Is the most unproductive firm the foundation of the most efficient economy? Penrosian learning confronts the neoclassical fallacy

William Lazonick

International Review of Applied Economics, 2024, vol. 38, issue 1-2, 58-89

Abstract: Edith Penrose’s The Theory of the Growth of the Firm provides an intellectual foundation for a theory of innovative enterprise, which is essential to any attempt to explain productivity growth, employment opportunity, and income distribution. Penrose’s theory of the firm is also an antidote to the absurdity that has been taught by PhD economists to millions of college students for over seven decades: the most unproductive firm is the foundation of the most efficient economy. The dissemination of this ‘neoclassical fallacy’ to a mass audience began with Paul A. Samuelson’s textbook, Economics: An Introductory Analysis, first published in 1948. Over the decades, the neoclassical fallacy has persisted through 18 revisions of Samuelson, Economics and in its countless ‘economics principles’ clones. This essay challenges the intellectual hegemony of neoclassical economics by exposing the illogic of its foundational assumptions about how a modern economy operates and performs. To get beyond the neoclassical fallacy, economists must be trained in a ‘historical transformation’ methodology that integrates history and theory. It is a methodology in which theory serves as both a distillation of what we have learned from the study of history and a guide to what we need to learn about reality as the ‘present as history’ unfolds.

Date: 2024
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DOI: 10.1080/02692171.2021.2022296

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