THE ROLE OF THE FIRM
Rector Magnificus, Honourable Minister for Scientific Research, Officials, Honoured Guests, Esteemed colleagues and students, ladies and gentlemen,
in preparing these brief reflections on the role of the firm in the contemporary economy that is, on our expectations regarding the role of the firm in todays world I have had to choose between two alternatives: to describe the role of the firm in the economic context and era in which we live, or to try and explain, not simply describe, what was, is, and presumably will be the role of the firm that is of the profit oriented business organization - in the present phase of mans evolution.
The first alternative would have made my task much simpler; in fact, I could have dealt with the topic with only two words: “Let’s look around!”.
The firm is certainly not the only wealth-producing institution known to man, but where and when it has existed – and looking back over time and space can only lead us to confirm this - well-being and “wealth” have been more abundant than elsewhere.
In particular, there are five “important phenomena” regarding the contemporary economy where the firm is viewed as a protagonist, and which can be observed by “looking around” (in this brief treatment I cannot deal with other, perhaps more relevant, phenomena):
The question that immediately comes to mind is: “How can we explain, if at all, such phenomena?”.
My answer depends on the following hypothesis: we must not view the firm only as a system capable of producing goods or services but as the center that supports to the maximum extent possible a more general phenomenon that guides the economic (and non-economic) fortunes of mankind: the phenomenon of productivity.
In my view productivity is the true phenomenon that has to be explained; the firm is only one of the means of production which is capable of supporting this phenomenon; but it has been the instrument which, compared to all the others, has accelerated to the maximum extent possible the growth in productivity.
To deal more easily with the topic it is useful to consider the “firm” from a systems perspective: each individual firm is seen as a system of transformation; firms, as a whole and in their mutual relationships, form a combinatory-type system.
Systems are ordered structures formed by elements that interact, in order to allow the system to produce a certain effect.
Based on the internal structure and the way they produce their effects, systems can be classified as:
Operative systems are systems made up of diverse parts (functionally differentiated elements) called “organs”, each of which is specialized in carrying out certain operations based on information; each biological individual represents the highest expression of an operative system; however, even a hair-dryer, a university, a large factory, a state apparatus can be observed as operative systems.
In particular, operative systems of transformation are those in which the organs are pre-arranged to carry out the transformation of given elements into others. The human mind that transforms information into operations, a mill that transforms grain into flour, or the giant corporation that transforms factors into production are all examples of transformation systems.We define as combinatory those non organized systems whose structure is composed of relatively similar agents, each of which produces a micro behaviour similar to that of the others. The macro behaviour of the system, as a unit, derives from the combination of the analogous behaviours of its similar agents, according to a feedback relation.
This internal feedback between micro and macro behaviours guarantees the maintenance over time of the system’s macro behaviour and directs the micro behaviour. When the system starts up “by chance”, it then maintains its behaviour “by necessity”, as if a Supreme Authority regulated its time path and produced the observable effects and patterns.
Firms, populations, ocean waves, a swarm of grasshoppers, the furious charge of a herd of elephants, the dynamics of a line of cars on the highway, spectators standing up at a stadium in response to those in the first row, can be viewed as clear examples of combinatory systems.
The behaviour of individuals gives rise to that of the system, but the behaviour of the system in turn absorbs, directs and conditions that of the individuals, almost as if a hidden director, an “invisible hand”, were guiding the micro behaviours in order to maintain the behaviour of the entire system.
I would like to continue on this particularly important point by giving a simple example: suppose we have a dance hall, and that the music begins, a beautiful waltz, and we take the floor to dance. At first all the couples are somewhat embarrassed since, dancing in a direction independently decided on by each couple, they begin to elbow, push and bump into each other; then, by chance, some couples begin to dance circularly, for example in a clockwise direction, thereby freeing up space. Other couples take advantage of the space to follow in the same direction, and soon all the couples on the floor adjust (they are “forced” to do so) to this tendency and end up by dancing in an ordered fashion, following a circular direction, almost as if a director had ordered them to do so. If “chance” had favoured an anti-clockwise direction, then “by necessity” the system would have shown the opposite macro behaviour.
How much simpler it would have been if an official master of ceremonies had from the start guided the direction of the dance!
We must, however, clear up another concept fundamental for our conclusions.
Systems are characterized by their “teleonomy”, and we can distinguish between endogenous and exogenous teleonomy.
This term is difficult to precisely define without making further considerations that would inevitably take us away from our topic. Very simply put, teleonomy can be considered as the feature of a system whereby it remains active in its environment; in the macro system it is a part of.
Endogenous teleonomy is the behaviour of the system whereby it maintains its structure; it is the effect of a behaviour undertaken by the system itself so as not to avoid disintegration.
Exogenous teleonomy, on the other hand, is the behaviour of the environment in keeping “alive” a certain type of system that the environment considers useful.
Human parasites have almost been eliminated, since they do not enjoy exogenous teleonomy. The environment has rejected them, even if it is not difficult to imagine the effort of those small biological systems to remain alive despite the anti-parasite products ; but they did not have enough endogenous teleonomy (despite the genetic mutations that have made some species resistent to anti-parasite products).
