The Human Firm – a Socio‐economic Analysis of its Behaviour and Potential in a New Economic Age

Citation

Tremblay, P. (2000), "The Human Firm – a Socio‐economic Analysis of its Behaviour and Potential in a New Economic Age", International Journal of Social Economics, Vol. 27 No. 3, pp. 244-255. https://doi.org/10.1108/ijse.2000.27.3.244.3

Professor Tomer’s new book proposes an alternative economic theory of the firm inspired by the increasing dissatisfaction with the black‐box approach to organisations proposed by conventional economics textbooks. It aims at providing a more compelling foundation capable of explaining recent “real‐world developments” in areas such as organisational structures and strategy, the deliberate adoption by private businesses of ethical, social and green norms and their investments in marketing relationships; all of these are deemed difficult to interpret with models featuring the neoclassical, short‐term profit‐maximising business firm. The book blends a number of important theoretical issues and attempts to connect them with topical industrial practices and policy in “a new economic age”. The topics and concerns reflect critical developments in both economic and organisational strategy theory and hold the promise of greater integration between these fields. The book aligns a series of Tomer’s prior papers which, from a stylistic viewpoint, have been suitably well‐integrated in an effort to keep its flow. Any problem with continuity occurring while reading Tomer’s work has more to do with methodological weaknesses appearing at the core of his theory. Such substantive issues are never really raised and leave the reader to expect a more detailed analysis which never comes. In fact, the introductory chapter, which integrates some of the main theoretical insights found in the book, establishes rather loose assumptions and theoretical connections. It leaves the reader to expect that the author will later take position on important current methodological debates necessary for Tomer’s theory to become a serious contender among the numerous recent models of the firm. This does not really happen and as one progresses through the book, it becomes possible to identify serious methodological weaknesses and even philosophical contradictions in the apparatus suggested by the author. This review will argue that, despite holding interesting ideas, there are serious difficulties with Tomer’s overall theoretical account which prevent the Human Firm from fulfilling its promises.

The overall layout of the book is relatively simple. It attempts to provide a theory of the business firm which is compatible with the socio‐economic tradition and is also relevant for a general understanding of industrial development and policy. In Part I, Tomer presents the firm as “fully human” in the sense that it reflects human and organisational potential and because it is capable, like individuals, of developing its capabilities and appreciating new possibilities. A main tenet of the approach is that the firm’s ability to open up its strategic opportunities is embedded in its social and organisational make‐up and needs to be compatible with the social and organisational structures of its environment. The firm itself constitutes the central actor of the model, although the analysis often needs to shift forward to focus on economic agents inside it (which form its internal social and organisational capital) and backward to the socio‐economic environment in which it is embedded. In Part I, Tomer purports to establish a socio‐economic model of decision making, strategy and structure, using a holistic human model of the firm. From the hypothesis that firms need to spend a great deal of attention in improving the quality of their investments in internal and external social capital, Tomer argues that most fail to optimise their organisational investment potential, in large part, because they under‐emphasise the “softer” aspects of their essence and uniqueness (presumably taking the form of intuition, spirit or other aspects of their character) which ought to play a greater role in the analysis of industrial strategy. While Tomer mainly uses analogies with “individual humans”, he is never very explicit about the intrinsic nature (however soft) of the firm. In Part III, the author examines the relationship between the firm and its external environment and argues that the failure to understand the softer,non‐economic aspects or organisation underscores the failure of firms to achieve higher levels of productivity and play more constructive and responsible social roles. From that follow arguments that firms could play more positive ethical, social and environmental functions if they understood better (that is managers and academics alike) the nature of these soft internal factors.

The present review cannot address the very large number of potentially controversial lines of arguments found in this book but, for the sake of proposing a short methodological critique of Tomer’s proposed theory, it is useful to take on Loasby’s (1989) methodological position regarding the assessment of scientific models. He argues that scientific theories can only be judged on the basis of two main criteria: their internal coherence (in terms of consistency and connections between assumptions) and the relevance of associated hypotheses generally judged by their ability to address, question and connect with useful existing controversies. The present review will briefly explore (1) whether Tomer’s model connects adequately with recent developments and controversies regarding theories of the firm; and (2) whether it seems to incorporate coherent and self‐supporting behavioural and structural assumptions.

As mentioned above, Tomer’s general thesis raises many topical issues, but it is striking how little use he makes of alternative arguments and approaches opposed to the neoclassical black box (other than Leibenstein and Simon), in particular those that stem from recent organisational economics and from the strategic management literature. For instance, one would expect a socio‐economic theory of the Human Firm to address major views and debates within institutional economics about the nature and formation of economic institutions. The difficult but unavoidable question of whether to consider the transaction, economic agents, the firm, the industry or society as the basic unit for economic analysis is regularly raised by old institutionalism and evolutionary economists and ought to be incorporated in any serious attempt to challenge mainstream methodology on firms and industry. Contributions from the competency and cognitive approaches to organisational management ought also to have played a significant role in the elaboration of Tomer’s methodological position. In particular, economists not even mentioned in the book, such as Penrose (1959) and Richardson (1972), established some of the foundations of such approaches and have discussed at length many aspects that are featured centrally in the Human Firm: the nature of the division of knowledge, the processes by which competencies are accumulated, created, transformed or discarded, and the role of inter‐firm relationships and networks as means of appropriating competencies and learning. A whole research programme blending organisational and evolutionary economics with strategic management has developed around these insights. They address methodological issues which share essentially the same concerns and would have constituted a natural platform from which to elaborate (see Foss and Knudsen, 1996, for instance). Given Tomer’s rather loose use of the notions of “‘soft‐ and hard‐headedness” analogies to support a distinction between strict rational‐thinking and value systems, references to the growing literature taking a cognitive perspective to explain how firms learn and develop distinct technological paths would have been also expected. This lack of attention given to existing research areas and progress in theories of the firm is especially frustrating as Tomer falls into many basic methodological traps which have been addressed and are somewhat on the way of being resolved in existing methodological controversies.

