Effort and Efficiency in the Neoclassical Firm

Abstract

The neoclassical firm, framed, say, in the context of an Arrow-Debreu, general-equilibrium model, has traditionally been viewed as an institution that combines units of goods and services called inputs, such as raw materials, machines and labor time, into units of another good or service referred to as output. In so doing, the firm is thought of as restrained by both market prices and its production function, and is assumed to hire those quantities of inputs, and produce (and sell) that quantity of output which maximizes its profit. Such a firm is assumed to be technically efficient in that, by definition, its production function associates the maximum possible output with each combination of labor time and non-labor inputs (given technology). Moreover, since its output and all of its inputs flow through perfectly competitive markets, the quantities of output and inputs it achieves at economy-wide, general equilibrium are Pareto efficient.

Review of Political Economy 6 (1994), pp. 62–71. © Taylor & Francis, Ltd. (http://www.tandf.co.uk/journals/). Reprinted with permission.

The resent paper has benefited greatly from the criticisms and suggestion of Samuel Bowles and Douglas Vickers. The author would like to thank them for their help.