With this minimum conceptual framework we can now deal with the role of the firm in the economy, and can already correctly pose the questions we will try to answer: if firms are operative systems of transformation that are part of a vaster combinatory system, then analyzing their role and function means searching for, on the one hand, those characteristics that move firms to remain in existence – by developing endogenous teleonomy – and, on the other, those that bring the economic system to accept them as instruments of production.
The “universe” that a scientist studies contains features that the scientist accepts without bringing them into question, features that are the essence itself of the reality that is to be analyzed, so that their absence would risk eliminating the object of study.
The physicist, for example, does not doubt the existence of the force of gravity or nuclear forces; without these there would be few phenomena to study! The biologist does not question the capacity of living organisms to reproduce, to try and perpetuate their species. Without such phenomena the object of biological studies would not exist.
Firms, as operative systems, act within a social-political-economic macro system in continuous evolution. Thus, let us ask ourselves above all what are the “forces” that guarantee the universe of economic behaviour its continuous movement, its continuous evolution.
We can list the folloiwng “basic postulates” of business economics regarding the “forces” that give rise to the universe of economic behaviour, without which this same behaviour and the firms which produce it would not occur:
In an observable universe in which needs did not exist, and/or the available “resources” were in excess, and/or man was not industrious, and/or not provident, or he operated in an isolated fashion, without carrying out exchanges, there would be no economic behaviour and, as a result, no interest in economic science.
After having examined the assumptions that guarantee the existence of an economic system, we must now ask ourselves: “How did the firm arise?”. Only after clarifying this point can we understand its function, characteristics and role.
We can assume that at the start of man’s economic activity consumption was primary.
Production – that is, the application of labor to obtain the goods needed to satisfy needs and motivations – was, though necessary, joined to consumption activity; production for the sole aim of meeting the consumption of the producer can be defined as self-production.
There is an important consideration to make here: since production requires labor, and labor is unpleasant (tiring, burdensome), then through self-production man produced only those goods he personally felt the need for and in the quantity just necessary for consumption (rationality hypothesis).
Why produce more than necessary for personal, family or tribal needs? Why toil more than necessary? Self-production was aimed at consumption.
How many farmers still today in our country cultivate a small vegetable plot for their own needs, and breed rabbits for their own consumption? How many of these cultivate or breed animals beyond the amount they believe they can consume?
Thus, for thousands of years productive acitivity has taken the form of self-production; but with the increase in population density in a given territory, and the improvement in transport and communications, man has realized it was more convenient to specialize in the production of a particular good, obtaining a quantity that exceeded what was strictly necessary for his personal consumption, in order to exchange the excess amount for other goods.
Productive specialization (the first breeding activity, the first agricultural areas, the first fishermen) thus gives rise to four important phenomena: the first, which is fundamental for our firm, is the separation between production and consumption: man does not directly produce the goods he feels the need for and does not directly consume the goods obtained, but produces goods that others will consume and consumes goods that others have produced; the second is the spread of exchange; the third is the creation of money as the means of exchange, and above all as the instrument for transferring over time the purchasing power; the fourth is the substitution of money for goods as the immediate object of economic calculations: money itself becomes the good to acquire by means of work and production (from means to end).
Production thus undergoes a radical change: from a process aimed at obtaining goods with utility – that is, capable of satisfying needs and aspirations - it becomes a process aimed at obtaining goods possessing value: that is, goods that must be requested, desired by some consumer. Thus, thanks to money the value of goods can be quantified by means of prices. With production we not only obtain goods which are useful, but wealth – in other words, goods possessing a value which is monetarily quantifiable.
Man begins to aspire toward well-being, for which the availability of money, even more than of goods, often becomes the index held to be most significant.
As a consequence, the production firm appears as a system of transformation, where two fundamental transformations are carried out:
But according to a fundamental postulate – man is a planner – individuals do not consume all the available wealth.
The spread of production and the use of monetary payments facilitates saving and investment; this leads to the formation of capital. Originally the latter took the form of goods with value, derived from past labor, accumulated in manufactured items, subtracted from consumption, and reutilized in the production process. Then, thanks to the ability of money to transfer values over time, capital was transformed into monetary capital, to be accumulated and managed.
With the availability of such capital the manufacturing firms can thus more easily be created, quickly expand, and even multiply; very soon there is a sufficient number of such firms to give rise to the combinatory system of production units and to allow these to develop.
We have looked at the birth of production firms; but what is their role? To understand this we must consider the characteristic aspect of production: productivity.
This phenomenon, which perfectly reflects the rationality hypothesis, is the tendency to increase the ratio between the quantity of wealth obtained and the quantity of labor employed to produce it (in general terms, average productivity can be measured by the ratio of the quantity (or value, if quantified) of the goods produced to the quantity of the labor employed).
The cost of production depends on productivity: the higher productivity is, the lower is the cost of production.
Thus productivity is simply the measure of the degree of efficiency of the production firm, where the latter is understood as a productive system of transformation (or better yet, productivity is a function of the degree of efficiency of the productive transformation of labor into production).
From the above we can immediately observe that production understood as an economic phenomenon occurs only if the producer , through the production firm, can lower the cost of production below the limits of the cost of self-production for the other consumers; that is, if there is greater productivity in production than there is in self-production.
Nevertheless, in the combinatory system of production firms each firm can exist – and it is here where endogenous teleonomy manifests itself – if it produces at a level of productivity which is not below that of the other firms; and every production firm “tries” to continue along by attempting to improve its efficiency, and thus its level of productivity.
