Review of Austrian Economics, 13: 59–79 (2000)
2000 Kluwer Academic Publishers
An Austrian Theory of the Firm
STEVEN E. PHELAN
School of Management, University of Texas at Dallas, Box 830688, Richardson, Texas 75083-0688, USA
Abstract. The modern Theory of the Firm uses the concept of rent and makes implicit assumptions about
equilibrium. An Austrian (Market Process) Theory of the Firm should have something to say about each of these.
Two strategic perspectives are analyzed, the neoclassical microeconomic perspective (using the Ricardo-Marshall
approach to rent) and the Market Process perspective (using the Fetter approach to rent). In a neoclassical world,
rents indicate “unsolved” or unexploited “inefﬁciencies” as every hypothetical outcome is viewed against the
standard of perfect competition. By contrast, in the Market Process world there is no single ideal standard by
which to measure any particular outcome. All action takes place in an open ended universe in which the future is
continually being created, in which competition is a “discovery process.”
JEL classiﬁcation: L1.
Introduction: The Absence of an Austrian Theory of the Firm?
There has been much conversation recently about the absence of an Austrian theory of the
ﬁrm and suggestions for remedying the situation (for example, Foss 1994, 1997b, Sautet
(forthcoming)). It is not self evident that Austrian economics needs a theory of the ﬁrm—it
is quite possible that the deﬁnitive theory exists outside of Austrian economics. Nor is it
obvious what that theory might look like.
In this paper we contend however that, in fact, there is an incipient Austrian theory
of the ﬁrm that does add something to the existing theories. The nature of that theory is
suggested by the very relationship that existing theories of the ﬁrm bare to the foundational
body of theory out of which they arose and to which they are continually looking. To be
more speciﬁc, the seminal contribution to the theory of the ﬁrm by Coase (1937), which
belatedly spurned an incredibly large (and still growing) volume of work, arose out of a
perceived deﬁciencyin thecorpus of microeconomictheory.This deﬁciencywas its inability
to provide, or at least failure to address, the rationale for the existence of the ﬁrm. In truth,
if Austrian economics has no theory of the ﬁrm, neither does neoclassical economics. What
goes by that name is really a theory of the industry, a theory of industrial structure that is
not meant to be descriptive of the real world institutions that we identify as ﬁrms. It is
thus incapable of addressing questions relating to ﬁrm, as opposed to industry, structure.
Peter Lewin would like to thank the members of the Austrian colloquium at New York University for helpful
comments and suggestions, particularly Mario Rizzo, Frederic Sautet, Israel Kirzner, Joseph Salerno, Bill Butos,
David Harper, Roger Koppl and Glen Whitman. The usual disclaimer applies, particularly since we have not
followed their advice in every case.