respect. Rugman and Verbeke argue that Penrose provides little basis for ‘isolating mechanisms’, which they argue is integral to the resource-based view. Locket and Thompson counter that Penrose’s approach is compatible with managers seeking to create and protect rents through isolating mechanisms.
Raffaelli (2004, p. 210) argues that Marshall had a coherent and general theory of development or evolution, encompassing deliberative innovation and systemic selection and reproduction among innovations, embodied in repeatable or autonomous routines that exhibit tendencies of inertia.
Pigou (1920, p. 790) acknowledges in a footnote that Marshall had in mind something more, such as a typical firm or firm of average size. However he argues that such complications are irrelevant to his purpose of analysing the industry supply curve using the equilibrium firm to stand for all firms.
There are alternative neoclassical theories of the firm, particularly the theory due to Coase (1937), Williamson (1975) and Simon (1976) that relaxes the assumption of perfect knowledge and relates the boundaries of firm activity to transaction costs. However, this simply adds further external conditions, the degree of imperfect information and the costs of the technology for overcoming it, to the exogenous determinants of firm size.
The modern representative firm or agent is a travesty since it relates to uniform agency, which is to say it is representative of itself, which is most odd.
We are grateful to a referee for pointing out the similarity between Young’s discussion of round-a-boutness, in which entrepreneurs propose new firms so proposing extensions in the division of labour, and Marshall’s discussion of ‘contrivances’. Raffaelli (2003, p, 55) explains that by contrivance, Marshall means invention, creativity and innovation. Contrivances can challenge established routines, and through repetition can become a basis for new routines.
“Higher-order” is used in the sense of Menger (1976, p. 56): ‘a large number of other things in our economy that cannot be put in any direct causal connection with the satisfaction of our needs, but which posses goods-character no less certainly than goods of first order.’
Metcalfe et al. (2006) draw on Young’s explanation of interdependence among industries in their emergent modelling of economic growth.
The competitive group re-appears as a unit of analysis in Caves and Porter (1977) and influences strategy research thereafter.
Marshall does this too, but in a descriptive rather than systemic sense.
If innovations are embodied in capital goods, adoption may result in indivisibilities either in the form of minimum output scale for the equipment or the requirement that a whole production facility be redesigned to accommodate the new machines.
Steindl’s argument concerning the relationship between the variance of return and the risk premium closely follows Kalecki’s principle of increasing risk (Kalecki 1937).
Steindl follows the standard practice of statistical agencies, particularly the US Census Bureau, and defines industries in terms of common or overlapping production technology. This definition is appropriate in terms of Steindl’s focus on scale and adoption of best-practice technology as sources of cost advantage for firms in an industry, but ignores potential competition between products with competing uses that are produced using different production technologies.
This view of price rigidity as endemic with imperfect competition follows the arguments of Berle and Means (1932) on the prevalence of administered prices in big business.
Internal accumulation also features prominently in the post-Keynesian analyses of Eichner (1976) and Harcourt and Kenyon (1976), in which dominant firms set their profit margins to generate sufficient retained profits to carry out their desired investment in the expansion of productive capacity. However, causality differs from that in Steindl, where investment increases to the level set by the interaction of a rigid price with falling unit cost. In the post-Keynesian analyses, it is price that increases to the level required to finance desired investment expenditures, given the firm’s unit cost and demand for its product.
Levine (1981) and Shapiro (1986) relax this restrictive aspect of Steindl’s analysis and consider innovation in terms of new product development as a means to overcoming a given growth rate of market demand for established products. Bloch (2006) considers the implications of new product development for Steindl’s analysis of the pattern of competition between progressive and marginal firms.
See Sraffa (1926) for a discussion of alternative criteria for defining an industry.
Penrose’s theory sees the firm as a process extending into the future and deriving artefacts, lessons and practices from its past, in which managers develop ‘administrative coordination’ and ‘authoritative communication’ over some set of resources (Penrose 1995, p. xi). The firm has some resemblance to that featured as a representative in neoclassical economics, but, as one of our referees points out, develops, acquires, adjusts and experiments with, rather than assumes, its production function.
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Financial support from the Australian Research Council is gratefully acknowledged. An earlier version of this paper was presented at the 18th HETSA conference held at the University of Western Australia in July 2005. The authors appreciate helpful comments from the audience as well as from Stan Metcalfe and from anonymous referees, but take full responsibility for any remaining errors or omissions.
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Bloch, H., Finch, J. Firms and industries in evolutionary economics: lessons from Marshall, Young, Steindl and Penrose. J Evol Econ 20, 139–162 (2010). https://doi.org/10.1007/s00191-009-0133-0
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DOI: https://doi.org/10.1007/s00191-009-0133-0