We can now understand what was, is, and, most likely, will be the role – that is, exogenous teleonomy – of the production firm and of production itself: to obtain ever higher levels of productivity.
The micro behaviour of every production firm – to try to achieve ever higher levels of productivity, and thus efficiency – determines the macro behaviour of the entire combinatory system of production: raising the average productivity of the system.
The increase in productivity becomes the dominant feature of the entire economic scenario; it is institutionalized. In fact, I would not hesitate in defining it as a true theoretical hypothesis of how mans economic behaviour operates: the hypothesis of growing productivity, according to which economic behaviour in production tends to achieve ever greater productivity, while itself being governed by the continuous increase in productivity.
This increase in productivity manifests itself not only through an increase and spread of wealth, an improvement in the quality and variety of products, a shift from an economy that satisfies needs to one that satisfies aspirations, but also, and perhaps above all, in the gradual reduction in the average time dedicated to work and an improvement in the conditions of work. Only a century ago the reduction in the working day to 12 hours a day 6 days a week – and a further reduction to 10 hours for children – was considered a great social achievement. Today in advanced industrial countries the objective is a 5-day work week of 7 hours a day (and there is a continual increase in part-time work), while education is now obligatory until the age of 14. Perhaps tomorrow’s problem will be how to manage our free-time … , a problem to which I will return later.
However, this naturally raises a question: what does productivity depend on?
If we define “factors of productivity” as those elements that can increase productivity, then these can be grouped into three classes:
Without question the first factor of productivity was the natural fertility of the land – from hunting grounds to fishing grounds, from places favoring tourism due to the snow and sun to those abundant in uranium or oil – so much so that as a result of this there arose the two most deeply-rooted institutions of all time and place: property and inheritance.
Empirical observation shows that where the economy is based on self-production, property is non-existent or limited to only a few pieces of production equipment. Native American Indians had no concept of the ownership of the natural environment they lived in before contact with the White Man, just as property does not exist among Pygmies today, if we exclude the territories (property claimed by the tribe and not individuals) and the equipment needed for self-production and consumption processes.
There is also no property in those communities that strictly pursue spiritual ends, as in cloistered monasteries of Buddhist communities.
But the idea of property is widespread today in all sectors (“Don’t enter my office and don’t use my computer”, says the clerk, even if the property claimed does not belong to him … ) and is often confused, or joined with, the idea of “belonging” (“my” institute, “my” factory, “my” university porter, “my” messenger-boy … ).
Fertility has given rise to, and continues to do so, great amounts of capital (from those that have made possible the building of the pyramids to petrol-dollars).
Even today the search for fertility is easily observable: studies on inexhaustible energy supplies, biological and bio-engineering to select– or even create – high-yielding edible vegetable and animal organisms.
Skill competes with fertility for first place among the sparks to productivity; the subdivision of the productive functions – hunting, fishing, fruit gathering, and so on – was the consequence of the various skills of individuals.
Skill thus leads to specialization and to the search for discretion in transmitting the acquirable skills: from art and trade workshops to post-university courses, from guilds to patent offices.
Equipment – the artificial expansion of the limited hardware represented by the human body – is an ancient discovery (from the first honed rock to the first wooden plough), but its extensive use in production firms dates to the Industrial Revolution, which occurred fewer than 10 generations ago.
The need for equipped labor has given a strong impulse, and was perhaps even the originating cause, to technological research and, in parallel fashion, to scientific research, with an exponential growth in discoveries and inventions.
The last effort, in chronological terms, to increase productivity was the organization of work (of work processes) and of the worker (the individuals who supply labor).
The organization is the most surprising of modern phenomena; it creates substantial productive synergies, since it leads to the formation of operative systems made up of individuals who carry out specialized functions: the organizational (or organic) structures.
The organization brings together various skills, specializing them into functions carried out by organs that live on, though with a continual turnover. Skills are passed on and survive even beyond the lifetimes of the individuals.
The organization creates rules which, when respected, suffice to advance productivity. Productive activity is depersonalized; it is no longer carried out by man as an individual but by the organizational structure of the firm the individual operates in based on the rules of organized labor.
The organization creates coordination, collaboration, learning (the transmission of information), incentives, and emulation; these elements, taken together, provide an identity to the individual within the organization he belongs to and makes the success of the organization a condition for his continuing participation.
Moreover, the logic of organized labor is such that productivity is also enhanced by the contribution of those who join the organization only for pecuniary reasons, because they desire to engage in pleasurable work, or because they simply want to find social gratification.
The consequence of organizations is the inevitable (and more or less intense) gradual separation of the act of working from the productive outcome.
For this reason we must solve the problem of providing incentives to the individual worker to participate in the productive organization.
Pertinent here are thus the last two elements of productivity: endogenous and psychological factors.
In fact, no individual offers his labor, despite a fertile environment, an innate or acquired skill, suitable equipment, and an efficient organization, if there is no prospect of advantages, gratification, and if, a posteriori, these prospects are not realized.
Motivation and satisfaction are the most difficult factors of productivity to achieve. Within the organization these can be adequately developed, but coercion has never been able to supplant these for very long.
