William Lazonick

2021 Hopin Virtual Events Platform

Abstract: 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.

2022 Mexico City

Abstract: In the study of the evolution of the U.S. corporate economy, I have employed a methodological approach that integrates history and theory: the study of history provides the knowledge that we distill as theory, while theory thus constructed provides us with an analytical framework for the further, and more pointed, study of history as well as the refinement of theory. I will outline how I have used this methodology to understand how and why the U.S. corporate economy turned from innovation to financialization since the 1980s. I will also summarize how the three business histories on Hercules, Merck, and Cisco that are papers for this panel apply and further develop this integrative methodology. As “Chandlerian firms” with their origins in the “Old Economy” business model, Hercules in chemicals and Merck in pharmaceuticals entered the 1980s as companies with decades of sustained innovation. Yet during the 1990s both companies became highly financialized, legitimized by the ideology that a company should be run to “maximize shareholder value”. Financial interests used shareholding to reap where they had not sown, as manifested at Hercules and Merck by massive stock buybacks. The rapid growth of Cisco to become the dominant company in enterprise networking in the 1990s epitomized the “New Economy” business model, with a central role of the stock market in attracting labor using shares as a compensation currency and acquiring other companies using shares as a combination currency. Over the past two decades, however, Cisco has become highly financialized, ceasing to be an innovative enterprise as it wasted all its profits on buybacks. In chemicals, the case of Hercules, now extinct, presages the recent attacks on DuPont and Dow by “predatory value extractors” (see Lazonick and Shin, Predatory Value Extraction, OUP, 2020). In pharmaceuticals, the case of Merck exemplifies a once highly innovative firm that has largely lost the capability for internal drug development. In communication technology, the case of Cisco leads us to ask the question: Why isn’t it Huawei?

2023 Detroit, MI, United States

Abstract: How much better would the United States have responded to the Covid-19 pandemic had there been in place in 2020 competent and committed political leadership? A partial answer to this question lies in identification of the organizational and technological capabilities to develop, manufacture, and deliver “countermeasures”—personal protective equipment (PPE), ventilators, diagnostic tests, therapies, and vaccines—that a competent and committed federal administration would have been able to mobilize to respond to the pandemic. Main repositories of the necessary capabilities are government agencies and business corporations, with the development, production, and delivery of countermeasures relying heavily on government-business collaborations (GBCs). The proposed paper for the BHC session builds upon a 2020 working paper by William Lazonick and Matt Hopkins, “How ‘Maximizing Shareholder Value’ Minimized the Strategic National Stockpile.” I trace the historical evolution within the U.S. federal government of the current system of public-health preparedness for and response to a pandemic through the end of the Obama administration. Then, I analyze the particular GBCs to develop ventilators for the SNS that were initiated and implemented by the Biomedical Research and Development Authority (BARDA), under the Assistant Secretary for Preparedness and Response (ASPR) within the U.S. Department of Health and Human Services (HHS). BARDA initiated two successive GBCs, one beginning in 2010 and the second in 2014, with two different business firms, for the purpose of developing portable, easy-to-use, and affordable ventilators for the SNS. The strength of these collaborations lay with the innovative ventilator manufacturers with which BARDA contracted. Their weakness appeared when these innovative manufacturers fell under the control of business corporations committed to the ideology of “maximizing shareholder value” (MSV). Building on the ventilator example, the BHC paper will consider the wider deleterious impacts of MSV ideology on U.S. pandemic preparedness.

2026 London

Abstract: 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.