The marginalist controversy

The neoclassical theory of the firm was, at least temporarily, more shaken by the mar- ginalist controversy than by these isolated contributions. The assumption of maximiza­tion of profit was questioned not only by empirical studies (Hall and Hitch 1939; Lester 1946), but also by behaviourist and managerial theories.

Behaviourism was concerned about the empirical validity of neoclassical assump­tions and was searching for laws to describe the behaviours and decision processes of businessmen. Herbert Simon (1955) more realistically considered that their rationality was bounded, referring to the cognitive limitations of the decision makers, that is, limits in their knowledge and computation capacities. Behaviourists mainly see the firm as a means of compensating for the limits of rationality, and composed of different self­interested groups in conflict (March and Simon 1958). Richard Cyert and James March (1963) viewed the firm as a collection of individual members each with different goals (production, sales, market share, and so on) and seeking compromises out of the result­ing conflict.

The conflict between owners and managers, neglected by the marginalist theory, is the main problem addressed by managerial theories. This is the problem identified by Adolf Berle and Gardiner Means (1932) as “the separation of ownership from control” in the modern corporation. In their analysis, inspired by Veblen, power moves away from the owners to managers in large business enterprise. These managers are very dif­ferent from the heroic Schumpeterian entrepreneurs: they are engaged in maximizing their own rewards, which may clash with ownership interests. This separation of owner­ship and control goes hand in hand with the extension of large corporations, that is, of administered sectors that fix prices and reduce the interaction of supply and demand on the market. In the 1960s, managerialists pursued this analysis of managers’ objectives (beyond profit maximization). William Baumol (1959) assumes that managers maximize revenue (sales). Williamson (1964), also influenced by the behavioural group, conceives managers as agents who are not controlled by owners and have preferences over staff count and emoluments. Robin Marris (1964) sees the aim of managers as increasing corporate growth, while the shareholders weigh up the costs of reduced wealth with the costs of controlling managers.

Facing all these criticisms, the champions of the profit maximization assumption defended it by citing the process of selection and the necessity of unrealistic assumptions (Machlup 1946; Alchian 1950; Friedman 1953). Fritz Machlup (1967: 9, 27) explicitly asserted that the marginalist firm was only a “mental construct”, “an imaginary reactor to environmental changes” with no “empirical counterpart”. However, new waves of criticisms of and alternatives to this view, based on the contributions mentioned above, emerged during the 1970s.