Edith Penrose’s contribution to real world economics

The International Review of Applied Economics is devoted to the practical applications of economic ideas. Given that the firm is one of the building blocks of the economy, the practical application of economic ideas to understanding the nature and behaviour of the firm has been surprisingly weak in the history of economic ideas. This is despite Adam Smith’s (1776) Wealth of Nations focussing on what happens within the firm, with the division of labour enabling increased productivity. Ronald Coase won his Nobel Prize for posing the question of ‘why a firm emerges at all in a specialised exchange economy’ (1937), and for the answer he gave in terms of the ability of intra-firm organisation to save on the transactions costs which would be incurred by seeking to conduct the same productive activity via individual contracting through the market.¹

That way of posing the question – indeed, that question – had already retreated some way from Adam Smith’s analysis of what actually happens within firms. Such was the impact of the ‘marginalist revolution’ that replaced the classical economists’ agenda of analysing the distribution of income between the classes in society, and the different roles those classes played in the productive process, with a focus instead on the utility-maximising individual consumer and profit-maximising producer making decisions at the margin.

It was Edith Penrose who did more than anyone to rescue the firm from this ‘black box’ of economic theory, to analyse and describe how firms functioned, what differentiated them, and why some grew whilst others failed. At the end of this issue is a Call for Papers for a Special Issue of the International Review of Applied Economics on the research agenda which Penrose developed:

https://think.taylorandfrancis.com/intl-review-of-applied-economics-edith-penrose-legacy/?utm_source=CPB_think&utm_medium=cms&utm_campaign=JOD09434

Contributions are welcome from across what has become a rich seem within economic, as well as management and business research. This includes innovation, and the nature of learning and productivity growth – all of which are if anything becoming more important over time, not least as we approach the 4th industrial revolution of big data, machine learning, artificial intelligence and robotics. What goes on within the firm is important – not just to that firm, and to those who work for it and are connected with it in various ways, but also for the economy and society more generally.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. As a 1st year undergraduate in 1976, I opened Coase’s article in the Bodleian Reading Room to find that beside the opening question to Part II of the paper, of ‘why a firm emerges at all’, someone had written in the margin, ‘To exploit the workers’ – an aspect pursued by others.