Abstract

"The Penrosian Legacy, the Theory of Innovative Enterprise, and Business History"

William Lazonick, Academic-Industry Research Network (william.lazonick@gmail.com)

Edith Penrose’s 1959 book, The Theory of the Growth of the Firm, is the definition of a classic—a work everyone cites but few have read. Written in an abstract, but clear and non-mathematical, style, Penrose claims that her theory of the growth of the firm is just another approach to analyzing the activities of this economic institution that can be explored alongside, but not in contradiction to, the neoclassical theory of the firm. From the neoclassical perspective, the firm makes output decisions by optimizing subject to given technological and market constraints, and these decisions, in turn, determine its size.

My argument in this paper is that, when understood as a “theory of innovative enterprise”, Penrose’s theory of the growth of the firm represents a radical departure from the neoclassical theory of the firm and its various agency-theory (Alchian and Demsetz, Jensen and Meckling, Williamson, etc.) derivatives. In essence, Penrose argues that, through organizational learning, the firm grows by transforming the technological and market conditions that the optimizing firm of neoclassical theory takes as given constraints. In the face of inherent uncertainty, organizational—or what I call collective and cumulative—learning can prove successful in generating a higher-quality product, which enables the innovating firm to attain a larger share of the market and thereby spread the high fixed cost of developing the higher-quality product to achieve, through economies of scale, low unit cost. In the proposed paper, I will explain why the theory of innovative enterprise needs business history to construct its key concepts---which I call the “social conditions of innovative enterprise”. I will also explain why business history needs the theory of innovative enterprise to understand corporate growth dynamics, value distribution among the firm’s participants, and the limits to firm growth posed by the behavior and power of its different types of participants.