Many of the difficult conceptual issues facing organisational economics and theories of strategic management are not addressed directly by Tomer, who prefers to supply a broad overview of the implications of an ideal alternative. The typical reader of this journal with an interest in the theory of the firm might not gain much from many of these nowadays well‐known critiques. Most importantly, he/she will most likely recognise some methodological flaws in the general arguments, only a few of which can be addressed in this review. A critical difficulty found throughout the book is that Tomer’s work often attempts to implicitly reconcile neoclassical, equilibrium‐based thinking with issues such as organisational evolution or the emergence of firm‐specific ethical norms, which cannot be appropriately handled by optimisation and equilibrium‐based theorising. Loasby (1991) has remarkably well propounded the view that the equilibrium and the evolutionary ways of thinking are fundamentally incompatible and that blending them gives way to contradictory assumptions regarding the nature of knowledge and ignorance. This is why one cannot help but be uncomfortable with a model which portrays the firm as sub‐optimal simply because misguided management failed to produce its full “potential output” and did not invest optimally in learning. The influence of Leibenstein is clear, but to the latter’s credit, the emphasis was strictly on incentives and he conceived of firms in which organisational slack acted as a buffer to handle unpredictability. Tomer often intermingles (without clarifying) the problem of less than adequate incentives (which he believes the Human Firm could presumably handle with a more conducive atmosphere or organisational culture) with that of how to organise the division of knowledge and articulate learning strategies and structures (in which the organisational culture becomes a firm‐specific and tacit learning strategy, interpretation which never materialises in the book). This is why the Human Firm’s managers seem sometimes to be expected to invest in organisational capital on a rational basis mainly for handling known opportunities (for instance, pages 6‐9; this is close to Leibenstein and portrayed as a failure) and some other times seem to be portrayed as entrepreneurs dealing with what seems like genuine uncertainty. In fact, it is symptomatic that Tomer never addresses the issue of the nature of uncertainty or ignorance directly; nor does he state what he actually means by “learning” in his world of human firms which seem to be capable of simply investing in a “continual learning technology”. Many of the difficulties this reviewer sees with his discussion of marketing relationships and internal structures are connected with that same general problem, as firms (and economists analysing them) are depicted as mainly having failed to perceive, “blinded by old paradigms”, or understand the optimal learning strategy. Never is it suggested that they might be facing the “unpredictable”. Perhaps the true sense of flexibility lies in the realisation that what managers ought to prepare for is the fact that they cannot predict which strategy will prove wisest after the event and realise that they and others will have different views as to what the future holds. It is also disturbing that Tomer always seems to naïvely argue that a type of internal structure or collaborative strategy has become the most appropriate in the 1990s and could explain structural difficulties in the US economy. Recent writings by evolutionary and institutional economists on “firms‐as‐organisations” argue rather that the division of knowledge interacts with the nature and degree of environmental uncertainty (Langlois and Robertson, 1995). Therefore, a type of structure or strategy ought to be connected with specific environmental contexts and develop diverse interpretations of what the future will look like and what to do in that context. The resulting diversity of structures and strategy constitutes a major source of flexibility in the macro‐economy. This is different from arguing that firms should deliberately endorse integration and flexibility as recipes for success if only they understood what these mean.

Another important difficulty which arises throughout the book has to do with a number of statements of a more normative nature. Tomer often raises questions related to ethical and environmental concerns and argues that contemporary firms cannot afford to ignore these if they hope to survive in the modern business environment, because this is not what society wants (or what society’s overall interest is) and “society” is unlikely to put up with it forever. “Society” is seeking win‐win situations and this does not often happen in real life because of non‐responsible, deviant or insight‐less decision makers unwilling to invest in an ethical orientation, compassion or patience. Acting as the devil’s advocate, the present reviewer cannot help but be sceptical about that sort of argument which is based on a few examples of businesses adopting a green or social outlook and doing well for themselves. Even more perturbing perhaps is the repeated assertion that businesses cannot ignore “society’s preferences”. Once again, it seems that the problems of disperse knowledge about technology and social values is misconstrued, especially since mainstream and alternative economics insights agree at least on the notion that uncovering diverse, complex (and arguably not altogether exogenous) social and environmental preferences is central to the problem of socio‐economic coordination. Treating the latter as given and knowable is even more conservative than much neoclassical thinking on the issue and seems like a nai¨ve basis to address policy questions.

It would be possible to disagree with numerous smaller issues but they, in general, have a close link to the two main methodological difficulties discussed briefly above. While most readers, including the present reviewer, will feel a great deal of sympathy with the purpose and some of the intuitions combined in this book, they are likely to be very frustrated with the insufficient number of connections with contemporary debates and the lack of analytical depth and details supplied by the author. The ability to address other interesting issues is hampered by the need to first address more fundamental theoretical positions, which are being raised in the growing literature discussing alternative views of the firm. For instance, while Tomer provides adequate attention to the issue of inter‐firm marketing linkages, he does not consider the broader and fundamental question of the boundaries of the firm (such as the integration of its co‐existent horizontal, vertical and diagonal dimensions). This seems particularly problematic from the point of view of a theory which places the firm as the central, human‐like actor of an economic theory. Questions of boundaries and possible technological disintegration do not sit well with such a view. In those respects, the book raises a hotchpotch of interesting and relevant questions but cannot fulfill its aims of providing the foundations for a satisfactory socio‐economic theory of the firm.