In the above analysis I have spoken of production organizations as economic units that produce organized work in order to efficiently carry out productive transformations.
But what are firms? Are they the same as production enterprises?
We define firm as a production organization having the following features:
When all of these features are not present the production organization or enterprise cannot be defined as a firm.
In particular, enterprises that operate without being able to autonomously carry out the management operations necessary to deal with the risks from demand and competition are not considered firms.
Let us now analyze the demand risk.
Since we have defined production as the activity through which goods and services are obtained which will then be sold to other consumer concerns, it is clear that production firms can continue to exist only if there is a sufficient demand for their products. Demand risk is an economic risk, since it is not enough to find people who require the produced goods, because they consider them useful; it is necessary that they attribute to goods a value which exceeds that of the factors that the firm has consumed in the production processes: in other words, the cost of production.
The demand risk is related to the degree of consumer freedom; that is, the possibility for the consumer to determine his own scale of preferences and to make use of the necessary information to freely choose among the products offered by the various production firms.
The competition risk, on the other hand, is connected to the fact that every production firm is subject to competition from other firms that can offer the same, or similar, products, on more favorable terms.
The risk of competition is related to the degree of freedom of economic initiative; that is, the possibility everyone has to create a production firm to satisfy the needs and aspirations according to the consumers’ scales of preferences (or to influence these).
Today firms, though subject to the same logic as enterprises in the Middle Ages and during the Industrial Revolution, present two important characteristics which it is important to point out:
The first firms operated with little capital, which represented a patrimonial investment undertaken and managed for profit, and directly controlled by a capitalist entity; this gave rise to the great industrial dynasties.
Thanks to the raising of large amounts of capital from modest shares of monetary savings by a large number of consumption concerns; thanks to the investment of this capital made possible by the creation of joint-stock companies, on the one hand, and financial intermediation, on the other; and thanks also to the effect of the “natural” expansion of capital for the continuous reinvestment of the operational cash flow from revenues and ammortization (the Lhoman-Ruchti effect), and that of self-financing (retained earnings), capital became relatively abundant – and flowed unendingly at the international level – so that the real problem today for economically “healthy” firms (those with autonomous economic efficiency and conditions to maintain this over time) is not so much to produce as it is to maintain the soundness of the capital invested in them. Capital is kept sound over time if it preserves its purchasing power and offers a financial return (interest or dividend) equal to the average return from other investments under conditions of similar risk.
Since the existence of profits means that capital has a yield, profits are not only a consequence of the firms efficient activity. Minimum levels of profit represent the condition for the existence of the firm itself, since they represent the condition for maintaining the soundness of the capital invested in the firm. For this reason they become the objective to achieve by means of the search for profitable production.
As we can see, the cycle is inverted: when capital was relatively scarse it was sought after to carry out and maintain production; with a relative availability of capital permanently invested in the firm (better yet, with capital that usually cannot be disinvested) it is instead economically-profitable production which becomes necessary to keep capital invested.
As a result, firms tend to become financial transformers; that is, “containers” of capital that from time to time invest and disinvest in businesses with a high revenue/cost ratio (ratio of economic efficiency) in order to have an adequate return.
Together with the increase in the size of firms (the effect of the hypothesis of growing productivity, which we do not have time to demonstrate here) there has also been a rise in the need for, and thus in the power of, managers.
Along with the appearance of managers who are distinct from “owners”, and who manage the capital of those who do not have the power to intervene in a management role, we have seen the well-known phenomenon of the formal separation between the ownership of capital and the control of the firm.
Firms have been transformed from instruments for producing remunerations and profit (financial transformers) into organizations where various groups satisfy their own institutional interests; organizations that see the creation of remunerations and profit as the condition for their existence in the combinatory system.
We come now to the second important feature: firms become teleological systems of entrepreneurial transformation; that is, systems (organizations) having autonomous profit objectives, able to act with reference to units capable of existing autonomously, with decision-making power, and with internal control aimed at the achievement of levels of efficiency needed for their preservation. Firms, as autonomous organizations, become systems differentiated with respect to the factors of production, and in particular to the suppliers of risk capital.
But even more importantly, firms become systems truly possessing endogenous teleonomy that tend to feed the system with their teleology, which is “necessarily” directed toward efficiency.
Let us see how.
We have seen above that firms can increasingly be considered financial transformers: instruments for the investment of capital; capital that management must keep economically integral through a continual flow of investments and disinvestments in support of productive activities with a certain amount of risk.
Technically speaking, firms are increasingly transformed into “business portfolios”; that is, into “containers” of productive activities involving given products for given markets, with the aim of obtaining profits from each business.
Management, on the basis of an accurate system of information and forecasts, and accepting a given degree of risk, continuously modifies the makeup of the businesses in its portfolio, eliminating low-profit ones for others with a higher profit. The type of production carried out in each business is not very relevant for the entrepreneurial and financial transformation: cars can be produced alongside of newspapers or hospitals; computers alongside of food firms; agricultural products alongside of chemical ones; and so on.
Nothing gives a better idea of the firm as a portfolio of businesses than the large diversified groups.
But this is not all: from a financial perspective each business is important not only because it yields an annual profit but because it can be sold, thus producing a capital gain.
There thus appears a new economic agent: the “business negotiator”, whose goal is to achieve a capital gain; this agent is known as an “entrepreneur-financier”.
