Geography Reference
In-Depth Information
is available to every firm freely and instantaneously, that is, knowledge is
considered as a fully public good.
The aim of the neoclassical theory of the firm, as part of the wider
theory of value, is to explain how both prices and the allocation of
resources are determined. The notion of the firm corresponds to a model
of 'price-output decision maker', where growth is conceived as an increase
in the output of given products carried out by a movement along the pro-
duction function. The
optimum
size
of the firm is determined by the output
level at which the marginal cost is equal to marginal revenue, and for a
price-taking firm this corresponds to the lowest point on the firm's average
cost curve. In models of perfect competition and constant returns to scale
the limits to the firm's output expansion are found to be cost increases,
whereas under monopolistic competition and increasing returns to scale
the limits to output growth are in terms of falling marginal revenues. The
implications are that firm 'growth', that is, the observation of a larger
size firm at a later point in time, must be a consequence of the changes in
supply or demand conditions which determine changes in the optimum
size of the firm in equilibrium. As such, by implication, in a particular
industry serving a particular market, all firms must exhibit essentially the
same size, thereby making it possible for us to discuss a 'representative'
firm for each given market. In this fundamentally static type of theory,
the market limits the size of the firm and determines its equilibrium size.
Moreover, the introduction of uncertainty and risk does not substantially
alter this theoretical framework.
Neoclassical economics has obviously acknowledged the existence of
technological change. When it became apparent that growth could not
be explained simply by changes in factor endowments, the unexplained
growth was attributed to technical advance (Swan 1956; Solow 1956).
However, in this basic neoclassical framework technical progress is treated
as an exogenous phenomenon, as 'manna from heaven', which leads to
shifts in the production frontier. In other words, growth is seen primarily
as a
state
, reflected in terms of an increase in quantity of output, rather
than a
process
involving changes in either the quality of production or the
nature of production (Koutsoyiannis 1982). As such, in this schema, the
sources of innovation are thus treated as being external to the firm and
also indeterminate.
The economists of the New Growth Theory (NGT) of the late 1980s
and early 1990s started to overcome some of the major limitations of the
orthodox neoclassical view of economic growth, and in particular the exo-
geneity of innovation and technology. In the newer generation of models,
technological progress began to be treated as an input factor in its own
right, as a kind of 'intangible capital' which results from the knowledge
