3. The world created by capitalist firms

This paper was first presented and published at the RWIO Conference, Rio de Janeiro, September 2015. For the full paper, see: http://cors.usp.br/rwio/10rwio/14.pdf

Michael Joffe

Imperial College London



The transformation of the world since the industrial revolution corresponds spatially and temporally with the emergence of the capitalist firm – in which the firm owns and controls the means of production – an institutional development. Such firms are hugely diverse, but share a combination of the need to generate profit with the ability to buy in all necessary inputs, the key limitation being managerial capacity. A firm’s strength depends on the perceived promise of its initiative (ex ante), plus its achieved success (ex post) e.g. its cost structure; the gap between these is subject to radical uncertainty. A firm’s ability to affect the world depends on its degree of strength. Competition between firms is an arms race, creating growth by longterm cost reduction plus new products. Alternative explanations of capitalist growth, such as invention, entrepreneurship and innovation, only apply in the context of their relation to the capitalist firm. The distinguishing feature of the capitalist real economy is that the firm takes decisions in the light of its economic environment. This is how quantity and price, as well as employment and investment, are set. These firm-level decisions provide micro (or meso) foundations for phenomena such as growth and unemployment at macro level.