We can now finally see the role of the modern firm in the contemporary economy.
The firm represents the form that has historically responded to the desire for production: through profits the firm creates wealth, and those benefitting from profits can achieve a greater and/or better satisfaction of their needs.
A historical analysis shows that profits (in the same way as the yield from fertility which today is transformed into profits) represents one of the most powerful motivations for production, and thus one of the most important “endogenous” factors of productivity.
One the one hand, profits move individuals to risk their capital, investing it in productive activities; on the other, it is the strongest motivation for the creation of new businesses. Profit becomes a means for guaranteeing the remuneration and preservation of capital as well as an instrument for increasing the payments to labor (from job contracts to the recent Italian firms agreements) and producing a satisfactory amount of interest for the loan capital (from indexed securities to futures).
As we have just seen, the freedom of the consumer and competition among producers guarantees that profits will occur only if the firms succeed in possessing the factors of productivity, which thus also become factors essential to profits. This makes it vital for firms to create new businesses, explore new markets for their old products, or invent new products for old needs (solar cells to heat water and ? ) and new needs (antipollution purifiers); and above all, goods to create new aspirations … (from automatically-adjusting car seats to wall-length televisions).
The need for profits obliges the firm to rationalize its technical processes of production and management control (from the Decision Support System to Just-In-Time production), thereby favoring applied scientific research and technological innovation, and improving product quality while reducing price, which permits efficiency to expand throughout the entire combinatory system.
The endogenous teleonomy of the firm viewed as a business portfolio obliges the firm to maintain integral the invested capital and to increase it, along with the necessary increase in the size of the firm.
Its teleology resides in the ability of management to independently decide on the makeup of the business portfolio, on the basis of hypothesized environmental scenarios and the acceptable risk threshold.
In order to produce adequate levels of profit, in order to remain in the combinatory system – which tends to become international, if not “global” - firms, as systems of entrepreneurial transformation, can, rather have to, follow one of the following two paths:
The second path, the increase in selling prices or the reduction in purchasing prices, is difficult to pursue: the freedom of the consumer, anti-trust laws aimed at guaranteeing the liberty to take initiatives, economic incentives for restructuring, associations of workers and consumers, and so on, are roadblocks along the way over the long run.
There remains only the first path, the steadier one, the one the hypothesis of growing productivity foresees as long-lasting: the search for the economic efficiency of the businesses through an increase in internal efficiency, in productivity.
Never before throughout history has the problem of productivity raised so much interest. Until recently it was only an economic problem; now it has become a serious political problem, since it is one of the most critical aspects of trade relations among nations. At this point we would be truly happy if the Toyota production system, which we have created, could be useful for solving the problem of productivity. This is a quote from Taiichi Ohno, the creator of the just-in-time production system.
And who does not somewhat fear Japanese productivity?
Once again we have to take into account the combinatory system: the search for internal efficiency, the increase in productivity, implies a pursuit, an infinite feedback among firms in order to survive.
But is this search for efficiency a cause or effect of the law of increasing productivity?
There is one crucial question: why does man desire wealth, and ever greater wealth, for which profit today is only one of the most powerful impulses and motivations for obtaining it through the firm?
However, to try and explain the reasons why people long for “wealth” and desire profits lies outside the observable universe of business economics; it is like asking why we like a car that goes 180 miles per hour, a $100,000 watch, or a $50 million painting: certainly not only because they better satisfy our needs for transport, to be on time, or better occupy our free-time!
These are psychological more than physiological reasons, and fall into the field of study of sociology and anthropology. But they represent very powerful motivations, considering that already 20 centuries ago … it was easier for a camel to pass through the eye of a needle than a rich man to enter into the Kingdom of God … unless … the rich man had gained his wealth by investing the talents the “Lord” had given him; and only a strong spiritual enlightenment can produce another St. Francis.
I will begin the conclusion by going back to the initial questions we posed:
I shall leave it to you to answer these questions.
An increase in productivity follows the logic of production, but the impetus provided by the search for well-being, for wealth, and for profits accelerates this phenomenon. It is easy to understand that inequalities in productivity derive from the differing weights by which the factors of productivity operate, and in particular the factors of organization and motivation.
Certainly production in the form of the firm is still considered to be useful today, since this leads to the efficient production of remunerations (wage, interest, rent, profit). And it is precisely here where the endogenous teleonomic strength lies, which moves firms – and more generally production firms – to maintain themselves in the economic system by means of their teleology. Moreover, firm-based production allows the system to increase its productivity, leading to a general increase in well-being. Here is where the exogenous teleonomic force resides that moves the system to try to maintain itself, to expand, and, in some cases, to introduce firm-based production.
However large the wealth that is produced, however vast the quantity and quality of needs that “productive man” manages to satisfy, the logic of production says that productivity will increase further, and the logic of wealth in particular makes this progress vital for the economic system and for all of mankind.
The axiom of insatiability guarantees the system the energy necessary for further progress.
The firm seems to be the instrument for this progress, at least until other forms of production organizations succeed in carrying out productive and economic transformations which provide sufficient motivation for obtaining efficiency from labor and the use of capital, in the context of a controlling organization (with a consensus that generates collaboration), not one that is controlled.
