Document Type

Foreword

Publication Date

1996

Center/Program

Center for Contract and Economic Organization

Center/Program

The Charles Evans Gerber Transactional Studies Center

Abstract

The study of institutions, and particularly the study of institutions that societies use to govern business enterprises, is at a point of transition. In the last two or three decades, scholars focusing on economic principles to define appropriate legal rules and corporate institutions rose up to challenge the traditional orthodoxy of corporate governance found in the Berle and Means corporation.

One of the most exciting trends in the literature rests upon the "increasing marginal returns" school of economics associated with Brian Arthur and the Santa Fe Institute. The traditional neoclassical economic theory of production, familiar from decades of undergraduate and graduate courses in microeconomic theory, focuses on competition between products in terms of decreasing marginal returns. The idea is that the economy will settle to a competitive (and optimal) equilibrium at the point where the decreasing marginal returns that sellers can obtain from increasing production just equal the increasing marginal costs of producing more and more units of a given product. As a producer increases the amount of production of a given product, it must sell to purchasers less excited about the product. Demand for additional units decreases, which in turn decreases marginal revenue.

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