Economica 

About: Economica is an academic journal published by Wiley-Blackwell. The journal publishes majorly in the area(s): Wage & Unemployment. It has an ISSN identifier of 0013-0427. Over the lifetime, 6538 publications have been published receiving 237010 citations.

The Nature of the Firm

Abstract: Economic theory has suffered in the past from a failure to state clearly its assumptions. Economists in building up a theory have often omitted to examine the foundations on which it was erected. This examination is, however, essential not only to prevent the misunderstanding and needless controversy which arise from a lack of knowledge of the assumptions on which a theory is based, but also because of the extreme importance for economics of good judgement in choosing between rival sets of assumptions. For instance, it is suggested that the use of the word “firm” in economics may be different from the use of the term by the “plain man.”1 Since there is apparently a trend in economic theory towards starting analysis with the individual firm and not with the industry,2 it is all the more necessary not only that a clear definition of the word “firm” should be given but that its difference from a firm in the “real world,” if it exists, should be made clear. Mrs. Robinson has said that “the two questions to be asked of a set of assumptions in economics are: Are they tractable? and: Do they correspond with the real world?”3 Though, as Mrs. Robinson points out, “more often one set will be manageable and the other realistic,” yet there may well be branches of theory where assumptions may be both manageable and realistic. It is hoped to show in the following paper that a definition of a firm may be obtained which is not only realistic in that it corresponds to what is meant by a firm in the real world, but is tractable by two of the most powerful instruments of economic analysis developed by Marshall, the idea of the margin and that of substitution, together giving the idea of substitution at the margin.

The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957†

Abstract: When the demand for a commodity or service is high relatively to the supply of it we expect the price to rise, the rate of rise being greater the greater the excess demand. Conversely when the demand is low relatively to the supply we expect the price to fall, the rate of fall being greater the greater the deficiency of demand. It seems plausible that this principle should operate as one of the factors determining the rate of change of money wage rates, which are the price of labour services. When the demand for labour is high and there are very few unemployed we should expect employers to bid wage rates up quite rapidly, each firm and each industry being continually tempted to offer a little above the prevailing rates to attract the most suitable labour from other firms and industries. On the other hand it appears that workers are reluctant to offer their services at less than the prevailing rates when the demand for labour is low and unemployment is high so that wage rates fall only very slowly. The relation between unemployment and the rate of change of wage rates is therefore likely to be highly non-linear. It seems possible that a second factor influencing the rate of change of money wage rates might be the rate of change of the demand for labour, and so of unemployment. Thus in a year of rising business activity, with the demand for labour increasing and the percentage unemployment decreasing, employers will be bidding more vigorously for the services of labour than they would be in a year during which the average percentage unemployment was the same but the demand for labour was not increasing. Conversely in a year of falling business activity, with the demand for labour decreasing and the percentage unemployment increasing, employers will be less inclined to grant wage increases, and workers will be in a weaker position to press for them, than they would be in a year during which the average percentage unemployment was the same but the demand for labour was not decreasing. A third factor which may affect the rate of change of money wage rates is the rate of change of retail prices, operating through cost of living adjustments in wage rates. It will be argued here, however, that cost of living adjustments will have little or no effect on the rate of change of money wage rates except at times when retail prices are 1 This study is part of a wider research project financed by a grant from the Ford Foundation. The writer was assisted by Mrs. Marjory Klonarides. Thanks are due to Professor E. H. Phelps Brown, Professor J. B. Meade and Dr. R. G. Lipsey for comments on an earlier draft.