ABSTRACT
One of the main reasons for the neglect of the firm in modern economic theory is Robbins’s emphasis on markets: economics was not meant to be concerned with organizations (as discussed in Chapter 1). Machlup explains, for instance, that a firm is just a “theoretical link, a mental construct helping to explain how one gets from the cause to the effect” (Machlup 1967:9). It is a way station in the understanding of the allocational role of the market. “As distribution and allocation came increasingly in the forefront of economic analysis,” explains McNulty, “production, in the sense of the physical or qualitative transformation of resources, which had been the initial analytical focus of the Wealth of Nations, was pushed increasingly in the background, and with it, the role of the firm-the organization through which that transformation had been effected. This was accompanied, as economics developed and aspired to scientific status, by a growing role for the concept of market competition” (McNulty 1984:239). It is because of their strong focus on markets that economists of the twentieth century, including Austrian economists, have often neglected the firm by giving it an
increasingly passive role1. Even if we think of Knight’s theory of the firm as a contribution to Austrian economics, there still remains a neglect of the firm in the process view. As Witt explains:
The neglect of the firm as the organizational form of an entrepreneurial venture has a tradition in Austrian economics. It may be traced to a characteristic of the scientific community in the German language countries. There, economic theory (Volkswirtschaftslehre) and business economics (Betriebswirtschaftslehre) were institutionally segregated as early as at the turn of the century to a degree still unknown today in the Anglo-Saxon world. As Lachmann once conjectured, Austrian writers therefore considered the organizational form of entrepreneurial activities to be a topic best left to their business economic fellows.
