An economist's perspective on the theory of the firm

Abstract

An outsider to the field of economics would probably take it for granted that economists have a highly developed theory of the firm. After all, firms are the engines of growth of modern capitalistic economies, and so economists must surely have fairly sophisticated views of how they behave. In fact, little could be further from the truth. Most formal models of the firm are extremely rudimentary, capable only of portraying hypothetical firms that bear little relation to the complex organizations we see in the world. Furthermore, theories that attempt to incorporate real-world features of corporations, partnerships, and the like often lack precision and rigor and have therefore failed, by and large, to be accepted by the theoretical mainstream.