But for this to occur the firm must have exhausted its reason for existing as a propulsive element of productivity.
When, and if, this moment will arrive is impossible to predict.
On the other hand, the exogenous teleonomy of the firm is stronger than ever.
Wealth, it is true, is not possessed by everyone; today it is distributed in quite unequal ways and amounts. The opulent North and poverty-ridden South represent painful realities that heighten social tensions.
But wealth is inevitably destined to spread, even if the expansion of productivity is unequal in nature and, what is more, has existed as a consistent phenomenon only for a few generations.
Perhaps within a few generations the globe could be transformed into a huge productive enterprise capable of providing benefits to all, and whose operational logic could be different from that of the firm.
But trying to forecast today the future spread of wealth and destiny of the firm 100 years, or even one generation, from now would be like trying to predict the weather in a years time by simply observing for one minute the movement of the clouds from the window of our house.
Scientific research and technological progress, made possible and necessary by the need for the growth in productivity, have reached levels that allow us to foresee the possibility of an extreme increase in productivity, which will result in the absence of a need for the majority of human labor; much production will tend toward the ideal of “zero cost” (today you get a free radio for buying a few cookies; how much marmalade will we have to eat tomorrow to get a free computer?).
At the theoretical level Turing and Von Neuman have demonstrated the possibility of realizing self-replicating robots. At the applied level, progress in the science and engineering of systems has led to the creation of robots capable of carrying out complex activities, guided by systems (and not too sophisticated ones at that) of electronic programming.
It is not difficult for artificial intelligence to convince us that it is not pure fantasy to believe in the feasibility of the production of robots by other robots, as part of a closed technological chain, and the use of such robots in automated production systems with cybernetic controls.
Even now in large-scale North American farming ploughing, seeding, and threshing is done almost entirely without human intervention, by means of agricultural machines guided by underground magnetic tracks; even now large ships plough the oceans guided by satellites; and even today there are international expositions of automatic plants. And robots have only just begun to appear on the stage of productive transformation! Perhaps the real problem for tomorrow will be to manage our free-time, the maximum expression of man’s freedom ...
But will man be able to overcome boredom? To reach cultural levels that allow him to abandon the obscure systems he has always thought up and which today’s increasing productivity has made abundant?
But, above all, will man reach such levels in time?
Like productivity, pollution (and, in general, the impoverishment of our ecosystem) is growing, transforming into scarce resources those which until yesterday were held to be abundant or self-reproducing. Unfortunately, the law of increasing productivity has not spared the production of arms; on the contrary: growth is greater here than in any other sector… as is guaranteed by the axiom of the teleonomic man.
And even if pollution allows us to make it to tomorrow, the first postulate of human behaviour, in spite of ourselves, states that man is bellicose …
Rector Magnificus, Esteemed Guests, Colleagues, Students and patient audience. I have concluded my simple considerations on the proposed topic.
I urge you not to consider these statements as value judgements.
I leave any moral, ethical and political judgements to other disciplines; I leave it to other forms of knowledge to make judgements on wealth and poverty, on earthly needs or transcendental aspirations, on cereals and citrus fruits that are thrown away, on children that die of hunger, on public or private enterprises, on socialization and privatization, on collectivist or capitalist regimes, on morally useful or reprehensible production, on unemployment or inflation, on space lasers and shields, on protectionism and car and wine wars … , on the good or the bad, the selfish or the altruistic, the private or social use of skills, fertility and technology.
As a researcher I observe and theorize, not judge.
As a man I have many hopes, since “the” science I believe in tells us that all social combinatory systems can be directed toward political and moral objectives which are consonant with the human spirit. The dynamic of the system, though feeding the micro behaviours of its elements, is also fed in turn by these behaviours; and thus it is possible “to govern the system” by setting rules for the micro behaviour.
Even the production combinatory system can be directed toward desired objectives by setting clear and stable rules – above all, just ones – for the behaviour of the production units, in particular the firms, as well as that of consumers.
As a man I hope that the direction of the system is enlightened, or at least humanely rational.
But of one thing I am convinced: in the context of the postulates of human behaviour, no matter what rule is set for the system, it will always act or react according to the hypothesis of increasing productivity, unless the rules are such as to inhibit the factors of productivity.
The main topics in this inaugural speech have been subsequently dealt with in:
P. Mella, Economia Aziendale, Utet, Turin, 1992
P. Mella, Dai sistemi al pensiero sistemico, FrancoAngeli, Milan, 1997
P. Mella, Razionalità e libertà nel comportamento collettivo, FrancoAngeli, Milan, 1999
See also the following sites, edited by the Author:
 The hypothesis follows the observational logic of Business Economics; this discipline, which seeks models and sets out rules for the rational economic behaviour “in” firms, and as a result develops models and norms for the effective and efficient behaviour “of ” firms understood as operative systems designed for optimizing the production and/or consumption of wealth.
 Combinatory systems can often be described as models that represent the relationship between micro and macro behaviours. Who has ever been in a crowded place will have witnessed the phenomenon of the rising buzz: as soon as the place is sufficiently crowded a buzz arises that slowly increases and is inevitably transformed into a deafening noise. How can we represent and explain this?
