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Does organization matter to an understanding of the modern corporation and to the design of public policy that affects it? The answer to that question has changed considerably during the past 40 years.
Although if the microeconomics textbooks used in most MBA courses are to be believed, the answer-both in 1955 and 1995-is that the organization does not matter very much.
Successive Developments
A unifying theme-but not a unified theory-runs throughout the MBA curriculum: How does the well-run business firm function? All of the core courses-marketing, production, organizational behavior, finance, accounting, economics-address this question. Of these, the discipline of economics is the most general and arguably speaks with the greatest academic authority.
The basic theory of the firm that is featured in microeconomics textbooks describes the firm in technological terms as a "production function" in which inputs (labor, capital) are transformed into outputs (goods, services) according to the laws of technology. Upon assigning an objective function to the firm (usually profit maximization) and describing the market in which it operates, students learn how firms set price and output and respond to changing opportunities (demand, input prices).
This is important material and some of the associated ideas-marginal analysis, opportunity costs, tradeoffs-have truly wide application. Every MBA who understands these concepts and can apply them to the business environment has a big advantage. But does this theory, or more generally this approach, help us to understand the size, shape, and purposes served by the modern corporation and other forms of complex economic organization?
If firms are mainly technological entities, then their natural boundaries will be determined principally by technological economies of scale and scope. But firms that extend their boundaries beyond these natural limits then pose a puzzle. What explains these boundary-extension efforts?
Economists looked in their tool box and pulled out what appeared to be a general purpose explanation: monopoly was responsible for horizontal, vertical, and conglomerate structures and, more broadly, for nonstandard and unfamiliar contracting practices. Public policy toward antitrust was significantly influenced by this monopoly predilection. What came to be known as the "inhospitality tradition" took shape. Donald Turner captured the spirit of the 1960s (during his term as the head of the Antitrust Division of the U.S. Department of Justice) in his remark:...