The translation of demands for commodities into demand for factor services necessitates some clearly defined technologies which tell us how commodities are produced and how factors are distributed and, in addition, how much the process of conversion from services to commodities "costs". In summary, we need to understand production as a matter of indirect exchange and so extend the tools of analysis derived in the context of pure exchange to analyzing production. The idea of production as indirect exchange was at the heart of the theory of the Lausanne School of Léon Walras (1874) and Vilfredo Pareto (1896, 1906). The Lausanne theories of production were built with one eye on the general equilibrium system in which they were to be embedded. As a result, the basic production unit - the "firm" - was relegated into a subsidiary role. Indeed, Walras ignored the decision-making role of producers entirely. Many of the propositions we find here regarding profit-maximization, choice of factor inputs and its grand conclusion, the marginal productivity theory of distribution, are due in good part to other scholars, notably Vilfredo Pareto (1896, 1906), Enrico Barone (1895, 1896), Philip Wicksteed (1894), John Bates Clark (1889, 1890, 1899) and Knut Wicksell (1893, 1901). The various strands of production theory, however, remained largely scattered until the1930s, during the height of the "Paretian" school, where it was consolidated in the hands of Jacob Viner (1931), Harold Hotelling (1932), John Hicks (1932, 1939), Sune Carlson (1939), Paul Samuelson (1947) and, in a characteristically long-gestating monograph, Ragnar Frisch (1965). Further advances, particularly in the use of duality theorems for production, were made later in the work of R.W. Shephard (1953), Hirofumi Uzawa (1962, 1964) and Daniel McFadden (1966). The integration of the theory of production into Paretian general equilibrium theory is covered elsewhere. In contrast, the theory of the "firm", in all its rich, detailed, partial equilibrium glory, was initiated in the unique work of Augustin Cournot (1838) and followed up by Alfred Marshall (1890) and the Cambridge Neoclassicals. It was against the Marshallian tradition that Piero Sraffa (1926) directed his famous critique, and it was out of the ensuing rubble that the theory of imperfect competition was initiated by Joan Robinson (1933) and Edward Chamberlin (1933). Cournot's theory of oligopoly was resurrected by Heinrich von Stackelberg (1934) and others and has since come to fore of industrial organization theory. After the Second World War, the theory of production veered off in another direction, exploiting the activity analysis and linear programming methods developed by the Cowles Commission. As such, the "Neo-Walrasian" theory of production (e.g. T.C. Koopmans, 1951; G. Debreu, 1959) covers much of the same ground as the Paretian theory, albeit using somewhat different methods. It has been argued that several Paretian themes were lost in the process, but the Neo-Walrasians have nonetheless asserted the greater "generality" of their methods. Convenient and comprehensive restatements of production theory are found in virtually any microeconomic textbook. It is worthwhile highlighting the surveys by Sune Carlson (1939), Ronald W. Shephard (1953), C.E. Ferguson (1969), M. Fuss and Daniel McFadden (1978), M. Ishaq Nadiri (1982), Werner E. Diewert (1974, 1982) and R.G. Chambers (1988). The brilliant historical treatment by George J. Stigler (1941) is very much worth consulting. A final reminder: we use the term "capital" repeatedly when
discussing examples in the theory of production. However, we warn all readers that
from now on, throughout all our sections dealing with the theory of production, Capital proper is
dealt with separately elsewhere.
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