Chapter 12

The Black Box of the Firm: Human Relationships and Productivity

In This Chapter

arrow Understanding the survival principle and economic efficiency

arrow Presenting x-efficiency theory

arrow Thinking about efficiency wages

According to conventional economics, what happens inside the firm is of little consequence for economic analysis. Conventional economics assumes that people behave in a manner that generates the best possible economic results. Behavior is, among other things, assumed to be narrowly self-interested, and the market is assumed to beat up and eliminate firms that don’t perform efficiently.

But in behavioral economics, economic outcomes can be affected — big time — by how the firm is managed and by the preferences of workers, managers, and owners. Another key finding in behavioral economics is that both inefficient firms and efficient firms survive and can even do quite well in real-world economies. This chapter discusses the economics underlying how inefficient firms can prosper and why efficient firms don’t conquer the universe.

I also explain how, from the conventional perspective, changing the wage rate should have no impact on productivity. High wages increase costs for ...

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