The theory of the managed firm (TMF)

Abstract

Abstract

The economics literature on the ‘theory of the firm’ is extensive. But it fails to address Coase’s 1937 ‘killer questions’, his pointing out that we have no rigorous theory of the firm that can explain or justify their existence. In particular we have no theory of how real people, as opposed to computational devices, fit into notions of the firm that can address Coase’s critique. This is surely a problem for those teaching firm management in business schools and elsewhere - albeit an elephant that has been swept under the carpet. This paper sketches a theory of the firm that stands on the managers’ creative judgments that their reasoning supports but does not dominate; hence the ‘theory of the managed firm’ (TMF) rather than merely the ‘theory of the firm’ (ToF). Along with Adam Smith, I presume human judgment is the source of all new economic value and so see the managed firm as democratic capitalism’s principal apparatus for channeling creative inputs into the socio-economy. Thus managers have both economic and political functions. Firms generate value as managers contribute their judgment in the course of shaping their firm’s responses to the Knightian uncertainties (KUs) and bounded rationalities (BRs) met with as the firm’s freely chosen goals are pursued. Under KU/BR, an analysis of managers’ agentic activity and rhetorical practice complements their rational decision-making and helps us see more of the nature of the managed firm. The TMF provides a post-positivist basis for re-theorizing entrepreneurship, business leadership, strategizing, and innovation management. Practice rather than theory is its basis. It also rejects the ‘separation thesis’ of the business ethics literature, and so provides a theoretical basis for an ethics of managing.