The Innovating Firm

Abstract

In this chapter I shall describe a model of the behaviour of the firm in an economy in which some of the basic assumptions of neoclassical theory are not satisfied, and in which there is consequently room for the activities of entrepreneurs. The neoclassical assumptions that will be dispensed with are perfect knowledge of technology, perfect competition in the supply of finance, and the absence of time lags. But, at this stage, in order to avoid some additional complications, I shall retain the assumption of perfect competition in goods markets and for services other than finance. It will be found that, with the assumptions used in this chapter, it is possible to construct an alternative theory of the firm, which yields results more consistent with observed facts than standard neoclassical theory. With a view to clarifying the differences between these two theories, both in their assumptions and in their predictions, I shall start by giving a brief summary of the essential elements of the neoclassical theory of the firm.