D VOLUME OF INDIVIDUAL VOICE = INTENSITY OF NOISE + DECIBELS TO BE HEARD
D INTENSITY OF NOISE = VOLUME OF INDIVIDUAL VOICE x NOISE COEFFICIENT
The first function describes the micro behaviour the individual, to be heard, must speak at a higher voice volume than the background volume as a function of the systems macro behaviour, the background noise intensity.
 I would like to note the similarity to the problem of the elimination of “useless institutions”: we can compare the effort of the latter (which apparently has succeeded) to remain in existence with that of the biological systems. The endogenous teleonomy of such institutions (retribution, power, usefulness for other institutions) is stronger than the exogenous teleonomy.
 The distinction between needs and aspirations is fundamental for explaining mans economic behaviour.
 Very simply, we can state that we have an economic behaviour when man undertakes activities aimed at satisfying needs or aspirations.
 Saving and investment are clearly distinct activities, even if investment assumes saving and saving (monetary) is indirectly transformed into investment thanks to financial intermediation.
 Production and consumption are not usually carried out by single individuals, but by organized and specialized individuals that make up organizations and firms.
 We thus see the chain of mans economic activities appear, which are made up of five links:
® PRODUCTION ® EXCHANGE ® CONSUMPTION ® SAVING ® INVESTMENT
Production and consumption represent the basic economic activities; exchange, saving and invesment the complementary economic activities.
 Utility is an associated qualitative-quantitative dimension of goods and services that are identified by their ability to satisfy given needs and certain aspirations; drinkable water, for example, is useful in satisfying aspirations for prestige, but one might need a diamond to cut a sheet of glass or build a high-performance electric conductor.
Gold, for example, though having the same utility if used as a means of exchange, takes on a different value for the miser, who desires to accumulate it in ever greater quantities, or for the monk who has taken a vow of poverty.
 Even the relation between labor and needs is weaker, since money inserts itself between these two phenomena, which lengthens the chain of economic production; from:
® LABOR ® PRODUCTION ® GOODS ® CONSUMPTION ® UTILITY
the process becomes:
® LABOR ® PRODUCTION ® [GOODS ® EXCHANGE] ® MONEY ® [EXCHANGE ® GOODS ® CONSUMPTION] ® UTILITY
Thus the immediate relationships between labor and production in terms of goods are no longer highlighted, and only those between work and monetary remunerations are perceived, forgetting the fact that normally the labor supplied is nevertheless always inferior to the cost of the self-production of the goods the worker could obtain with this.
 The “miser” – who, in order to accumulate “wealth” does not satisfy his most basic needs – is the symbolic model of how powerful is the desire for monetary “wealth”; on the other hand, the collectionist – who, in order to purchase a “unique piece” is willing to give his entire capital and even go into debt for the rest of his life, living in the most absolute poverty just to be able to admire his “treasure” – represents the symbolic model of how powerful the aspiration toward non-monetary “wealth” is.
 From these considerations we immediately see that production understood as an economic phenomenon only occurs if:
Condition a) asserts that, in general, production takes place if:
C(B) < CA(B), 
Having indicated by C(B) the cost of production of a given good B, and by CA(B) the cost of self-production of that good, assuming that the cost of self-production is equal for all persons (if it were less for some people then it would be convenient for those people to produce the good themselves).
CA(B) C(B) = P(B) 
When there is a productivity differential for a given production process it could be convenient to institutionalize that process with regard to given economic units, in which labor, instead of being directed toward self-production for final consumption, is directed toward production to obtain goods to exchange with other units; thus there arises the production concern as a means of producing.
C(B') < p < U(B") 
where C(B') is the cost of production of the production process necessary to obtain the good B' traded in the exchange, and U(B") is the consumption combination brought about by good B" received in the exchange.
p < CA(B") < U(B") 
Naturally, this must also hold in symmetrical fashion for the other trader, Y, as well, for whom the exchange of good B" (necessary for final consumption) produced by means of good B' is convenient only if:
C(B") < p < U(B') 
p < CA(B') < U(B') 
Considering  and  together, and eliminating U(B') and U(B"), which are not quantifiable, it follows that:
C(B') < p < CA(B') 
Considering  and , after disregarding utility, we have:
C(B") < p < CA(B") 
This leads us to conclude that, after also considering the interconnected phenomena of production and exchange, it must generally be the case that:
C(B) < p < CA(B) 
where as before B is a good obtained by a given production process.
p C(B) = producers advantage 
which represents, as we can easily see, the amount called income or profit, if positive;
CA(B) p = consumers advantage 
which represents the advantage to the consumer from consuming the production of others purchased at a price below the cost of self-production.
 The hypothesis of increasing productivity, being a theoretical hypothesis, can never be proved, only corroborated by positive examples, though it is capable of being falsified (in the sense of Popper).
The law of order, in apparent contrast with the preceding law, states instead that matter tends to assume an ordered structure (in which entropy diminishes), which is manifested in all its complex splendor in biological organisms and social-political organizations.
While the law of disorder is the law of heterogeneous groups that join together in groups which are increasingly more homogeneous in statistical terms, the law or order is perceived with the birth of systems, of ordered structures, made up of diverse elements, each of which has a role and carries out a function according to given information. Order is based on information incorporated in the system or its elements.
