an agentic ‘theory of the firm’

JC Spender ESADE & LUSEM

University of Ferrara 202-Dec-2011

theory here ?

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ToF answers• Why firms exist• Why their boundaries are located where they are• Why their internal structure and process is the way it is• Why is their performance so varied

• basic unit of analysis, investment, regulation and managerial action• accounting and its weaknesses• locus of value creation (black box)• tool for entrepreneurs, associations & politicians

Why do we need a ToF ?

how should we ‘state’ a ToF - registered name, balance sheet, blueprint, math formula, words ?

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what kinds of statement in economics ?

• positive - what is - objective reality = (covering laws)Σ

• normative - what ought to be - social

• deductive - modus ponens - logicality

• inductive - modus tollens - generalization

• conventionalist - agreement in the absence of certainty

• instrumentalist - prediction - unit action

• empirical - observation

• hypotheses - verifiable, falsifiable

• speculative - unverifiable, illogical, …

Friedman (1953) - theory as a language, ‘filing system’ for empirical material

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and the politics of economics ?

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positivism

• potential and shortcomings• research is all about methodology• etic and emic

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current ToFs• bureaucratic• systems• behavioral• managerial• political• legal• institutional • firm/context - fit• micro-economic

• neoclassical• principal-agent• transactions cost• team production• nexus of contracts• property rights

equilibrium, Rational Man & profit/growth

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analysis

covering law or

theory P

event X ?

covering law or theory Q

statistics - estimating the probability that hypotheses about covering laws and observations are not matters of chance.

If P then X as being more probable than if Q then X

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let’s look at language - and get back later to theory as language

uncertainty makes language necessary an entailment of denying positivism’s assumptions

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theory as language

• theory T - well-formed sentences that comprise a formal language ΣL - the set of sentences/theorems logically derivable from axioms M

• theorem ti - one rigorous expressions of T

• observation-language O - based on axioms P that are not consistent with M

• Duhem-Quine thesis• natural language L - encompasses L but also admits heuristics,

hunches, inconsistencies, illogicalities, jokes, contradictions, paradoxes, etc.

• ToFs as ‘natural languages’ rather than ‘rational’ or ‘rigorous’

firm as an idiosyncratic practical (natural )language for engaging a malleable world with the intention of seeking profit - but what makes profit possible ?

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‘if - then’ causal relations in the real world

• real world = non-equilibrium, surprising

• asymmetry (moral hazard, lemons, principal-agent, etc.)

• uncertainty - ignorance (of ? )

• uncertainty - uncreated (agency - whose ?)

• Knightian U, knowledge-absence, profit potential

• under U focus must shift from ‘the situation’ to the actor/s who imaginatively define the situation

• from passive ‘functionaries’ to active/agentic entrepreneurs

• multiple languages - anti-positivism

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imagination & judgment

• knowledge-absence = under-determination

• creativity as human complement to human rationality

• what gets created ? artifact - could be a theory

• entrepreneurship = creating a ‘unique’ language that resolves UI a selected aspect of U and bridges into action

• language as the fundamental of the ‘business model’

look at making new language

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statements, language

• A or ~A … (to be or not to be, that is the question)

• syllogism - instance a is deducible from covering law/theory A - a is an instance of A

• Socrates is mortal

• syllogism is tautology

• how can we know or state ~A ?

• a language to encompass both assertion and negation

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where do languages come from ?

• invented distinctions - conceptual (A, B, C), empirical (O)

• distinctions with negations

• axioms - self-referencing terms (Spencer-Brown & Luhmann) - distinctions without negations

• statements synthesize relations as the interplay of concepts and sense-data

• build from low level to increasing complexity = precision

• generality to specificity

• collectivity to individuality

• natural language to formal language

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language of empiricism, falsification

• ~A1 more than a negation - an assertion A2 we associate with observation O1 or O2 (not ~O)

• testing requires an O language based on axioms un-related to the A axioms (Duhem-Quine)

• O language must encompass A and ~A

• thus we need A1, A2, O1, O2 to draw a conclusion such as If A1 then O1

• causal statements are ‘law-like’ and falsifiable

• hypotheses

• multiple languages again - U

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O1 O2

A1

A2

hypothesis - ( If A1 then O1

and If A2 then O2)

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synthesis - making new language

• matrix

• independent languages

• A, B and O affirming If A1 then B1, etc. leading to C as explanation

• method of synthesizing interplay between theory & practice

A1 A2

B1

B2

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language C - encompasses {(A1, B1), (A2, B2 ), (A2, B1), (A1, B2)}

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time-out !

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what’s this to do with firms ?

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• firm is a deliberately created language that guides others’ attention, perception, and practice towards intentions (goals) when complete knowledge of situation and means is not available

• entrepreneur’s role is agentic - to create, deploy and control (1) intentions (2) this language (jargon), and (3) practice

• thereby to bring something new into the world (Penrose) that was not there previously

• the outcome - harness the agency of others into engaging selected uncertainties U - innovation

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von Clausewitz’s methodology

• relating theory to practice - acting with partial understanding• deploy theories, heuristics, hunches, to make action frame• jump in - frame as language for engaging an uncertain world• synthesize options in frame - Barnard• etic & emic - whose A, B, C, D story ?

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A

B

CD

example ??

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agentic ToF

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pricing attack

technologicaladvance

un-exploitedpotential

BM

regulatorychanges

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rhetoric - making language work for you

• entrepreneurial vision

• harnessing others’ agency

• incentives or persuasion ?

• logos, ethos, pathos

• how to construct compelling argument

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collaborative agency• uncertainty

• engagement with others’ imagination

• language of action - rhetorical activity

• the ‘firm in action’

• firm as socio-economic ‘tool’

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agentic firm - and the world it invokes

• mind’s hand reaching creatively into the unknown to find something new - the firm as the locus of collaborative innovation

• capitalism - ownership of the means of production

• Coase & subordination

• legitimated modes of subordination

• externalization of ‘costs’, privatization of gains

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summary

• ToF that generates profit and economic growth MUST be about people and their agency - not RM

• agency interrupts between cause and effect

• the theory turns on Knightian uncertainty U - resolved by the imagination of those engaged

• construct a language - business model

• for the agentic actors - BM bridges between entrepreneur’s theory and their practice

• politics and economics of subordination vs freedom

• being about people and their productive relations, the firm is an essentially political phenomenon

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