Overview
This chapter is divided into four sections. In the first we consider the meaning and scope of theories of the firm, and the role of a theory of the firm in economic analysis. The second section highlights the principal difficulties involved in formulating theories of the firm at the present time. In the third, and principal, section a review is offered of some of the newer managerial and behavioural theories of the firm, and a contrast is drawn between these and what is regarded as the neo-classical theory of the firm. The final section offers some conclusions on what has gone before, and suggestions as to the direction of future developments.
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References
O. S. Hiner, Business Administration, London (1969), pp. 11–12
K. Heidensohn and N. Robinson, Business Behaviour, Philip Allan, Oxford (1974), p. 2
C.J. Hawkins, Theory of the Firm, Macmillan, London (1973), p. 9
J. K. Galbraith, The Affluent Society, Hamish Hamilton, London, 2nd ed. (1969), p. 33
This interesting change is highlighted, and emphasis in the original text added, in S. J. Prais, A New Look at the Growth of Industrial Concentration, Oxford Economic Papers, Vol. XXVI (1974), 274
See K. W. Rothschild, Price Theory and Oligopoly, Economic Journal, Vol. LVII (1947), 299–320. For data on aggregate and market concentration see S. J. Prais, Ref. 5, p. 283;
and J. F. Pickering, Industrial Structure and Market Conduct, Martin Robertson, London (1974) pp. 15 and 17
A. A. Berle and G. C. Means, The Modern Corporation and Private Property, Harcourt, Brace and World, New York (1933)
For further data on large personal holdings in large firms see A. F. Freris, Profit or Sales Maximising or ‘Managerial’? Some Recent Evidence on the Theory of the Firm in the U.K., Business Education Review, Vol. I (1974), 117
K. Midgley, How Much Control do Shareholders Exercise?, Lloyds Bank Review, No. 114 (1974), 24–37
R. J. Monsen and A. Downs, A Theory of Large Managerial Firms, Journal of Political Economy, Vol. LXXIII (1965), 221–36
Ibid., p. 230. The full implications of these phenomena are by no means established. It has yet to be established if it would be in the shareholders’ best interests to attempt to force management to conform to profit maximising behaviour. Statistical evidence on the relative profit and growth performance of ‘management controlled’ and ‘owner-controlled’ firms is inconclusive. See K. J. Blois, Profit Maximisation by Whom?, Loughborough Journal of Social Studies, Vol. II (1967), 10–16;
and H. K. Radice, Control Type, Profitability and Growth in Large Firms: An Empirical Study, Economic Journal, 1971, Vol. LXXXI (1971), 547–62
See K. W. Rothschild, Ref. 6, 305
H. Albert, The Neglect of Sociology in Economic Science in K. W. Rothschild (ed.), Power in Economics, Penguin, Harmondsworth (1971), p. 27
J. W. Markham, Conglomerate Enterprise and Public Policy, Harvard Business School, Boston (1973), p. 165
E. H. Phelps Brown, The Underdevelopment of Economics, Economic Journal, Vol. LXXXII (1972), 7
C.J. Hawkins, Ref. 3 (1973), p. 28
J. K. Galbraith, A Contemporary Guide to Economics, Peace and Laughter, Deutsch, London (1971), p. 9
R. M. Cyert and J. G. March, A Behavioral Theory of the Firm, Prentice Hall, New Jersey (1963), p. 13
K. Heidensohn and N. Robinson, Ref. 2, p. 133
A. F. Freris, Ref. 8, 103
K. Heidensohn and N. Robinson, Ref. 2, pp. 3 and 6
See F. Machlup, Theories of the Firm: Marginalist, Behavioral, Managerial, American Economic Review, Vol. LVII (1967), 1–33
G. Whittington, The Prediction of Profitability, CUP, Cambridge (1971), p.2
See O. E. Williamson, The Economics of Discretionary Behaviour: Managerial Objectives in a Theory of the Firm, Kershaw, London (1974), p. 11
O. S. Hiner, Ref. 1, p. 15
See W. J. Baumol, Economic Theory and Operations Analysis, Prentice Hall, 5, 2nd ed. (1965), pp. 295–303
Given that profit is maximised when MC = MR, and sales revenue is maximised when MR = 0, then the nearer MC is to zero the more closely will profit maximising and sales revenue maximising outputs and prices coincide.
