Understanding the Benefits of Capitalism Through the Lens of a New Theory of the Firm

Abstract

This paper utilizes the Pragmatic Theory of the Firm to better understand the process that delivers economic progress reflected in rising living standards. Section One explains how firms build knowledge and create value. Section Two introduces the Knowledge Building Loop to clarify and delineate the knowledge building process. Section Three introduces the Pragmatic Theory of the Firm to provide insights about how knowledge building at the firm level translates into increasing living standards at the macro level, i.e., how capitalism works. Section Four analyzes shortcomings of corporate governance (boards of directors) and proposes a solution. Section Five highlights the main takeaways from this paper.

Keywords: Capitalism, value creation, knowledge building, pragmatic theory of the firm, life cycle

JEL Classification: D21, G10, G12, G30, G34, G38, L21, M10, M41