The Firm as an Entity

Implications for Economics, Accounting and the Law

Yuri Biondi, Arnaldo Canziani, Thierry Kirat

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134122110
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The book enhances current economic understanding of the firm as an institution and an organization, looking beyond the narrow boundaries of neoclassical economics to an interdisciplinary approach based on accounting and law as well as economics itself. It represents the first synthesis of the authors' research work on the subjec

Part I
Introduction

The firm as an entity

1
Coming back to the enterprise entity

By Y. Biondi, A. Canziani, and T. Kirat
(volume editors)

A feeling of lack about the current state of the economic theory of the firm

Notwithstanding their insights, and their innovative contributions to a better understanding of the economy of the firm, the accepted theories of the firm still have a flavour that is distinctly neoclassical, i.e., they directly or indirectly rely on “worldviews” (Weltanschauungen) as well as on tools rooted in the neo-classical tradition. Such a common approach rests on two basic preconceptions. Drawing upon methodological individualism, which reduces collective phenomena to transient interactions among individuals, the collective dimension of the firm is entirely associated to the question of the legal personality and thus to the corporation. As a consequence, once the firm – seen as a corporation – dissolves in atomistic interplays, or is merely understood either as a “legal fiction” or a “governance device” dealing with the relations among stakeholders, it loses its fundamental contents of an economic, holistic and dynamic nature.

As a matter of fact, the theoretical and analytical interest in the firm is not at all new, but it is far more long-standing than generally imagined. It clearly emerged at the beginning of the twentieth century when scholars – in the United States, and mainly in Continental Europe (France, Germany, Italy) – realised that economic transformations under way asked for innovative inquiring about the firm and its active impact on economy and society. In addition, the need for new perspectives was fostered by the desire to delve into facts, and by the deeper insight driven by epistemic revolutions as well, pragmatism to mention but one.

Economic theory actually retained some of the contributions of that period – those concerned in particular with oligopolies and limited competition in general – but the entire movement was broad and insightful. The economic institutions of the renewed industrial and financial capitalism (big business, i.e. groups and trusts and Konzerne) radically challenged the classical theories as well as the interpretation of economic and social relationships they spread. Generally speaking, the whole of received perspectives – with their deterministic, mechanical, reassuring appeal – were under attack: questioned and defied. From this scientific unrest, a set of theoretical and practical issues arose: (i) dynamics and the firm (or enterprise); (ii) the nature and role of profit; (iii) the nature and role of the firm and its key actor (be she proprietor, entrepreneur, manager, captain of industry, “baron”); (iv) money, production and value.

The comprehensive approaches to the world of firms in some neglected authors of the past

Referring to that time of high theory, we revive here two different sources of approaches and ideas: (i) American institutionalism; and (ii) the continental tradition of accounting and business economics, coupled with the seminal contribution of A.C. Littleton in the United States. At the same time, we cannot neglect a galaxy of scholars from different nations and fields – from W. Rathe-nau to F. Perroux – who were sharing common scientific concerns and adopting broadly speaking institutional perspectives.

Challenged by the prophetical essays of T. Veblen on business enterprise, absentee ownership and the leisure class, American institutionalism focused the economic and monetary process generated by business dynamics. John R. Commons in parallel, along with the transformation of American economy, masterfully interpreted the interplay of two core institutions of capitalism, law and money, especially thanks to impressive empirical analyses and original theorisation. He centred on the institutional economic features of this process and on the ways that should lead to a reasonable functioning of the capitalistic system. At the same time, John Maurice Clark devoted much of his lifetime to study the social control of business. His analyses of the transformation of American capitalism were dominated by the problem of accounting for overheads, and the main features of institutional processes.

With the valuable collaboration of Means, A.A. Berle Jr developed a paramount research programme on economics, finance and law that generated the well-known, seminal analysis of the role of modern corporations and private property. According to Berle, the economic theory of the twentieth century needed definite severance from classical economics, in particular from the idea of property as ownership of the business enterprise as well as the very defender of liberty, justice and peace. The classical framework – especially private property rights – is no longer able to cope with the whole congeries of the firm, whose dynamic and collective dimension open the way and constitute the field of overwhelming power ; a power that, in turn, theory and polity have to grasp and deal with, in order to make liberty and fairness effective.

Veblen, Commons and Berle stand as the leading figures among a generation of economists who cast doubts on both Classical (English) and emerging neoclassical perspectives, providing the more radical tenets of marginalism have been influential for Commons or even Zappa, in an early phase. Their contributions were fostered by a common quest, which, in turn, needed to be understood. Gruchy (1947) – describing their economic thought by the term “holistic” – worked out the first synthesis of this relevant, coherent alternative to classical and neoclassical perspectives.

