Arguments Of Alfred Marshall's Theory Of The Firm

One of economists’ primary concerns, dating back centuries, has been that of understanding and describing the objectives of firms and those who control them. In the late 19th century, Cambridge professor and neoclassical economist Alfred Marshall applied marginal analysis to the firm; the result being the inception of what is referred to today as Marshall’s theory of the firm. The theory puts forth the idea that businesses aspire to produce at a level where their marginal costs are equal to their marginal benefit, that is, MC=MB. According to the theory, at this point profits are maximized, and maximizing profits is the primary and central objective of all firms. However, the 20th century witnessed the emergence of various criticisms of the theory, most of which centered around three main arguments; that firms are unaware of the basis of …show more content…
Whether or not firms attempt to maximize profits and if the principal-agent problem provides greater resistance to this goal as business organizations grow is a stronger argument against the theory. However, it is also flawed in the sense that many of the other objectives allegedly sought out by firms can be rationally understood to be connected to gaining maximum profits in the long-run. Furthermore, studies on the principal-agent problem have provided no quantitative evidence to prove that smaller firms are more disposed to profit maximization than larger firms. The argument that probably stands strongest is that of non-rising marginal costs in both the long and short run. The ideas that diseconomies of scale are non-existent and that firms build in spare capacity in order to avoid rising costs in the immediate future put the upward-sloping marginal cost curve into