A Revisit to the Prevalent Producer Theory with Emphasis Placed on Firms’ Individualism

Abstract

As time elapses, an increasing number of theorists and practitioners expressed the urgent need for the community of economists to rebuild economic theories so that derived conclusions would be more readily applicable to real life. To answer this theoretically and practically important call, this paper attempts to reformulate some of the main conclusions of the producer theory so that firms are allowed to have their individually different criteria of optimality and methods of optimization, as the real-life business world dictates. To achieve this goal, on the basis of natural endowments of firms, this paper establishes a series of 7 generally true propositions, while it simultaneously examines how some of the presently well-known results hold true only conditionally. In the process of achieving this end, we generalize Hotelling’s and Shepard’s lemmas to much more relaxed scenarios than before. Because natural endowments are generally different from one firm to another, what is considered better is defined differently so that firms do not collectively produce a better society as a whole, even though each of them maximizes its selfinterest. In other words, one of the main conclusions this paper derives formally is that the invisible hand, as proposed so convincingly by Adam Smith, is indeed not only invisible but also nonexistent in real life, unless a supernatural being is out there to tell what is better for everyone. In the conclusion, several open questions are listed for future research.