Production, exchange, and firm allocation: Division of labor reconsidered

This dissertation attempts to provide an answer to the question of firm hierarchy. It does so by explaining the economic significance of entrepreneurial authority within the institutional context of the firm. Neoclassical theory assumes the independent existence of a production process, defined by existing technology. The phenomenon of organized production lacks clear theoretical expression in orthodox price theory. While the assumption of an independent production process is shown to be true to the conditions of craft type production, the form of industrial production is inadequately represented in the neoclassical production function. More specifically, the nature of the labor input is obscured in orthodox production theory. The process character of industrial labor is explored and the presumed existence of a definable production function for the labor input is shown to be highly suspect. The role of entrepreneurial authority is established by explaining the absence of a market type exchange calculus for the labor input within the firm. A distinction between "specialization of work" and "division of labor" is proposed to establish three necessary conditions for market exchange and price allocation: (1) A dichotomy between production and consumption choices. (2) Effective supply of exchangeable or tradeable goods. (3) Profit-maximization as a behavioral rule of market allocation or coordination.;Using the modern industrial firm as the prototype of hierarchial organization, I study the breakdown of exchange with respect to the specific case of industrial labor. Here, the division of labor embodied in industrial technology is seen to undermine the above three conditions for exchange and create the necessity for entrepreneurial coordination.