The Problem of Production: A New Theory of the Firm

The theory of the firm has been fertile ground for economists. Bylund proposes a new theory, rooted in Austrian economics, which examines the firm as a part of the market, and not as a free-standing entity. In this integrated view, a theory is offered which incorporates entrepreneurship, production, market process and economic development.

This book is published by Routledge, and was released in Europe in December 2015 and in the USA in January 2016. The book’s page at the publisher’s web site is here.


Table of Contents 


1. What We Know and What We Don’t Know about the Firm

2. The Extent of the Market Process

3. Specialisation Deadlock

4. Entrepreneurship and Integration

5. Authority and Hierarchy

6. The Volatile Character of the Firm

7. Financing and Ownership

8. The Firm as a Market Institution

9. The Nature of the Market Process

10. Policy Implications

11. What the Future Holds


Description (from proposal)

The theory of the firm has been fertile ground for theorizing over the course of the past century. Ronald Coase, the “father” of the modern approach, acknowledges that there was a vast literature on organizing and the firm already in the 1920s and 1930s. But while Coase published his groundbreaking article on the nature of the firm in 1937, the field fallowed through the mid-to-late 1960s when “reignited” by Oliver Williamson and others. Nevertheless, the by far most influential approach is that of Coase and Williamson, which uses the magnitude of transaction costs in the market to explain the rationale for organizing. Several alternative approaches have since emerged, each focusing on property rights, information costs, knowledge and resource control, uncertainty, etc. Interestingly, the literature on the firm generally fails to study the firm in its natural context and so does not take into account our understanding for the market process, entrepreneurship, etc. By implication, the firm is neoclassical in the sense of being a “black box” in a general equilibrium, and that is explained by a simple rationale.

This is a problem as well as an opportunity, and this book addresses the former while attempting to exploit the latter. What I present in this book is an integrated view based on the unique perspective of the Austrian or “causal-realist” school of economics. This school does not have a theory of integration (production within firms), but several attempts have been made in the recent literature to formulate rationales for the firm using Austrian viewpoints (e.g. Langlois, 2013; Foss & Klein, 2012; Lewin & Phelan, 2000; Sautet, 2000; Witt, 1999; Dulbecco & Garrouste, 1999). Perhaps more importantly, the mainstream literature in management and entrepreneurship has adopted several Austrian concepts to propel their theorizing. Both of these trends suggest that Austrian ideas are sound for this particular field of study and that the theory of integration is fertile ground for further theorizing. But both lack looking beyond the rationale for integration, a problem I address in my 2011 article. What is needed is to take a step back and fit the pieces together, to provide a thicker explanation and deeper understanding of what integration means, how it emerges, and what it means to the market process.

In my view, the firm is not a free-standing phenomenon that can be studied separate from its context. Rather, the firm must be studied as a response to and with influence over the market process within which it is embedded. In other words, it is insufficient to draw on a single or a few aspects from Austrian theory when attempting to explain the firm. Doing so simply palliates errors in the present literature by adding bits of reasoning to it. In many ways, this is what the extensive literature following Coase’s transaction cost approach, which Demsetz (2008) shows is a rather fundamental misunderstanding. (I elaborate on this in a forthcoming article contextualizing Coase’s conceptualization.) Another problem is the almost exclusive focus on the firm’s rationale rather than the process of emergence, which I address in another forthcoming article.

The solution lies, instead, in taking a step back and so look at the firm from the point of view of a “thick” conception of a functioning, dynamic (i.e., real) market. Doing so reconnects empirical phenomena with theory and suggests a complete whole that provides a broader as well as deeper understanding for economic organization, its value and origins.

This book is the first of its kind in addressing this gap. Building on Austrian theory of capital (with heterogeneous resources, specificities, capital structure, etc.), Austrian conceptions of entrepreneurship (Kirznerian arbitrage, Schumpeterian innovation, Misesian judgment), and the Austrian view of the market as an equilibrating disequilibrium process, the theory here presented provides an explanation for economic organizing that fits together several levels of analysis: entrepreneurship, innovation, and production; organization, authority, and production processes; and evolving market structure, the market process, and economic development. This allows me to formulate a “thick” theory of the market process that does not depend on arbitrary distinctions (such as that between “market contract” and “employment contract”).

Briefly, I show how integration is a means to develop/create resources that are neither available in nor possible to create through market contracting. The firm therefore emerges and exists in the overlap of Austrian capital theory, price theory, and entrepreneurship theory through new resource creation and, consequently, price (change) determination; as such, this view of the firm provides additional depth and meaning to the “Schumpeterian” conception of the entrepreneur, offers a cause of change to the capital structure in the market (and therefore a new way of studying business cycles), and breaks new ground between price and plan coordination.