The Information- and Knowledge-Based Approaches to the Firm: Contributions by Richardson and Malmgren
Less than a decade after the emergence of the Journal of Industrial Economics, a new trend in the economics of industry and competition emerged with the contributions made by two Oxford economists: George Richardson and Harald Malmgren, both students of John Hicks.
The development of the Richardson-Malmgren view of the behaviour of industrial firms was not a coincidence or an unintended consequence of their respective work, but on the contrary was largely influenced by the intellectual context of Oxford in the late 1950s and early 1960s. Indeed, Richardson and Malmgren were not aware of each other’s work until quite late on.The Richardson-Malmgren approach stressed the role of information and knowledge in explaining industrial behaviours. Several remarks can be made about the similarities between both authors.
George Richardson contributed to a new strand of thinking in the field of industrial economics, stressing the role of information in the evolution of firms. Richardson opened Information and Investment (1960) with a critique of the concept of perfect competition and of the Walrasian general economic equilibrium (GEE) theory. This stressed the fundamental importance of information and knowledge and led to Richardson’s more general critique of the suppression of the co-ordination problem in neoclassical microeconomics. In fact, according to Richardson, informational factors within the firm are essential, mainly because ‘no direct connection can exist between objective conditions and purposive activity; the immediate relationship is between beliefs about relevant conditions and planned activities which it may or may not prove impossible to implement’ (Richardson 1959: 224; italics in original). Thus, Richardson’s critique of GEE theory was made on the basis of the existence of informational factors. Company performance largely depends on what Richardson called the “market conditions” in the GEE.
This includes both “primary” conditions (concerned with technical production possibilities and the current state of consumer preferences) and “secondary conditions” meaning the ‘relevant projected activities’ of other economic agents (ibid.: 229). As Richardson puts it, ‘[firms’] mutual interdependence clearly presents, for entrepreneurs, a barrier to obtaining the necessary secondary information, and, if we are to hope to show how a system can work, we cannot escape the obligation to explain how the barrier is overcome’ (ibid.: 230). This concept of mutual interdependence providing more information to the firm represents the rationale behind the emergence of co-ordination.Harald Malmgren worked on very similar issues but seems not to have been aware of Richardson’s work until he was very far advanced in writing his the- sis.[19] He spent much time discussing period analysis with his supervisor, John Hicks, after the publication of Value and Capital (1939). In line with Richardson’s argument, Malmgren’s work on the concept of time periods led to insights regarding the importance of new flows of information in the process of decision-making and located informational factors at the heart of his theory of industries. In fact, Malmgren argued that firms entered into co-operation to stabilise the expectations of managers and could therefore reduce transaction costs (as also argued by Richardson). Malmgren’s contribution was original and constituted a first attempt in paving the way to a new kind of industrial organisation, mainly based on organisational and firm theory. His contributions favoured a multi-disciplinary approach, incorporating ideas not only from economics, but also from organisational theory, game theory and information theory.
The desire for realism expressed by the co-ordination approach to industrial economics does not, however, imply that Richardson’s and Malmgren’s contributions were purely empirical. On the contrary, their publications remain theoretically grounded, especially regarding their insights on the importance of co-ordination and individual interactions in a decision-making process.
A modern theorist of the firm, reading their texts for the first time, may be tempted to link their examination of decision-making to early game theory in that they consider the importance of strategic interactions. However, this interpretation would be misleading as Richardson and Malmgren made it clear that, even though they were aware of game theory, they did not explicitly employ it in their research.Richardson's work could not be framed in terms of game theory mainly because, in his framework of investment co-ordination, before “placing their bets”, entrepreneurs are first trying to improve the information they have about other agents, since the actions of others necessarily influence the outcomes of their own choices (see Earl 1998: 18). In other words, Richardson was much more interested in the way that agents search for and collect information than by their strategic choices per se. Similarly, in his DPhil thesis, Malmgren made clear his rejection of game theory. Indeed, he argued that the solution to strategic interactions could only depend on the initial nature of the information available to each competitor and, therefore, on the degree of communication between these competitors. In this respect, Malmgren rejected the “theory of games” approach, ‘which ordinarily requires perfect information’, and which realistically ‘turns out to be a non-zero-sum game’ with an indeterminate solution (Malmgren 1961: 253).
The novelty of Richardson’s and Malmgren’s approaches to Oxford industrial economics was mainly due to their success in providing an alternative framework to GEE theory, which remained predominant at Oxford after having been revived by the publication of Hicks’s Value and Capital, twenty years before. The Richardson-Malmgren co-ordination view of the firm, as it stood, also offered an alternative to contemporary developments in game theory, which were mainly concerned with strategic choices and much less with the nature of information and knowledge at an individual level.
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