Lecture 1:

3 main perspectives:

1. Neo-classical
2. New institutional
3. The entrepreneur

Neo classical theory:

The representative firm= a model firm not necessity in existence, which as an abstract construction is used to illustrate the operations of a markets as a whole, transforms input in output and maximizes profits given prices and technology

Under perfect competition, the producers are price takers. First marginal cost decline (specialization) but they increase after time (called the law of diminishing marginal returns)

New institutional theory:

Asks why firms exist and why not leave all transactions to the market

The firm is hierarchical and the market is voluntary

But the market is not frictionless:

The firm (is costly as well) reduces transaction cost:

1. Discovering prices
2. Negotiating and concluding contracts
3. Taxes
4. Principal agent problem

The size of the firm is determined by the marginal costs of hierarchical transactions (Inefficiencies) and marginal cost of market transactions (frictions). But also by technology

The entrepreneur:

Where does technology come from, beyond determinism, change come from within (the top) of the firm. The entrepreneur is the agent of technological change

Technology can broadly be defined as new consumer’s goods, new methods of production and transport, new markets and new forms of organization. The entrepreneur is motivated by monopolistic profit. Creative destruction is the essential fact of capitalism

Proto industry:

1. Work from home (cottage)
2. Suplus workers in the countryside
3. No innovation
4. Inefficiency does not lead to elimination (not really competition)
5. Phased out due to the decline in prices and move of the people to the cities

Putting-out systems/cottage industry

The merchant entreprenourer uses a network of households:

1. The work is subcontracted
2. The workers use their own machines
3. Suited to pre-urban times, because workers did not have tot travel form home to work
4. Flexibility
5. Piece-wage(the more pieces, the more money)
6. No surveillance

Craft guilds:

1. Quasi enterprises that organized labour and capital
2. Managed human capital information-masters provided money to their protegees
3. Quality control by the masters, for maintaining reputation
4. Controlling entry to the labour market, not anyone could join the guild system
5. Stability of income
6. As monopolies they restricted supply
7. Stifled innovation
8. Division of labour based on age and status, not skill

The industrial revolution made sure that economic growth was possible, besides that there is a demographic transition, firstly the death rate declines and then the birth rate declined. After wars the death rate increases for a  short amount of time and after the 2^nd WW, the birth rate went up for a little time as well.

There was also a structural transformation, people working in the agricultural sector declined an in the industrial and services increased

But wat is the industrial revolution:

Industrial revolutions are sharp transitions in technological paradigms, clusters of interventions and associated with new general purpose technology. There was a steam and first industrial revolution, electricity and second industrial revolution and a ict and third industrial revolution.

After the first industrial revolution more steam energy was used and so the total energy increased

New technologies during industrial revolution, advanced spinning wheel (more cotton was produced) and the steam machine

Coal and industrial location:

At first the steam engines were driven by water, so the steam engine was placed by water. Therefore the steam engine was dependent on water and workers. When this does not have to be the case anymore, firms can move outside the side to suitable locatons near coal. New urban cities were created, but now the firm depended on coal.

The factory timeline:

Early 1700: few big factories employeed 300-800 people, almost all work done at home or next to it

1800-1900:900 cotton spinning factories, but only with 300 peopke

1830s: between 400-500 workers

1914: most of the people did not work from home anymore

Benefits of factory system:

1. Economies of scale and scope, factories mostly specialise in one good, factories cluster in same place
2. Monitoring cost, earlier putting-out system, there is a principal agent problem and piece-wage, but in a factory time wage and supervision is possible
3. Discipline, factory owners want to make their people work harder, if the marginal product is greater than the wage, the greater the worker’s effort, the greater the owners profit. More discipline makes this possible
4. Communication vs transport cost, IR saw huge expansion in the knowledge base of techniques used. Division of knowledge becomes necessary. Factories foster full and reliable transmission of knowledge. Size of the plat is a function of three factors: by complexity of technical knowledge, the size increases. Communication knowledge makes the size decrease with lower info. Transport technology, size increases with lower communication costs. Early factories are associated with de-skilling

Downsize of the factories:

1. Alienation
2. Commuting
3. Discipline
4. Inflexible leisure/work boundaries
5. Competition