How applicable are classic economic theories for smaller firms?

Science of economics concerns itself with how society generates products, goods and services, and how it consumes them. This understanding has influenced movement of the world capital at important crossroads throughout history and it is continuing to be of a vital importance in our everyday lives. However, basic assumptions that has guided understanding of the behaviour of economic actors have changed dramatically throughout history and continue to evolve in the present days. The role of small firms and entrepreneurship in social development and its resulting contribution on improved livelihoods of individuals involved as well as the sort of spill-over effect in the rest of society is undisputed. Importance of the entrepreneurial firms and their owners has been topic of research from the early stages of economic theory development. However, subsequent additions to the original theory continued developing models which at present are almost totally detached form the realities that any typical small firms are subject to. Subsequent theoretical developments had no place for smaller firms needs nor entrepreneurs.

Theorists were viewing the world around them and were coming up with theories on how to help early age capitalists exploit the environment that they were operating in. It is only normal that firm’s competitive environment at this time was inexistent. Society, at best cases, had to continue developing for almost 200 years before firms started thinking how to sell products that they were making; its not such a problem making them, the real task is selling. This is why all economic theories view production and firms from a monopolistic perspective. Let’s take for example the concept of price and demand which links the expected numbers of units sold with the price of the product. It considers price and number of units on a straight line. Demand function itself is straight forward sum of quantitative factors which they must have or able to be translated into a monetary term. Practically it leaves no space for any other factor. This approach continues in other more specific area too. It considers production optimisation based only on internal factors. In practice this means that firms need to manufacture as much products as possible and its managers need to make sure that at the end of the process, they will be able to know the cost of such a product unit, approximately! The notion of over production just like 200+ years ago is still inexistent. It is for this reason mainly why economics as a science is still very much empirical, to a large extent excludes qualitative factors in the process of economic activity and especially decision making. It considers empirical function as the starting point of everything and continues as the way to decision making in the end.

Businesses must look closely at the obvious financial effects when making decisions, they must also consider factors that are not directly economic. These are likely to be factors that have a broader, and due to their nature less obvious, impact on the business. There is no taking credit away from empirical analysis and models, but decision making is a complex process and considering qualitative factors carefully is a must. Falling under the influence of empirical functions and facts risks giving less weight to other factors by managers, since it will be impossible to counter hard facts that numbers produce with broad and very often personal views.