Inside And Outside The Black Box - Organization Of Interdependencies

Production theory has remained substantially unchanged since the publication of the Theory of Production by Ragnar Frisch, (1928, 1965). The theory is based on the idea of a firm deciding on the possible input and output combinations of a single unit of production. His theory was substantially copied in contributions by Sune Carlsson (1939) and Erich Schneider (1947), and later by practically all textbooks in microeconomics. The idea is to model the firm as a “black box” in which a finite number of externally purchased inputs are transformed into a finite number of outputs to be sold in the market(s). Most of the time, the prices are externally determined. Often, the production process is summarized by some simplified production function as for example in the form of a CES function. Another and conceptually richer approach is the formulation of an activity analysis model. In the latter case, simple internal interdependencies can be included. In this paper, we indicate how internal interdependencies can also be modeled within a special CES framework. In recent decades, there has been a remarkable growth in the number of production units of firms like IKEA, Walmart and Apple to name a few such global networking firms. Most of the analysis of these network firms has been modeled by logistics and other operations-research analysts and to a limited extent by researchers in business administration schools. Very little has been done in economics. We propose a modelling approach consistent with microeconomic theory.