Adam Smith’s neoclassical theory of the firm
The neoclassical firm has several characteristics:
-The firm enjoys perfect information
-It operates at full efficiency (At the lowest point of the marginal cost curve)
-It is a price taker and not able to influence the market significantly
-Technology is exogenous (Can be obtained at almost no cost)
-The contribution of economic actors within the firm is not relevant
The neoclassical firm operates in a highly competitive environment and is usually represented by a small or medium sized company. (price taker)
Almost perfect examples for such a firm are for example early British metal-working firms. The growth of these firms stopped at the lowest point in the marginal cost curve so there was a limit to their size.
Later, Joseph Schumpeter challenged the neoclassical view of the firm. He focused on two things which he called ‘competitive habit’ and disequilibrium among firms. Competitive habit is how the company ‘behaves’ under competition in a disequilibrium.
Peter Drucker examined in 1946 that big business could be understood by looking at the technological foundations, the human effort that goes into it and the social impact it has.
Chandler said that technology has significant impact on the entrepreneurs choices and decisions and therefore forms the organization.
Edith Penrose believed that growth is explained by ‘the ability of the firm to exploit its physical and human capabilities’. She also takes organizational learning into account.
Winter and Nelson believed that a firm builds up routines to avoid uncertainty because the managers suffer from bounded rationality.
In the 1970’s 1980’s the agency theory was first describes. It describes contrasting interests of managers who focus on growth of the company or sometimes their personal benefit and shareholders of the company who have claims on the residual cash. (Their dividends)
Also the transaction cost theory came up which described that if the markets are inefficient some transactions have.......read more
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