How are things produced?

Newman, Susan (2020). How are things produced? In: Deane, Kevin and van Waeyenberger, Elisa eds. Recharting the History of Economic Thought. London: Macmillan International Higher Education, pp. 53–68.



For Adam Smith, the origins of the wealth of nations can be found in the rapid accumulation of capital made possible by the expansion of scale and scope of production based upon its organisation: the division of labour. It is therefore not surprising that early scholars of the political economy of capitalist development such as Smith, Mill and Marx were preoccupied with the question of how things are produced. Indeed, both the extent of interest in, as well as answers to the following questions set apart different schools of thought within economics: How are things produced? Who decides what, how and how much is produced? How are these decisions made? What role does production play in the economy?

The rupture in economic thought by the Marginalist revolution and rise of Neoclassical economics in the 1970s saw attention shift away from the processes of production towards exchange on the market. As we will discuss further, ideas such as the social division of labour that pertain to the organisation of production gave way to choice, contract and exchange as central concepts for economic theory. Students of economics would increasingly see firms represented as a set of cost and revenue curves rather than an organisation. Moreover, the Marginalist revolution saw a revolution in value theory from one anchored in the labour process (where the value of a commodity was created by the labour expended in its manufacture) to value being determined by the subjective judgement of consumers (a good is worth as much as someone is willing to pay for it) (see Chapter 9). This reorientation in economic thought is especially apparent when we look at standard micro economic textbooks such as Intermediate Microeconomics by Varian (2010) where any discussion of how things are produced are preceded by 17 chapters on market exchange and consumer choice theory. When the subject of production is broached, it is discussed within chapters titled “Technology” (Chapter 18), “Profit Maximisation” (Chapter 19), “Cost Minimization” (Chapter 20), “Cost Curves” (Chapter 21), “Firm Supply” (Chapter 22), “Industry Supply” (Chapter 23). Chapter 32 of Varian (2010), entitled “Production” contains no actual discussion of the process of production; rather it locates considerations of the level of production within the general equilibrium framework.

In addition to the stark differences between the understanding of production and its role in the economy between classical political economists and Neoclassical theorists, a number of other theories of the firm and production emerged both as theoretical critiques of existing orthodoxy as well as in response to apparent changes in the organisation of production. At the time of writing the Wealth of Nations, the British Industrial Revolution was still very much in its naissance, Smith would have observed the restructuring of production as organised by small enterprises organised as sole proprietorships in the main. It would be another 100 years before the joint stock company began to emerge as a dominant form of industrial enterprise. The concentration of production in this way influenced Marx’s analysis of production and the capitalist firm. The dominant presence of the vertically integrated multinational corporations (MNCs) in the organisation of global production formed the context for the contract theory of the firm and later competence theories that will be examined in this chapter. The last thirty years have seen a new wave in the restructuring of production with the continued dominance of MNCs in the organisation of production and global trade, together with the increased disintegration and outsourcing of productive processes such that the production of a single product can involve numerous (small) firms all of the world. The rise of transnational supply chains sees production stretched across multiple national boundaries. This change has prompted the emergence of a “new” set of concepts deployed in the understanding of production in the world economy. This chapter will thus examine the internal logic of various theoretical approaches to understanding production as well as how new ideas gained purchase as production itself was being restructured at the level of the global economy.

Viewing alternatives

Item Actions