Organizations and Markets

Reflections on Cyert and March

22 August 2008 at 8:34 am Peter G. Klein 1 comment

| Peter Klein |

The April 2008 issue of JEBO features a symposium on Cyert and March’s 1963 classic, A Behavioral Theory of the Firm (an O&M favorite). The book has been highly influential in organization theory, somewhat influential in behavioral economics, but mostly ignored in the contemporary economics literature on the firm (see here). As Mie Augier and March note in their introduction to the special issue:

As long as the primary focus of the theory of the firm was on the aggregate outcomes of interaction among rational actors, the book’s role in economics was limited. As Cyert and March noted, “Ultimately, a new theory of firm decision making behavior might be used as a basis for a theory of markets, but at least in the short run we should distinguish between a theory of microbehavior, on the one hand, and the micro-assumptions appropriate to a theory of aggregate economic behavior on the other. In the present volume we will argue that we have developed the rudiments of a reasonable theory of firm decision making” (1963, 16).

As interest in economics moved slowly toward greater concern with behavioral micro-assumptions, ideas consistent with Cyert and March (1963) became more prominent ([Kay, 1979], [Day and Sunder, 1996] and [Day, 2002]), although with hesitations and qualifications ([Baumol and Stewart, 1971] and [Williamson and Winter, 1991]). Elements of a behavioral view of the firm can now be found in many modern developments in economics, but especially in transaction cost economics ([Williamson, 1996] and [Williamson, 2002]), evolutionary theory ([Nelson and Winter, 1982], [Nelson and Winter, 2002], [Winter, 1986] and [Dosi, 2004]), and organizational economics (Gibbons, 2003). Behavioral ideas have been elaborated not only in theories of the firm but also in collateral areas of economics, such as strategic management (Rumelt et al., 1991), organization theory (Argote and Greve, 2007), and the psychological foundations of economic choice ([Tversky and Kahneman, 1974], [Kahneman and Tversky, 1979] and [Camerer et al., 2004]). Ideas of bounded rationality, conflict, learning, and routines are now commonplace, as is the general idea that economic behavior is guided by principles of human behavior. Although those ideas have many ancestors, A Behavioral Theory of the Firm probably contributed some modest amount of DNA.

Of particular interest to the O&M crowd are “Outlines of a Behavioral Theory of the Entrepreneurial Firm” by Dew, Read, Sarasvathy, and Wiltbank; “Realism and Comprehension in Economics: A Footnote to an Exchange Between Oliver E. Williamson and Herbert A. Simon” by Augier and March; and “Unpacking Strategic Alliances: The Structure and Purpose of Alliance versus Supplier Relationships” by Mayer and Teece.

Entry filed under: - Klein -, Management Theory, New Institutional Economics, Theory of the Firm.