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Institutional Size

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Rethinking Economic Growth Theory From a Biophysical Perspective

Part of the book series: SpringerBriefs in Energy ((ENERGYANALYS))

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Abstract

This chapter tests the implicit neoclassical assumption that large institutions are not important for growth. The linkage between institutional size and growth is tested by comparing changes in both corporate and governmental employment concentration with the growth of energy consumption (which is used as a metric of biophysical scale). Contrary to the neoclassical assumption, on both the national and international level, the employment concentration of large institutions is found to be correlated with growth. To explain these results, the following hypothesis is proposed: The expansion of hierarchy (as embodied in large, hierarchical institutions) plays an essential role in facilitating the growth of energy consumption. Anthropological evidence supporting this hypothesis is discussed, as well as the implications of this hypothesis for economic theory.

The Modern Corporation has undermined the preconceptions of classical economic theory as effectively as the quantum undermined classical physics at the beginning of the 20th century.

– Gardiner Means (1957, p. 287)

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Notes

  1. 1.

    To be fair, numerous scholars have attempted to add government to neoclassical growth theory (for instance Carboni and Medda 2011). However, in most applications, government remains absent.

  2. 2.

    Quite curiously, the production function does not include energy, the single factor one might think is most important in making something.

  3. 3.

    As used by Wicksteed, Euler’s theorem states that if \(Y=f(a,b,c,...)\) is a production function with factors of production \(a,b,c,...\) that exhibits constant returns to scale, then \(Y= a \frac{\partial Y}{\partial a} \,+\, b \frac{\partial Y}{\partial b}\,+\,c \frac{\partial Y}{\partial c}\, +...\). That is, ouput Y is guaranteed to be the sum of the quantity of each factor times its marginal productivity.

  4. 4.

    This is known as the first fundamental theorem of welfare economics: under conditions of perfect competition, market equilibrium is Pareto-efficient. It is impossible to make any one individual better off without making at least one individual worse off.

  5. 5.

    One might protest that the reverse may actually be true—that each additional unit of production will cost less. While this may be true in reality, as Harold Lydall notes, “neoclassical theory is built on the... assumption of absence of economies of scale” (1971 p. 91).

  6. 6.

    For the biophysical minded reader, note that since it is based in management studies, the resource-based view of the firm is mostly concerned with human resources.

  7. 7.

    Schumpeter also departed from neoclassical orthodoxy by asserting that large firms behaved co-respectively so as to avoid price competition.

  8. 8.

    The Ultimatum Game involves the division of a sum of money between two people. One person initially has all the money. This person then makes an offer (to the other individual) that may be either accepted or rejected. In the former case, the offer proceeds, while in the latter case, both participants receive nothing. The canonical maximizing model predicts that the receiving individual should accept any offer, since something is better than nothing. Knowing this, the person making the offer should advance the smallest possible amount. Contrary to theory, (Henrich et al. 2001) find that initial offers were, on average, no smaller than 25 % of the total.

  9. 9.

    A power law relation follows the formula \(y=ax^b\), where a and b are constants.

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  1. Faculty of Environmental Studies, York University, Toronto, Ontario, Canada

    Blair Fix

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Fix, B. (2015). Institutional Size. In: Rethinking Economic Growth Theory From a Biophysical Perspective. SpringerBriefs in Energy(). Springer, Cham. https://doi.org/10.1007/978-3-319-12826-9_4

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  • DOI: https://doi.org/10.1007/978-3-319-12826-9_4

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