Papers presented by William Lazonick since 2019

2022 Mexico City

"Innovation and Financialization in the Theory of the Firm"

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?

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2021 Hopin Virtual Events Platform

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

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.

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