See C. J. Hawkins, On the Sales Revenue Maximization Hypothesis, Journal of Industrial Economics, Vol. XVIII (1970), 129–40
W. J. Baumol, Business Behaviour, Value and Growth, Harcourt Brace, New York, rev. ed (1966), pp. 14 and 47
The question of the relationship between directors’ remuneration and firm size, and the relative incentive which directors appear to have to pursue either growth or profitability is attracting increased empirical research. Differences in firm size certainly appear to go a long way in explaining differences in managerial incomes. Some doubts, however, remain as to the role of profitability and growth in explaining differences in the level of executive remuneration; although it would appear that the pattern within quoted companies differs from unquoted. See G. Meeks and G. Whittington, Directors’ Pay, Growth and Profitability, Journal of Industrial Economics, Vol. XXIV (1975), 1–14;
and A. Coch, The Remuneration of Chief Executives in the United Kingdom, Economic Journal, Vol. LXXXV (1975), 75–94
R. Marris, The Economic Theory of ‘Managerial’ Capitalism, Macmillan, London, (1964)
Ibid., p. 47
Ibid., pp. 58–9 and 102
See O. E. Williamson, Ref. 25
Ibid., p. 33
O. E. Williamson, Corporate Control and Business Behaviour, Prentice Hall, New Jersey (1970), p. vii
A recent case of the anticipated benefits of the change from a functional to a multidivisional organisation structure is that of Dormer Ltd., formerly known as Sheffield Twist Drill & Steel. Under the previous functional organisation, according to one business correspondent, ‘the sales and production sides … were gradually growing apart … individual directors, moreover, found themselves facing several different directions at once. The final solution was to break the whole organisation down into smaller units with their own boards under a four-man holding company board at the very top … The subsidiaries were now separate, identifiable profit-centres with a system of transfer-pricing which has given middle management through the company impetus and responsibility’. See S. Caulkin, The Drill at Sheffield Twist, Management Today (April 1975), 45–6
O. E. Williamson, Ref. 37, (1970), pp. 133–34
R. M. Gyert and J. G. March, Ref. 19, Ch. III
Ibid., p. 36
An interesting practical example of this can be seen in the working of Cadbury Schweppes’ Operations Profitability Committee established in the light of the merged food giant’s failure to achieve anticipated profits in 1970. By the end of that year the Committee had cut executive main board director salaries by 10%, limited directors to four weeks holiday in the following twelve months, limited directors’ overseas travel, and sought reductions in ‘per-ipheral expenditure’. The company chairman further ordered, ‘We must not subsidise the meals in directors’ dining rooms’! See A. Vice, Blending Cadbury-Schweppes in The Strategy of Takeovers, McGraw Hill, Maidenhead (1971), p. 79
See H. Leibenstein, Allocative Efficiency vs. ‘X-Efficiency’, A merican Economic Review, Vol. LVI (1966), 392–415. J. K. Galbraith looks at the other side of the coin. Thus not only can one see ‘slack’ as arising when non-profit-maximising firms pay excessive prices for inputs (costs which are reduced in times of poor business conditions). Slack may also be seen in businesses setting output prices lower than could be achieved; increases being implemented only when it becomes necessary to cover unforeseen cost increases such as a major wage settlement. In the light of the drive on the part of large business firms for corporate growth and management security, Galbraith claims ‘the prices that are so set … will almost always be lower, and on occasion much lower, than those that would maximise profits over some period relevant to managerial calculation’, Economics and the Public Purpose, Deutsch, London (1974), pp. 115–6
R. M. Cyert and J. G. March, Ref. 19, p. 1
J. R. Wildsmith, Managerial Theories of the Firm, Martin Robertson, London (1973), p. 30
Ibid., pp. 15–16
R. L. Marris, Why Economics Needs a Theory of the Firm, Economic Journal, Vol. LXXXII (1972), 321
See J. K. Galbraith, The Liberal Hour, Hamish Hamilton, New York (1960), Ch. IV
C.J. Hawkins, Ref. 3 (1973), p. 8
Ibid., pp. 81–3
M. Shubik, A Curmudgeon’s Guide to Microeconomics, Journal of Economic Literature, Vol. VIII (1970), 412
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© 1978 W. Stewart Howe
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Howe, W.S. (1978). Theory of the Firm. In: Industrial Economics. Palgrave, London. https://doi.org/10.1007/978-1-349-86141-5_2
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