an agentic ‘theory of the firm’

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

2. theory here ? University of Ferrara

3. 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 Why do we need a ToF ? • basic unit of analysis, investment, regulation and managerial action • accounting and its weaknesses • locus of value creation (black box) • tool for entrepreneurs, associations & politicians how should we ‘state’ a ToF - registered name, balance sheet, blueprint, math formula, words ? University of Ferrara

4. 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 and the politics of economics ? University of Ferrara

5. positivism • potential and shortcomings • research is all about methodology • etic and emic University of Ferrara

6. 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 University of Ferrara

7. analysis covering law or theory Q covering law or theory P event X ? statistics - estimating the probability that hypotheses about covering laws and observations are not matters of chance. If P then X asbeing more probable than if Q then X University of Ferrara

8. let’s look at language - and get back later to theory as language uncertainty makes language necessary an entailment of denying positivism’s assumptions University of Ferrara

9. 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 ti - one rigorous expressions of T • observation-language O - based on axioms P thatarenotconsistent 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 ? University of Ferrara

10. ‘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 theactor/s who imaginatively define the situation • from passive ‘functionaries’ to active/agentic entrepreneurs • multiple languages- anti-positivism University of Ferrara

11. 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 UI a selected aspect of U and bridges into action • language as the fundamental of the ‘business model’ look at making new language University of Ferrara

12. 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 University of Ferrara

13. 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 University of Ferrara

14. language of empiricism, falsification • ~A1 more than a negation - an assertion A2 we associate with observation O1 or O2 (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 A1, A2, O1, O2to draw a conclusion such as If A1 then O1 • causal statements are ‘law-like’ and falsifiable • hypotheses • multiple languages again - U hypothesis - ( If A1 then O1 andIf A2 then O2) University of Ferrara

15. synthesis - making new language • matrix • independent languages • A, B and OaffirmingIf A1 then B1, etc. leading to C as explanation • method of synthesizing interplay between theory & practice language C - encompasses {(A1, B1), (A2, B2 ), (A2, B1), (A1, B2)} University of Ferrara

16. time-out ! University of Ferrara

17. what’s this to do with firms ? University of Ferrara

18. 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 University of Ferrara

19. 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 ? A B example ?? C D University of Ferrara

20. agentic ToF pricing attack un-exploited potential BM regulatory changes technological advance University of Ferrara

21. rhetoric - making language work for you • entrepreneurial vision • harnessing others’ agency • incentives or persuasion ? • logos, ethos, pathos • how to construct compelling argument University of Ferrara

22. collaborative agency • uncertainty • engagement with others’ imagination • language of action - rhetorical activity • the ‘firm in action’ • firm as socio-economic ‘tool’ University of Ferrara

23. 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 University of Ferrara

24. 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 University of Ferrara

25. !!! University of Ferrara