The Review of Austrian Economics, 18:1, 55–82, 2005.
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
Knowledge and Power in the Mechanical Firm:
Planning for Proﬁt in Austrian Perpsective
RICHARD ADELSTEIN email@example.com
Department of Economics, Wesleyan University, Middletown, Connecticut 06459, USA
Abstract. This essay draws on the transaction costs model of the ﬁrm and an Austrian perspective on the knowledge
problem in centrally planned orders to propose an empirically useful Austrian theory of central planning. After
an initial review of existing theories of the ﬁrm, part two develops insights from the calculation debate to sketch
a theory of planning centered on the interrelated problems of purpose, information and control in both individual
and central planning. Part three joins this theory to the basic framework of the transaction cost model to produce
an Austrian theory of the private ﬁrm that addresses the relation between knowledge and power in planned orders,
and illustrates its principal themes through a discussion of the historical development of American manufacturing
in the ﬁfty years prior to World War I.
KeyWords: theories of the ﬁrm, production contracts, central planning systems, scientiﬁc management
JEL classiﬁcation: B5, D23, P11.
1. Theories of the Firm
From the beginning, economists of every persuasion have struggled with the problem of
the ﬁrm. In his System of Moral Philosophy (1755), Francis Hutcheson, Adam Smith’s
teacher at Glasgow and his predecessor in the chair of moral philosophy, described the
division of labor as a method and the various tasks it encompassed as being assigned to
one person or another, words that suggest a conscious design executed by someone with
the authority to issue orders and move workers about to increase productivity or proﬁt
(Cannan 1937:xliv–xlv). This brings to mind a factory or an ofﬁce and, Smith observes
at the outset of his own luminous discussion of the subject, it is in just such places that
most people mistakenly suppose the division of labor is developed to its fullest extent.
So he begins with a “triﬂing manufacture,” the celebrated pinmaking ﬁrm in which “the
whole number of workmen must necessarily be small; and those employed in every different
branch of the work can . . . be collected into the same workhouse, and placed at once under
the view of the spectator” (Smith 1937:4). There, thousands of pins are produced each
day by workers using simple machines to perform eighteen distinct operations, all done
in close proximity under the watchful eye of a supervisor, in exchange for piece rates or
a daily wage. But Smith does not explain why this relatively simple allocation of tasks
should come to be administered within a ﬁrm, while the inﬁnitely more complex, global
division of labor within which it is embedded is created spontaneously by free exchange in
markets. Almost a century later, observing the development of the English factory system
and the inequalities of wealth and power it produced, Karl Marx described the capitalist