This institutional economics “calls for the construction of an economic science that would pay more attention to the theory of production and less to the mechanics of a competitive price system” (Gruchy 1947:7). As a consequence, the old economics of the market recedes into the background, while attention turns to such problems as surplus or inequalities of income distribution, i.e., to some of the relevant deficiencies of the competitive price system. Such an institutional economics adopts a comprehensive worldview in looking to reality and interpreting it. Economy and society are seen as an integrated system, as an evolving pattern or complex with a past, present and future. This system cannot be understood by splitting it into parts: collective and dynamic characters enter the drama. This is why the competitive price system, centred on equilibrium, is no longer helpful, nor as first approximation: whenever an economic approach relies on methodological reductionism, it appears to be essentially atomistic and static. On the contrary, the system presents an essential wholeness: not a mere assemblage of detached parts and elements but – as a matter of fact – an interrelated, structured whole whose parts are dependent and complement each other. This does not mean that all parts of the whole have a necessary harmony between them, but it implies a kind of coordination that is totally different from the equilibrium pattern provided by a formal, stable, determined mechanism. The whole is brought about by a number of factors which imply principles and choices, purposes and constraints, order and disorder, efficiency and waste, fairness and unfairness, development or distress: open to the forces of economic and social change, such a whole results in being only relatively established and endlessly evolving.

American scholars were not alone in this quest. At the very same time in Continental Europe, namely in Germany and Italy, business economists and accountants such as Nicklisch, Schmalenbach and Zappa developed self-contained theories of the firm. These theories moved from the firm interpreted as an economic agency to produce wealth, progressed steadily along time considering the firm’s social roles and interplays (fulfilling human needs, producing and distributing incomes, playing a distinctive social role), and identified it at the end as an institutional construct. This renewed interpretation contrasted among others the “black box” view: mechanical and old-fashioned, but still influential.

The two aforementioned streams, as well as the galaxy of authors adopting an institutional tenet, crossed the subsequent decades in either a well-recognised or a hidden way. And just to refer here to the most important of them from the viewpoint of continuity and coherence (Herbert Simon apart), François Perroux (1966) launched a comprehensive inquiry on “The Firm and the Economics of Twentieth Century.” He asked Berle and Richardson, among others,¹ to write about the firm, its functions and role in the new context of the late twentieth century. In his introduction to the collection, Perroux spoke of the limits of a “purely market theory” – i.e., the neoclassical black box – in understanding the economy of the firm. In particular, moving from market failures, and contrary to the mainstream, he posed such key questions as what are the intrinsic deficiencies of the price system as well as its lack of understanding economic relations and interactions under real dynamics and complexity.

At the same time, moving from the idea of “bounded rationality,” Simon (1991; 1997) developed a valuable critique of the firm framed by equilibrium, and suggested interpreting the firm as a dynamic system, connecting himself to Commons and the American institutionalism as well. Therefore, Simon stressed the need for a new theory grounded on active firms instead of paramount “effi-cient markets,” and criticised both the profit maximisation approach and the underlying idea of neoclassical equilibrium – essentially a static one.

The concept of the firm as an entity

Evidently both Simon and Perroux share the opinion that delving into the reality of the whole firm helps to recognise the limits of a purely market theory of the firm. Only in its abstract world can the firm as a “black box” provide the rationale for understanding and managing the firm. Under real dynamics and complexity, on the contrary, no simplistic solution can substitute for the interplay of management, organisation and accounting systems. No mechanism deprived of heuristic content can substitute for the idea and role of responsible decision-making, since the firm is a dynamic system of interactions, interdependencies, and complementarities. These relationships, located in time and space, are not merely (nor fully) contractual nor bargained: their dynamic system is different in nature from any static equilibrium of prices or nexus of contracts, property rights included.

These features are some of the building blocks of a theory of the firm as an entity. Anyway, the same concept of entity appeared first within the accounting field, to identify the core of the business activity which costs and revenues, financing and investments can be attributed to. Constructing on the many similar insights of those authors, and on Zappa’s in particular, the economic theory of the firm as an entity may be understood as the actual economic coordination set up by the management system – especially through the implementation of a working organisation – coping with the ongoing economic process that accounting represents and helps to govern.

This way, the concept of entity appears to constitute the innovative, unifying core of those theories of the firm. Such a new framework allowed the definition of new research territories as well as new approaches to economic and financial dynamics, income to the firm, and the production and distribution of wealth.

The very innovation of this perspective consists anyway in the different way through which these territories are entered into: contrary to methodological individualism, a comprehensive framework is developed, consisting in realism, wholeness and dynamics. At the very same time, the concept of entity permits the synthesis between the concepts of whole proper to institutional economics and of dynamic system proper to Continental accounting and business economics; and integrates the two concepts of “Betrieb” and “azienda,” originally accounting ones.

Due to these (and other) reasons, this theory of the firm appears to deserve consideration as it permits the everlasting juxtaposition between th...

Table of contents

• The Economics of Legal Relationships
• The Economics of Legal Relationships
• Contents
• Illustrations
• Contributors
• Part I Introduction
• Part II On the economic theory of the firm as an institution and an organisation
• Part III Perspectives for accounting, law and economics
• Part IV Essays on economic, legal and accounting features of the firm as an entity
• Index