From the optimal planning theory to the theory of the firm and the market: a quest in Masahiko Aoki’s early works

Abstract

This paper highlights Masahiko Aoki’s theoretical quest in the 1970s. The subject he first chose was the design of processes to find the solution maximizing a given objective function of a large-scale economic organization. So long as the information on technologies is scattered among individual production units, the optimal solution must be approached through successive communication between the central planning board and these production units. In his first book (1971), the optimal planning theory is considered to be an analytical tool for the search of a more desirable social system than existing systems in terms of both efficiency and morality. However, in the second book (1978), this theory is applied to describe prototype models of adjustment mechanisms working in the actual capitalist system: one is “the quantity adjustment mechanism” in which parts of inputs are assigned to production units based on a comparison of their shadow prices and the other is “the dual adjustment mechanism” in which each production unit increases production in response to excess demand and raises price when it is lower than marginal cost. Aoki’s theory of the capitalist firm starts from the perception that the firm organization is an institutionalized form of the quantity adjustment mechanism. It is also accompanied by a theory of the market being an institutionalized form of the dual adjustment mechanism. The latter contends that successive corrections of short-term disequilibrium in product markets due to inevitable errors of demand forecasts by individual firms involve underemployment of durable capital goods and labor. Although these developments of Aoki’s view are less known than his game-theoretic comparative analysis of the firm organization in later works, they are worth receiving more attention as an ambitious challenge to construction of the general theory of the matured capitalist system.