In Chapter 8 I shall examine the theoretical impact of a better theory of the firm. I have suggested, thus far, that both managerial and behavioral theories of the firm offer significant improvements over the reigning marginalist theory. What I have not done, however, is give a clear identification of those characteristics of the large managerial firm that most significantly call for a change in theoretical structure. In the present chapter I shall take the first steps in supplying such an identification.

There are three areas in particular in which the marginalist theory of the firm is unsatisfactory: its understanding of the notion of firm profit (which it takes to be identical in both the managerial firm and the entrepreneurial firm); its general failure to note that the managerial firm is not simply an instrument of its owner–stockholders, but instead involves the interaction of a number of different constituent groups; and, finally, its failure to note the importance of corporate organizational structure. These last two points, of course, require that the analysis of the managerial corporation attend to its character as a polity, a corporate body, not just as an economic agent.

The corporation and profits

As already noted, the traditional marginalist theory of the firm takes the firm as simply a maximizer of profits. The firm is, of course, also a producer, but it produces purely for the sake of profits. Because of the centrality of profits to the marginalist understanding of the firm, it is, I think, appropriate to start the present examination by looking at what the actual behavior of firms in the real world would indicate about the role of profits for the firm.