THE origin of this paper is a belief that, whatever its virtues as a major component of the theory of value, the theory of the firm as it exists at present is an inadequate basis for analysing the process of managerial decision-making. Professional economists working in industry are ready enough to declare (to take two examples)2 that 'the theory of the firm based on the marginal analysis is most unlikely to have any relevance to the real world and is of negligible use to economists earning their livings in it'; or that 'in such analyses as I have attempted of the actual processes of decision-making in business I have frankly found the theory almost completely irrelevant'. Perhaps, indeed, few academic economists would nowadays dispute this point. Of course many of the concepts used in the theory of the firm are valuable; but the integrated theory is not. Customary forms of theorizing about the firm require that the firms of the real world be treated as 'black boxes', which transform information inputs into decision outputs by managerial processes which need not be properly understood provided that their effects can be calculated. Now this is, in principle, a perfectly legitimate intellectual procedure; it is not necessary to be able to explain in order to be able to predict.3 The fact that no one yet understands exactly what happens within a blast-furnace does not prevent blast-furnaces from being used; and the establishment of statistical relationships does not depend upon the ability to analyse the processes which create those relationships. However, it is precisely the managerial processes within these 'black boxes' which form the subject matter of management economics. If management economics is to make a more adequate contribution to explaining business behaviour, to increasing the efficiency of management, and to the development of management education, economists must begin to look more carefully at managerial processes. For this purpose, the assumptions of the traditional theory are hopelessly inadequate.