A Brief 'Prehistory' of the Theory of the Firm

Abstract

The mainstream theory of the firm did not exist, in any serious manner, until around 1970. It was only starting then that the current theory of the firm literature began to emerge, based largely upon the work of Ronald Coase and to a lesser degree Frank Knight. It was work by Armen Alchian, Robert Crawford, Harold Demsetz, Michael Jensen, Benjamin Klein, William Meckling and Oliver Williamson, among others, that drove the upswing in interest in the firm among mainstream economists. Before then there was no great interest shown in the firm as a significant economic institution by any school of economic thought. What literature there was constituted, essentially, the `prehistory' of the theory of the firm. For more than two thousand years tools were available that could have given rise to a theory of the firm but none appeared. During this period the most sophisticated analysis that occurred was that which concentrated on micro-level production, and that only after 1930, while before then the deliberations that did transpire, limited though they were, were more focused on macro-level or aggregate production. Up until the 1970s the development of the theory of the firm was a story of neglect and disinterest.