The law of improvement states that matter tends to merge into increasingly evolved ordered structures, and that these structures are diffused as much as possible at the expense of disorder, compatible with the available resources and information to reproduce (from the blade of grass that grows among the asphalt to space programs to export life to other planets).
Not only does order spread everywhere but, where possible, ordered structures become increasingly more efficient, evolve and, in doing so, progress.
We immediately see how the law of disorder reigns supreme in the area of inanimate matter, and how the law of order does so instead for animate matter, where operative systems predominate, while the law of progress is found in biological and social populations, giving rise to combinatory systems.
The law of disorder is the law of the levelling of differences; that of order the law of the creation and maintenance of that which is in the system and that which belongs to the outside environment; the law of progress is the law of the heightening of the advantageous differences between individuals and populations.
Finally, the law of disorder is the law of ignorance; that of order the law of information (and of transmitted information); that of progress is the law of judgement, since it always implies a comparison of a before and an after, in order to perceive and judge the improvement; it is thus the law of intelligence, of man, as we conceive of him.
In this context mankind thus represents the most evolved combinatory system made up of men, where the law of progress prevails, of which the hypothesis of the increase in productivity, of an improvement in efficiency, is only one aspect.
 In organizations (for simplicitys sake we use this term to refer to organized structures) human work is undertaken according to the hypothesis of rationality (increase in the benefits of work and reduction in the sacrifice from working). Based on the form the rationality hypothesis takes, it is necessary to distinguish between two types of organization: controlling and controlled.
 Production firms are subject to various risks that can be divided into three related categories
 Profit represents the result of the economic transformation carried out by the firm, a result, however, that is quantified from the point of view of the firm itself; it measures the increase in wealth from production.
Profit(B) = p(B) - C(B) 
The exchange rate allows us to determine the revenues of the firm; indicating these by R(B) and by CM, CL, and CK the cost of materials, labor and capital employed in production (this distinction is typical economics distinguishes between the factors Land, Labor and Capital), we can rewrite  as:
Profit = R(B) - (CL + CT + CK) 
However, as we have demonstrated in another footnote, the exchange rate has the function of separating the total productivity of the production firm into two shares: one of which is retained by the firm and the other for the benefit of the consumer.
 Firms are not always controlling organizations; however, the condition says that a firm does not exist if management does not have the possibility of attempting to structure a controlling organization.
 From this perspective firms are seen as a means of transforming a capital investment of K(t) into a quantity CN(t+T) at the end of the production cycle T.
Profit = K(t+T) - K(t)
The resources invested, K(t), are used to acquire productive factors for the processes; the acquisition costs C(T) arise, understood as the amount of monetary resources to recuperate at the end of the production process; the goods produced are sold and the firm can recuperate the monetary resources that were spent; earnings, R(T), arise, which represent the amount of monetary resources recuperated at the end of the production process; thus, profit represents the measure of the excess of the resources that are recuperated with respect to those spent to carry out the production processes, and can be expressed as:
Profit = R(T) C(T)
We thus have:
CN(t+T) CN(t) = RV(T) CA(T)
This equation is now accepted as the foundation for the applied rules of all modern accounting theories. Based on this equation, profit can be viewed as the increase in capital due to management; however, it also shows that capital increases if, due to management, the firm earns a profit.
 We indicate by ROE (Return on Equity) the annual yield of the capital invested in the firm (ROE = income/capital).
R = K i
Given K and i we can determine the income R.
K = R/i
In this case K represents the economic value of the income R, and K itself can be defined as the economic capital and represents the economic value of the firm.
K = (110/10) 100 = 1,100
In this case not only does the investment maintain financially integral the 1,000 of capital invested, but it increases its economic value 1,100, earning a capital gain of 100 with respect to the best of the alternative investments.
K = (110/15) 100 = 733
In this case the investment would not be able to maintain the 1,000 of capital invested financially integral in order to obtain an annual income of 110.
 The modern firm can thus be considered an operative system of transformation, in which four transformations are carried out: 1) productive, 2) economic, 3) financial, 4) entrepreneurial, all aiming at achieving maximum efficiency.
 We must not confuse the problem of determining the propulsive role of profit in the growth of productivity with the ethical one of its distribution.
 To clarify this essential point regarding this subject, let us go back to the model in footnote  and quantify the efficiency of the economic transformation (third box from the top); that is, the efficiency of the firm as a system for the economic transformation of costs (INPUT) into revenue (OUTPUT).
Recalling that revenues and costs are quantified by multiplying the quantities by their respective prices, the above ratio can also be written as follows:
Revenues Quantity sold Selling price
The first of the final ratios is the productivity ratio (physical) of the factors of production; this expresses the efficiency of the economic transformation (second box from the top in figure ) and is defined as the internal or combination efficiency.
 Cfr. Yasuhiro Monden, Just-in-Time Production, ISEDI, Turin, 1986, p. XXX (Preface)
 This conclusion can be represented by the following simplified model of the firm as a transformation system of efficiency into profits.
We read the model in the following way: when there is a variation in the level of expected profits, set as the objective (in the business programme), and the actual level of profits (output), then the firm must try to modify the inputs; that is:
The first type of measure is carried out by means of a search for power positions in the market (reduction of competition) and, as we have noted, this type appears strongly hampered by the combinatory system.
 The industrial revolution began less than two centuries ago. A century was needed before we could attain a modest but dignified life style.