Institutionalist perspectives

American institutionalism proposed some alternatives to the views of the firm offered by classical and neoclassical economics. In his historical analysis of capitalism, Thorstein Veblen (1904, 1923) saw institutions, including firms, as mental habits evolving in a cumulative sequence.

In John Commons’s typology (1934), the managerial transaction describes the rela­tionship between employers and employees inside the firm as superior-inferior, seeking efficiency and based upon the negotiational psychology of command and obedience. Therefore, even if the firm also involves the two other types of transaction (bargaining and rationing), its focus is not on exchange or distribution but on wealth creation, not on allocation but on production.

The role of the entrepreneur in capitalist growth was central for Joseph Schumpeter (1911). As distinct from the capitalist who lends money and bears the risk, the entre­preneur is crucial for the process of innovation and responsible for business and other cycles. The innovation of the successful entrepreneur gains him an extra profit, but he is imitated by other entrepreneurs and the system returns to a new state of equilibrium. Here, the entrepreneur is viewed as an innovative individual, whereas in Schumpeter’s subsequent work (1942), innovations result from the research routines of specialist departments in large corporations trying to secure transitory monopoly power.

In Frank Knight’s theory (1921), the entrepreneur interacts with an uncertain world (inputs, outputs and production functions are not exogenously given), and must make decisions and exercise control. He owns certain capacities of “judgement” that help him to deal with uncertainty, but that cannot be transferred or evaluated. Since this judge­ment cannot be contracted, it is used inside the firm and gives rise to a profit. The entre­preneurial firm hence develops along the lines of the specific entrepreneur’s competence. Workers are more risk-averse and their competences can be assessed, which is why they are paid wages.

The non-contractible aspect of the Knightian entrepreneur’s competence was not understood by Coase, who rejected the involved explanation of the firm. His “The nature of the firm” (1937) initially went unnoticed, gaining fame only after the success of “The problem of social cost” (Coase 1960) and Oliver Williamson’s use of the concept of transaction costs (1979). Coase’s 1937 article was celebrated for the question it posed: if coordination by the market was as efficient as some economists argued, why would this alternative mode of coordination by hierarchy exist? This was the very same issue that was stressed by Smith or Marx: there is division of labour inside the firm, that is, another form of coordination than the market. But Coase linked it to the plan­ning debate of the 1930s: why is there planning in our market economies if planning is as inefficient as its opponents claimed? Coase’s answer was based on the costs of the operation of the market, “marketing costs” that consist in “discovering what the rele­vant prices are” and “negotiating and concluding a separate contract for each exchange transaction” (Coase 1937: 390-91). Inside the firm, multiple short-term contracts are replaced by a unique long-term contract which does not need to specify all contingen­cies; details are given later by the entrepreneur-coordinator. Coase was worried about the unrealistic assumptions underlying the neoclassical firm, but still wanted to use the Marshallian tool of substitution at the margin.

Coase’s article oscillates between an institutionalist and a neoclassical perspective, which explains its influential role for recent theories issued from both traditions (Foss 1994). On the one hand, he places hierarchy and the market in opposition, and views the entrepreneur as facing uncertainty and adapting to unforeseen contingencies. On the other, he keeps the analysis of equilibrium and optimality; he views the firm as playing the same role as the market - coordination - and the line between the two gets increas­ingly blurred (Coase 1988). Like in marginalist theory, the firm passively adapts to its environment and to the market instead of changing them.

The successes of the organization and the competences of the firm were put forward by Penrose in 1959 in a book that was at first neglected, but nevertheless became a fertile ground for evolutionary and competence-based theories of the firm. She defines “a firm [as] more than an administrative unit; it is a collection of productive resources the disposal of which between uses and over time is determined by administrative deci­sion” (Penrose 1959: 24), these resources being physical and human. Her interest was in the internal organization of the firm, specifically in management, whose capacities were limited and therefore constrained the growth of the firm, but which constantly pushed against these limits. The specificity of each firm results not from the individual entrepre­neur, but from the managerial personnel, learning both to manage and to work together. This learning inside the firm creates specific competences and path-dependency, which explains the diversity of firms.