Production Function and Institutions

Abstract

"The classical economists were primarily engaged in analysis of the wonder that is production. The marginalists, while laying the foundation of mathematical economics, shifted its focus to rational behavior of a single consumer, presumably because there they found a problem readily amenable to the mathematical tools at hand. Production process was assimilated after a couple of decades, in a conveniently truncated form In neoclassical writings production was a mirror image of the process of consumption, an optimal allocation problem by a decision maker. Later, economists got so accustomed to this formulation that no argument would be necessary for accepting this as the essence of actual production processes. A fundamental difference between the consumption and production processes is -one is a private action, the other is a joint one. A consumer can decide her best option all by oneself, but a single individual in a production process cannot. It was necessary, therefore, to reduce the production process to that of a single decision maker. Towards this end Walras conceived a hypothetical market of capital services, where landowners, workers and capitalists offer natural resources, personal skills, and capital proper. An entrepreneur, like an auctioneer, purchases productive services and combines them to activate the process of production (Ingrao and Israel, 1990,p. 107). The entrepreneur, the 'producer' in Debreu (1959), is the counterpart of individual consumer who could optimize individually while participating in a joint activity. Though Williamson's and the principal-agent formulations are far reserved about the omnipotent powers of one individual in a joint activity they still retain the primacy of one (or one group of) decision maker."