an agentic ‘theory of the firm’ JC Spender ESADE & LUSEM

02-Dec-2011University of Ferrara2 theory here ?

ToF answers Why firms exist Why their boundaries are located where they are Why their internal structure and process is the way it is Why is their performance so varied basic unit of analysis, investment, regulation and managerial action accounting and its weaknesses locus of value creation (black box) tool for entrepreneurs, associations & politicians Why do we need a ToF ? how should we ‘state’ a ToF - registered name, balance sheet, blueprint, math formula, words ? 02-Dec-2011University of Ferrara3

what kinds of statement in economics ? positive - what is - objective reality = Σ (covering laws) normative - what ought to be - social deductive - modus ponens - logicality inductive - modus tollens - generalization conventionalist - agreement in the absence of certainty instrumentalist - prediction - unit action empirical - observation hypotheses - verifiable, falsifiable speculative - unverifiable, illogical, … Friedman (1953) - theory as a language, ‘filing system’ for empirical material 02-Dec-2011University of Ferrara4 and the politics of economics ?

positivism potential and shortcomings research is all about methodology etic and emic 02-Dec-2011University of Ferrara5

current ToFs bureaucratic systems behavioral managerial political legal institutional firm/context - fit micro-economic neoclassical principal-agent transactions cost team production nexus of contracts property rights equilibrium, Rational Man & profit/growth 02-Dec-2011University of Ferrara6

analysis covering law or theory P event X ? covering law or theory Q statistics - estimating the probability that hypotheses about covering laws and observations are not matters of chance. If P then X as being more probable than if Q then X 02-Dec-2011University of Ferrara7

02-Dec-2011University of Ferrara8 let’s look at language - and get back later to theory as language uncertainty makes language necessary an entailment of denying positivism’s assumptions

theory as language theory T - well-formed sentences that Σ comprise a formal language L - the set of sentences/theorems logically derivable from axioms M theorem t i - one rigorous expressions of T observation-language O - based on axioms P that are not consistent with M Duhem-Quine thesis natural language L - encompasses L but also admits heuristics, hunches, inconsistencies, illogicalities, jokes, contradictions, paradoxes, etc. ToFs as ‘natural languages’ rather than ‘rational’ or ‘rigorous’ firm as an idiosyncratic practical (natural )language for engaging a malleable world with the intention of seeking profit - but what makes profit possible ? 02-Dec-2011University of Ferrara9

‘if - then’ causal relations in the real world real world = non-equilibrium, surprising asymmetry (moral hazard, lemons, principal-agent, etc.) uncertainty - ignorance (of ? ) uncertainty - uncreated (agency - whose ?) Knightian U, knowledge-absence, profit potential under U focus must shift from ‘the situation’ to the actor/s who imaginatively define the situation from passive ‘functionaries’ to active/agentic entrepreneurs multiple languages - anti-positivism 02-Dec-2011University of Ferrara10

imagination & judgment knowledge-absence = under-determination creativity as human complement to human rationality what gets created ? artifact - could be a theory entrepreneurship = creating a ‘unique’ language that resolves U I a selected aspect of U and bridges into action language as the fundamental of the ‘business model’ look at making new language 02-Dec-2011University of Ferrara11

statements, language A or ~A … (to be or not to be, that is the question) syllogism - instance a is deducible from covering law/theory A - a is an instance of A Socrates is mortal syllogism is tautology how can we know or state ~A ? a language to encompass both assertion and negation 02-Dec-2011University of Ferrara12

where do languages come from ? invented distinctions - conceptual (A, B, C), empirical (O) distinctions with negations axioms - self-referencing terms (Spencer-Brown & Luhmann) - distinctions without negations statements synthesize relations as the interplay of concepts and sense-data build from low level to increasing complexity = precision generality to specificity collectivity to individuality natural language to formal language 02-Dec-2011University of Ferrara13

language of empiricism, falsification ~A 1 more than a negation - an assertion A 2 we associate with observation O 1 or O 2 (not ~O) testing requires an O language based on axioms un-related to the A axioms (Duhem-Quine) O language must encompass A and ~A thus we need A 1, A 2, O 1, O 2 to draw a conclusion such as If A 1 then O 1 causal statements are ‘law-like’ and falsifiable hypotheses multiple languages again - U 02-Dec-2011University of Ferrara14 O1O1 O2O2 A1A1 A2A2 hypothesis - ( If A 1 then O 1 and If A 2 then O 2 )

synthesis - making new language matrix independent languages A, B and O affirming If A 1 then B 1, etc. leading to C as explanation method of synthesizing interplay between theory & practice A1A1 A2A2 B1B1 B2B2 02-Dec-2011University of Ferrara15 language C - encompasses {(A1, B1), (A2, B2 ), (A2, B1), (A1, B2)} language C - encompasses {(A1, B1), (A2, B2 ), (A2, B1), (A1, B2)}

time-out ! 02-Dec-2011University of Ferrara16

what’s this to do with firms ? 02-Dec-2011University of Ferrara17

02-Dec-2011University of Ferrara18 firm is a deliberately created language that guides others’ attention, perception, and practice towards intentions (goals) when complete knowledge of situation and means is not available entrepreneur’s role is agentic - to create, deploy and control (1) intentions (2) this language (jargon), and (3) practice thereby to bring something new into the world (Penrose) that was not there previously the outcome - harness the agency of others into engaging selected uncertainties U - innovation

von Clausewitz’s methodology relating theory to practice - acting with partial understanding deploy theories, heuristics, hunches, to make action frame jump in - frame as language for engaging an uncertain world synthesize options in frame - Barnard etic & emic - whose A, B, C, D story ? 02-Dec-2011University of Ferrara 19 A B C D example ??

agentic ToF 02-Dec-2011University of Ferrara20 pricing attack technological advance un-exploited potential BM regulatory changes

rhetoric - making language work for you entrepreneurial vision harnessing others’ agency incentives or persuasion ? logos, ethos, pathos how to construct compelling argument 02-Dec-2011University of Ferrara21

collaborative agency uncertainty engagement with others’ imagination language of action - rhetorical activity the ‘firm in action’ firm as socio-economic ‘tool’ 02-Dec-2011University of Ferrara22

agentic firm - and the world it invokes mind’s hand reaching creatively into the unknown to find something new - the firm as the locus of collaborative innovation capitalism - ownership of the means of production Coase & subordination legitimated modes of subordination externalization of ‘costs’, privatization of gains 02-Dec-2011University of Ferrara23

summary ToF that generates profit and economic growth MUST be about people and their agency - not RM agency interrupts between cause and effect the theory turns on Knightian uncertainty U - resolved by the imagination of those engaged construct a language - business model for the agentic actors - BM bridges between entrepreneur’s theory and their practice politics and economics of subordination vs freedom being about people and their productive relations, the firm is an essentially political phenomenon 02-Dec-2011University of Ferrara24

02-Dec-2011University of Ferrara25 !!!