The supply and demand of social systems: towards a systems theory of the firm

The economic theory of the firm apparently concurs with Niklas Luhmann’s theory of social systems with regard to the primary function of the firm to be complexity reduction, i.e. the alleviation of the cognitive burden on agents whose cognitive capacities are limited. At the same time, however, the theory of the firm ignores the attendant issues of societal sustainability emphasised by Luhmann. The paper aims to fill this gap.

Taking a theoretical approach, the paper builds on the conceptual construct of “the complexity-sustainability trade-off”, which combines two contrasting aspects of the relationship between a system and its environment, namely, the precariousness highlighted by Luhmann and the embeddedness highlighted by open systems theory. These themes are respectively reflected in the principles of complexity reduction and environmental dependence which constitute the trade-off.

Drawing inspiration from the classic Marshallian presentation of supply and demand in modern economics, the paper argues that the principles of complexity reduction and critical dependence translate into the demand for and supply of social systems. In the proposed systems-theoretic interpretation of the theory of the firm, demand and supply refer to the imperatives of achieving coordination and securing cooperation within the firm, respectively. Thus, in the theory of the firm, the complexity-sustainability trade-off manifests itself as a trade-off between coordination and cooperation.

The implicit focus of the theory of the firm on complexity reduction disregards the nature, importance and fragility of cooperation in real-world firms. In so doing, it impedes the authors’ understanding of unconventional types of business organisation, such as cooperatives. These defects can be corrected by reorienting the theory of the firm according to the proposed systems-theoretic approach, which holds that firms should not be governed or studied in isolation from their environment, as they too often are – and, accordingly, that apparently anomalous forms of organisation should be taken seriously, as they too often are not.