Review of Austrian Economics, 12: 25–41 (1999)
1999 Kluwer Academic Publishers
Toward a Praxeological Theory of the Firm
TONY FU-LAI YU
ecent decades have witnessed signiﬁcant advances in the theory of the ﬁrm.
Speciﬁcally, the capabilities theories of the ﬁrm, such as Nelson and Winter
(1982), Teece (1982), Foss (1994, 1996, 1997), Witt (1997), Langlois (1986,
1998) and, Langlois and Robertson (1995), which base largely on the classic
works of Penrose (1959, 1995) and Richardson (1972), have greatly improved our under-
standing of the nature of the ﬁrm. Some of these works come close to the Austrian theory
of the ﬁrm. In particular, Foss (1994, 1996, 1997) develops a capabilities theory of the ﬁrm
which draws on many of the Austrian’s favourite insights.
Lewin (1998) also investigates
the relationship between the capital and businessorganisationin the Austrian marketprocess
Despite these brilliant studies, an Austrian theory of the ﬁrm is still missing.
In this paper, I shall construct a praxeologicaltheory of the ﬁrm which is more deeply rooted
in the Austrian theories of human action, capital and entrepreneurship than is the capabi-
lities view. As will be argued shortly, my theory which takes on a subjectivist approach can
provide certain insights and advantages which are lacking in the capabilities view.
My Austrian theory of the ﬁrm is based upon three building blocks: (1) Weber-Mises’
action theories and Schutz’s phenomenology, (2) Lachmann’s theory of capital structure,
and (3) Kirzner’s theory of entrepreneurial alertness and discovery. As will be argued,
the ﬁrm emerges as an institution to solve coordination problems. The entrepreneurial
discovery and innovation require the construction of a common interpretive environment
with its own shared structure of typiﬁcations. Within this shared structure, there may be
elements of conﬂicting ideas, rivalrous competition, diverse experiences and division of
knowledge. However, the ﬁrm as a shared structure can reduce these variegated systems
of motives to a set of common organisational goals initiated by the entrepreneur, thus
This paper is dedicated to Paul L. Robertson. An earlier version of this paper was presented at the Austrian
Scholars Conference 4 held at Auburn University (Alabama), April 3–4, 1998. I thank Jeremy F. Shearmur and
the anonymous referee for their insightful comments.
School of Economics and Management, University of New South Wales, Canberra, ACT 2600, Australia.
Foss (1994, p. 55) argues that the Austrian theory of ﬁrm behaviour consists of (1) a grasp of the distinction
between planned and spontaneous orders, (2) the market process as a process of entrepreneurial discovery, (3)
property rights, (4) speciﬁcity and complementarity of assets, (5) the subjectivity of costs, (6) the private and tacit
nature of knowledge and (7) transaction and information costs.
Though Lewin’s paper is entitled “Capital Structures and Organisational structure”, unfortunately, he has not
actually incorporated the Austrian (Lachmann’s) theory of capital structure in his arguments. In my view, his
paper looks more like a capabilities than an Austrian one.
It is widely known that the theory of the ﬁrm is a neglect area in Austrian Economics (O’Driscoll and Rizzo,
1985, p. 123; Loasby, 1989, p. 157; Langlois, 1992, p. 166; Foss, 1994, p. 31). One reason, as suggested by
Foss (1994) is that the Austrians are primarily interested in the entrepreneur because it allows them to construct a
dynamic theory of the market process. As a result, there is no Austrian theory of the ﬁrm explaining its existence,
boundaries or productive competence.