ABSTRACT
Even though firms may be, in practice, as old as farming – and even if not that old, ‘firms’, of some description, are at least two to three thousand years old – attempts at the formulation of a theoretical explanation for the existence, boundaries and organisation of firms only go back, at the most, to the 1920s or 1930s, while the current mainstream approach to the theory of the firm is even more recent having been developed only since the 1970s. During the period, roughly, from 1930-1970 the mainstream theory of the firm was the neoclassical model in which the firm is seen as a production function or production possibilities set, simply a means of transforming inputs into outputs. Given the available technology, a vector of input prices, and a demand schedule, the firm maximises money profits subject to the constraint that its production plans must be technologically feasible. For the pre-1930 neoclassical period there was no generally accepted theory of the firm. None of the then contemporary schools of thought offered an exhaustive analysis of the firm. Before that the classical economists only had a theory of aggregate production. The emphasis in classical economics was on macroeconomic questions centred around economic growth.1 This resulted in less interest being shown in purely microeconomic issues, including firm level production.
