workforce, once decisions relating to the existence of theWrm and the boundaries of
theWrm have eVectively been taken. Traditionally, economics has had little to say
about the management of organizations. The association of economics with an
individualized methodology and with the operation of the market, without due
attention to the institutions that structure and shape the market, make it a discip-
line peculiarly unsuited to the study of organizations and their workforces. As
Herbert Simon ( 1979 ) remarked, the key characteristic of the modern economy is
the amount of coordination, activity, and transactions taking placewithinorgan-
izations; even in deregulated societies, there is still a tendency to form long-term
employment relationships, with most job changes occurring early on in careers.
Moreover, although a decision to ‘buy’—that is to outsource—is treated as a market
transaction, in most cases the result is a contract between organizations and not
with individual self-employed sole traders. These subcontract organizations still
have to ‘manage’ their own workforces, so that the internal organization of labor is
much more dominant than the market versus hierarchy analysis implies.^1
In order for economics to have much to say about HRM it is essential, as Hahn
implies, to identify a role for organizations and indeed for actors within organiza-
tions. Most of the theoretical work on the importance ofWrm strategy is found
outside the core mainstream, associated more with heterodox economists research-
ing innovation and varieties of capitalism. It is here that oneWnds various models
or approaches to economics that have resonances with the HRM literature; in
particular the work of Penrose ( 1995 ) on the growth of theWrm and March and
Simon ( 1958 ) in developing notions of bounded rationality and the internal
management of labor.^2 The resource-based view of theWrm that underpins much
of HRM is based on a methodology that is quite distinct from mainstream
economics. The focus is on the internal development of the organization—on its
path dependency that determines its access to unique resources—rather than on
the organization’s predictable and rational responses to external market forces. For
Penrose, ‘It is the heterogeneity, and not the homogeneity, of the productive
services available or potentially available from its resources that gives eachWrm
its unique character. Not only can the personnel of aWrm render a heterogeneous
variety of unique services, but also the material resources of theWrm can be used in
diVerent ways’ ( 1995 : 75 ).
(^1) At a macro level, the market versus hierarchy analysis is used to explain the existence ofWrms but
at an organization level, decisions to source products or processes from the market are treated as if
they were simple market contracts with sole traders, unless the notion of hybrid forms or relational
contracting is introduced.
(^2) There are also important antecedents of the study of HRM in the institutionalist economics
traditions associated with Commons and others, as reviewed by Kaufman ( 2004 :335 6). However,
this more open approach to economic analysis gave way to the hegemonic neoclassical theory of the
Wrm.
economics and hrm 69