The life of Edith Penrose

by on January 19, 2018 at 12:21 am in Books, Economics, History | Permalink

That is the subtitle, the title is No Ordinary Woman, and the author is Angela Penrose, daughter-in-law of Edith.  Here is one sentence:

Pen also wrote to Edith of his deepening love for her and how he wished she had remained in Virginia with him.

What a dramatic and eventful book.  Edith Penrose (1914-1996) is a not so well-known but highly underrated economist, with her major contributions coming in the theory of the firm and industrial organization.  As a girl, she survived only because her father shot a rattlesnake about to kill her.  Later, her first husband was murdered, right before their first child was born.  She and her second husband, working in Switzerland, helped Jews escape from Germany, and she later did food planning during the war in England.  In 1948 the couple lost one of their three children, right before his third birthday.  Later she received a doctorate in economics from Johns Hopkins, studying under Fritz Machlup.  Machlup at one point wrote a ten-page letter to her, with the top proclaiming: “I implore you to shut off your hypersensitivity and to overlook it if I sound condescending, arrogant or otherwise unpleasant.  I just want to be helpful.”

She headed the Owen Lattimore Defense Fund.  Later, she did not feel entirely comfortable teaching at Johns Hopkins (she was treated badly and not tenured) and so she ended up teaching in Baghdad and Beirut and was also an important early faculty member at INSEAD, perhaps their first world class hire.  She became an expert on energy economics and multinationals, traveling and advising around the world more or less without stopping.  Drawing on her doctoral work, she also published on IP problems for developing economies, an area where she was well ahead of her time.

She enjoyed writing poems and limericks for her own pleasure.  She also was known for her “direct questions” and her “disconcerting remarks.”

I would describe her work as halfway between economics and the business school tradition, broadly in the Austrian school but more descriptive and without the political slant of Mises and Hayek.  Her contributions include:

1. She insisted that models ought to consider where firms were in the midst of a disequilibrium process, rather than assuming perfect competition or some other smoothly honed end-state.  History matters.

2. She was the founding thinker behind “resource-based” theories of the firm, whereby firms are best understood in terms of what resources they have access to, rather than their products.  This was a dominant approach from the 1980s onward, though she received only marginal credit for her seminal role.  She also focused on which were the slack resources of a firm or not, as a means of ascertaining where the firm was headed, and ran all this analysis through a lens of expectations and perceptions, reflecting her studies with Machlup.  She thought in terms of what a firm’s “moat” might be, as you might expect from a contemporary Silicon Valley analyst.

3. She developed a theory of how some firms would grow very large, but based on “economies of growth” rather than economies of scale per se.  She tried to explain how there was a lumpiness to the growth process itself.  Difficulties of coordination serve as the ultimate limit on firm size.

4. In her theories knowledge creation drives economic growth, and that occurs largely within firms.  The cohesive shell of the firm helps to integrate knowledge.

I would describe her style as “every sentence tries to have some insight,” rather than “forcing you to come away with definite conclusions.”  Those of you who are used to models or data may find it frustrating to read her, though every sentences reeks of intelligence.

It does not seem she marketed her work very hard, but rather she was content to work out puzzles and pointers for her own satisfaction.  I read her work as an undergraduate, as it was recommended to me by some of the Austrian economists, and my recent rediscovery of it has been a pleasant surprise.

1 Matthew Young January 19, 2018 at 12:39 am

“She tried to explain how there was a lumpiness to the growth process itself. Difficulties of coordination serve as the ultimate limit on firm size.”And that determines the bound on complexity and an Avogadro’s number. It is a characteristic of aggregate sphere packers with only local knowledge.

She discovered the theory of everything about the time Weinberg was suggesting it.

2 Matt January 19, 2018 at 8:52 am

This sounds interesting. Any links or sources?

3 Daniel Klein January 19, 2018 at 6:33 am

Her econ sounds a bit like Erik Dahmen and the Swedish competence-bloc people, though with more emphasis on knowledge and from managerial perspective:

http://marginalrevolution.com/marginalrevolution/2016/06/sunday-assorted-links-71.html
https://link.springer.com/article/10.1007/s00191-009-0149-5

4 rayward January 19, 2018 at 11:54 am

Most of us are a prisoner of our age; and Cowen posted this about Penrose because her observations are relevant today even if they weren’t in her time (i.e., she was able to step out of her time to make a more insightful observation than simply an observation of what prevailed in her time). What do I mean? I studied economics in the late 1960s and early 1970s, a time of mature markets and mature firms, with very large industrial firms and very large industrial unions, and that’s the way “industrial organization” was taught. If I had studied economics in an earlier era I would have been taught that the growth of the firm was a function of a group of human beings coming together to accomplish a shared goal. Penrose’s theory of the growth of the firm (circa 1959) was that it was a function of a group of human beings coming together to accomplish a shared goal. What Penrose did was to look back in time for clues as to the growth of the firm, back before mature markets and mature firms. Fast forward to today, and ask if her theory is more relevant than what was taught when I (and Penrose) studied industrial organization. Without studying Penrose, I would say that’s what makes Penrose an “Austrian” and why Cowen believes she is relevant today. Penrose was not a prisoner of her age, a rare phenomenon. [So my libertarian friends don’t get all gleeful, think more deeply about what this means. That’s right, what was true yesterday may be true tomorrow even if it’s not true today.]

5 YSK January 19, 2018 at 12:05 pm

I am not sure about the “marginal credit” for the “resource-based” theories. She is recognized as a pioneer of these theories and is considered as a must read in the strategy/management field. She is obviously much better known in these fields than in economics.

6 T.J. Elliott January 19, 2018 at 2:27 pm

It is interesting and sad that the hyperlink below resource-based theories to the firm in this post takes us to a Wikipedia article that fails to credit Edith Penrose

7 clockwork_prior January 20, 2018 at 8:43 am

You did take the opportunity to correct that, right? Wikipedia is about collective effort, after all.

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