Abstract
We offer here a capital-based view (CBV) that incorporates, and goes further than related views, (like the resource- and the knowledge-based view) of the firm. This general approach uses ideas about capital and its structure to examine the nature of heterogeneous resources and their attributes and how they are organized by entrepreneurs (individually and in teams). These entrepreneurs exercise judgment in valuing these heterogeneous resources in productive combinations that they attempt to create. This article uses insights gained from this understanding of the nature and function of capital to draw further propositions about the role of knowledge, management, and economic organization. We survey the main components of the CBV of the firm and examine management and organizational topics looking through the lens of the CBV. The capital dimension adds new insights and provides a powerful unifying framework.
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Notes
Coase’s seminal article, after lying dormant for many years, eventually became the basis for a huge literature stream, with many tributaries, known broadly as “transactions-costs” economics associated particularly with the work of Williamson (1985), as well as Hart (1995) and others. This work continues to have enormous relevance and will occupy us at various points in what follows.
For a collection of foundational and extending contributions, see Foss 1997.
See, for example, the special 1996 winter issue of the Strategic Management Journal.
Note however the recognition by Grant that “all human productivity is knowledge dependent and machines are simply embodiments of knowledge” (italics added). The lead-in to this is, however, disconcerting: “Indeed, if we were to resurrect a single-factor theory of value in the tradition of the classical economists’ labor theory of value or the French Physiocrats land-based theory of value, then the only defensible approach would be a knowledge based theory of value, on the grounds that all human productivity is knowledge dependent and…” (Grant 1996: 112). The classical economists and the Physiocrats were not wrong because they picked the wrong factor of production for their single-factor theory of value. They were wrong because any, single or otherwise, factor theory of value is wrong. The value of outputs is not determined by the value of the inputs. Rather the value of any input is determined by (imputed from) the value of the output which is the result of acts of consumer evaluation. The importance of knowledge, we shall show, is that it is a (technologically) necessary dimension (component) of all factor inputs.
See the references cited at note 1 above.
See Tulloh and Miller (2006) for a conscious, subtle work along these lines—combining Lachmanian insights with recent insights in the theory of product design and development.
Here we understand “production” very broadly to include all activities from the initiation of the production process to the final delivery to the consumer—including, that is, manufacture, transportation, distribution, marketing, etc.—all the stages in the supply chain.
This contrasts with economic approaches that imagine a world in which additions to capital occur without changes in technology like standard neoclassical growth models deriving from Solow (1956).
Close your eyes and imagine the hundreds of millions of different things that are involved in production activities in the American economy; the buildings that contain untold varieties of complex, specialized physical equipment, producing billions of different goods and services, using diverse raw materials, under the direction of highly trained and finely specialized human beings. Many of the specialized resources, human and physical, have limited adaptability to alternative activities and purposes.
Lachmann: “The generic concept of capital without which economists cannot do their work has no measurable counterpart among material objects. Beer barrels and blast furnaces, harbor installations and hotel-room furniture are capital not by virtue of their physical properties but by virtue of their economic functions. Something is capital because the market, the consensus of entrepreneurial minds regards it as capable of yielding an income (1956: xv).”
See Arend (2007: 5) for a discussion of the role of heterogeneity and uncertainty in understanding entrepreneurship.
The scare quotes indicate that we understand that this is knowledge without awareness or cognition, discussed further below.
Consumption goods also have a knowledge aspect, of course. Indeed, knowledge is a necessary aspect of any economic good; if by economic good we mean something people value. It is only because of our knowledge that something will satisfy some purpose—in either consumption or production—that we consider it a good. Hence, we may reasonably say that consumption goods embody knowledge of what will directly satisfy our wants.
More accurately, the software is a symbolic representation of the knowledge; in this way it embodies the knowledge. When loaded in a computer, the computer then embodies the software that embodies the knowledge. Skirting this distinction helps make the point about the relationship between knowledge and “stuff” discussed in the text.
The concept of embodied knowledge is closely related to the concept of product design and the latter term may have expositional advantages. Product design is more concrete than embodied knowledge and builds a bridge to the emerging literature on the science of design (related to the modularity literature considered below) that uses the term precisely in this way. We owe this observation to Bill Tulloh. For the purposes of this article, however, retaining the embodied knowledge concept may better serve the purpose of explicating a CBV of the firm, especially for an audience interested in Austrian economics.
We use the term complexity in this article in its intuitive, common sense meaning. A system (structure) becomes more complex as the number of components it contains increases and the number of types of interface (interconnections) increases with it. Its increased complexity means that it is more difficult to figure out, to comprehend, though it is clear there is a coherent structure to it.
Even in a slave economy, where the human embodiment of the human capital (say acquired skills) could be sold, the slave would still be in crucial control over the use of his brain in a way that a machine is not, thus posing very different management problems.
This is an implication of Lachmann’s (1956) reconstitution of Böhm-Bawerk’s famous assertion that chosen “roundabout” methods of production are more productive. In effect, Lachmann replaced “increased roundaboutness” with “increased complexity.”
It may not. The integrated firm may keep the ownership value of all the parties unaffected or some may increase. When one firm acquires another, the principals of the acquired firm (it could be a sole proprietorship) often experience a dilution of their capital. Depending on how the deal is structured, they may become shareholders of a larger combined entity, or they may be diluted shareholders of a newly incorporated subsidiary. In the later case, though their percentage ownership may have gone down, the value of their capital may have increased—which is the point of the merger. To that extent (the extent to which the merger is successful), the dilution effect may be mitigated or erased—C 1 may be negative. The value of the merger is, however, at least partly endogenous—it depends, in part, on the behavior of the newly-incorporated owners.
Baldwin (2008) considers this problem in the framework of transactions which she defines and the transfer of (any of) information, material and energy for compensation. Thus, a firm is considered as a kind of “transactions free zone” (there are other kinds), in which ongoing transactions are replaced by relational contracts or close cooperation. Transaction-free zones are semi-isolated modules of resources and economic activity; specialized production units. This is examined further below. The discussion in the text can be formulated in terms of her framework as well.
All values are in discounted present-value terms.
The counterparts to this at the economy level are social institutions—law, language, custom, etc.—the social capital of the economy. These homogenize expectations across individuals concerning the general rules of the social game thus enhancing social coordination. Disequilibrium in some spheres of human action is only possible against a backdrop of equilibrium of other (enclosing) spheres (Lewin 1999, chapter 3; Lachmann 1971).
The M-form corporation is a particular form of modularization, in which the divisions form large modules (Sautet 2001).
Of course there are other aspects of modularity, like adaptability and resilience in the face of change, that are not examined here. See Lewin 2008 for example.
Erroneous views of capital have led to an under-appreciation of the centrality of the concept for understanding production, the firm, entrepreneurship, and the like (see Dean and Kretschmer 2007 for an example and Baetjer and Lewin 2008 for a critique). Perhaps the most egregious mistake is to think of capital as necessarily physical in nature and to exclude human, social and intellectual capital from the category of capital—confining them to a special and very different category. In this article we argue, to the contrary, that these are all part of capital generically speaking, part of the capital structure, though the non-alienability of human capital does imply specific management issues.
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Acknowledgements
We would like to thank Bill Tulloh for very helpful discussions on an earlier draft and a referee for helpful suggestions. We have used here material from Lewin, 2011 - an earlier, shorter version of this article. We dedicate this article to the memory of Don Lavoie.
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Lewin, P., Baetjer, H. The capital-based view of the firm. Rev Austrian Econ 24, 335–354 (2011). https://doi.org/10.1007/s11138-011-0149-1
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DOI: https://doi.org/10.1007/s11138-011-0149-1