2 - The economic paradigm and its basic assumptions

Summary

As developed in Chapter 1, a major part of traditional theory building in the field of strategic management is rooted in the economic paradigm. Every theory is based on assumptions that allow but also limit the insights it provides; therefore it is important to be aware of these basic assumptions. In the following sections, we discuss the assumptions underpinning the modern theory of the firm and those of strategy theory, so as to emphasize the differences from the upcoming stakeholder paradigm which will be the content of Chapter 4.

The economic paradigm of the theory of the firm

The neoclassical model of economic theory is anchored in the basic assumptions of “homo economicus” as self-interested and rational actor. In general the theory of the firm shares this understanding. However, this concept has been increasingly questioned as anomalies have been observed in decisions, which contradict the assumption of decision-makers acting completely rationally. Simon’s early articles established a basis for this development, by distinguishing two basic perspectives: “perfect rationality” and “bounded rationality.” Bounded rationality was based on the limited informational and cognitive capacity of the decision-makers on the one hand, and environmental uncertainties on the other. Thus, not optimization but satisfaction is important when making decisions.