October 19, 2012 Leave a comment
The last couple of weeks I’ve spent time to go through most of Dan Spulber‘s Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations. Spulber here makes an interesting attempt at incorporating the entrepreneur in the economic theory of the firm through providing clear boundaries of what is entrepreneurship and how it is related to firm creation. Entrepreneurs, Spulber writes, are “the prime movers—the makers of firms.”
What he manages to do is offer an entrepreneurial aspect of the common consumer, who at any time can become an entrepreneur through founding a firm. This is what Spulber denotes the “foundational shift” into entrepreneurship, and the entrepreneurial stage continues as long as the firm’s objectives are identical to the founder’s. In other words, entrepreneurship becomes the phase from starting a firm (i.e., the establishing of the firm) to the firm becoming its own entity with a set of objectives that in some way deviates from the objectives of the person who founded the firm.
This way, Spulber limits the entrepreneurial phase in time and identifies a clear starting point as well as a clear end-point for what is termed entrepreneurship. While this may not be easily measured empirically, the framework is specific enough for theoretical enquiry. And, for this reason, the contribution should be of value to those of us theorizing on entrepreneurship and the firm. What the field needs is structure in the sense of boundaries and theoretical frameworks to support a standard set of research, and Spulber certainly helps in providing this.
The purpose of the firm is intermediated exchange such that exchange between consumers (the starting point population in Spulber’s theory) is carried out indirectly through a firm. Firms therefore pop up where it is cheaper/more efficient with intermediated exchange than direct exchange between consumers, i.e. where consumers are better off coordinating their transactions through organization.
Spulber defines the firm as “a transaction institution whose objectives differ from those of its owners” (p. 63). While this definition may be helpful, it seems a bit circular: It only raises the question of what this institution whose objectives differ is – saying that it has differing objectives doesn’t say much about its nature. While seemingly insufficient, Spulber’s definition is much in line with other definitions of firms in the literature. Like Grossman and Hart’s definition of the firm “as being composed of the assets (e.g., machines, inventories) that it owns” (1986, p. 692). What exactly is this “it” that owns assets?
Spulber also mirrors Coase’s original article (1937) when saying that the firm is what exists if it is more efficient (cheaper) than not existing. And just like Coase, it is a bit too obvious – and not very helpful. The fact that a firm, if it exists, is more efficient than if it would not exist seems to follow directly from economic theory, and doesn’t offer much explanation for what it is or how it is organized.
Please note the emphasis on “what” and “how.” The “why” has already been discussed by Coase, Williamson, Spulber and others; the problems that remain are the definition of the firm (what is it – is it just a legal entity?) and how it comes to be. Coase does not get into asking (and even less answering) the question of how firms emerge from the theoretical starting point of the “atomistic” market. This is the much more interesting question, and explaining how necessarily also provides guidance as to what it is and why it is founded.
This, incidentally, is what I do in a couple of my own papers currently under review.
While Spulber doesn’t move much further into answering the question of how or gets more specific as to the question of “what,” the book is an interesting read for anyone interested in entrepreneurship and the firm. It is a contribution to both fields, especially where they intersect, and provides a nice framework for further study. I highly recommend it, even though theorists of entrepreneurship and the firm without inclinations for economic theory may find it a bit tedious due to the mathematical notation.
There is no doubt that this book is an important contribution to the literature and that it deserves much more attention. Spulber’s book provides much of the rigor needed for the study of entrepreneurship and the firm.