The Coordinated Activity Theory of the Firm

Abstract

This paper proceeds from the assumption that economies are characterized by a high degree of interactive nonconvexity in most activities and at most scales. The consequence is nonconvex production and preference sets and the corresponding inefficiency of myopic algorithms. One application of this perspective is the theory of the firm. Conventional theories explain the existence, boundaries and internal organization of firms on the basis of contracting costs that impede the otherwise optimizing properties of market decentralization. I propose instead an approach in which the motive for organizing production within rather than between institutions is to internalize nonconvexities, thereby obtaining the benefit of explicitly coordinated plans. A useful device for representing this problem is the profit landscape, understood to be nonconvex in the sense that fitness landscapes are in evolutionary theory. Firms face three types of challenges, optimizing with respect to a particular profit hill (the problem analyzed in standard microeconomics), selecting a desirable hill, and achieving flexibility to transition between hills in the face of environmental change. These entail tradeoffs, which are reflected in the diversity of personnel, organizational, and innovation strategies observed in actual enterprises. While the use of the landscape metaphor in coordinated activity theory resembles a similar deployment in evolutionary economics, the two approaches differ in the questions they ask and the units of observation and analysis they employ. The applicability of the coordinated activity model is underscored by its congruence with the bulk of management literature, which can be understood more readily in terms of hill-selection than, or in addition to, the hill-climbing paradigm of conventional economics. In this sense, the existing management literature already provides a body of empirical and applied support for coordinated activity theory, although not generally for the socially-founded objectives of economics.