Is the Unproductive Firm the Foundation of the Most Efficient Economy? Penrosian Learning and the Neoclassical Fallacy

Edith Penrose’s 1959 book, The Theory of the Growth of the Firm, provides foundations for a theory of innovative enterprise. Penrose’s theory of the firm is also an antidote to theory, taught by PhD economists to millions upon millions of college students for over seven decades, that the most unproductive firm is the foundation of the most efficient economy. The dissemination of what I call the “neoclassical fallacy” to began with Paul A. Samuelson’s textbook, Economics: An Introductory Analysis, first published in 1948. Over the decades, the neoclassical fallacy has persisted through 18 revisions of Samuelson, Economics and in its countless “economics principles” clones. This essay challenges the intellectual hegemony of neoclassical economics by exposing the illogic of its foundational assumptions about the role of the firm in the operation and performance of a modern economy. The neoclassical fallacy gained popularity in the 1950s, as Samuelson revised Economics three times. Meanwhile, Penrose derived the logic of organizational learning that she lays out in TGF from the facts of firm growth, absorbing what was known in the 1950s about the large corporations that had come to dominate the U.S. economy. Also, during that decade, the knowledge base on the growth of firms on which economists could subsequently draw was undergoing an intellectual revolution, led by the business historian, Alfred D. Chandler, Jr., who, in his 1962 book, Strategy and Structure, independently corroborated Penrose’s theoretical perspective. In combination, the works of Penrose and Chandler form intellectual foundations for my own work on the theory of innovative enterprise—an endeavor that has enabled me, as an economist, to recognize not only the profound importance of organizational learning for economic theory but also the fallacy of the neoclassical theory of the firm for our understanding of the central institution of a modern economy, the business corporation.