The Theory of the Firm: The Austrians as Precursors and Critics of Contemporary Theory

ore than one commentator has observed that a distinct theory of the firm is conspicuously missing from the main body of Austrian economics (e.g., Langlois 1991, p. 2; Minkler 1991, p. 8). As two Austrian economists observed some years ago: "there is no subjectivist or Austrian theory of the firm" (O'Driscoll and Rizzo 1985, p. 123). That is still the situation. With the term "theory of the firm," I shall set forth a theory that has something to say about the existence, the boundaries and the internal organization of the institution known as the business firm. And with the term "firm," I shall describe a n organization that is planned with the express purpose of earning profit. In Hayekian terms (Hayek 1973), the firm is a "planned order," an aspect of "taxis." That social institutions have always occupied center stage in Austrian economics is a proposition that commands widespread agreement today (Hodgson 1988; Langlois 1986,1991). Many economists recognize the distinctiveness of, for example, the Mengerian theory of the origin of a medium of exchange (Menger 1871, chap. 8), and probably even more economists are familiar with the Hayekian account of the information providing function of the price system (Hayek 1945). Many economists also know that Hayek's insight stemmed from his involvement in the socialist calculation debate, preeminently a debate about the organization of economic activities. Indeed, Hayek's "The Use of Knowledge in Society" has become a standard reference in the literature on economic organization (e.g.,