In the latest in our series on unsung economists, we throw the spotlight on Edith Penrose. She led a remarkable life: during World War II, she helped some of her colleagues escape the Nazis. After the war she assisted Eleanor Roosevelt in drafting the Universal Declaration of Human Rights. And all that was before she got a PhD in economics from Johns Hopkins University.
As an economist, Edith Penrose became an expert in the oil market and helped set up the economics department at the University of Baghdad in Iraq. She studied the tense relationships between big multinational firms and the small countries in which they operated. But she is perhaps best known for her contribution to the study of how a business scales from small to big. The ideas put forth in her seminal book The Theory of the Growth of the Firm are still taught today and are even enjoying something of a renaissance. Today on The Indicator, the groundbreaking work and remarkable life of Edith Penrose.
UNIDENTIFIED PERSON #1: NPR.
(SOUNDBITE OF DROP ELECTRIC SONG, “WAKING UP TO THE FIRE”)
CARDIFF GARCIA, HOST:
The economist Edith Penrose lived an extraordinary life. In the 1930s, living in California, her first husband was killed, probably murdered by a political rival. Then in the 1940s, working in Switzerland, she helped some of her colleagues escape the Nazis. Then after the war, she assisted Eleanor Roosevelt in drafting the Universal Declaration of Human Rights. And all that was before she got a Ph.D. in economics from Johns Hopkins University and started her career as an economist.
SALLY HERSHIPS, HOST:
And as an economist, Edith Penrose made a seminal contribution to the study of how a business grows from small to big. But she also became an expert in the oil market and helped set up the economics department at the University of Baghdad in Iraq, which she had to leave because of a violent regime change. And she studied the tense relationship between big multinational firms and the small countries in which they operated.
GARCIA: I’m, like, getting tired just thinking about all – it’s really impressive.
HERSHIPS: It sounds exhausting.
GARCIA: Yeah. And throughout her life, the thing that characterized both the way she lived and how she approached her work in economics was a willingness to think independently, to challenge or even ignore the ways things had been done before. Her daughter-in-law Angela Penrose, who wrote a book about Edith, says that independence was helpful, considering the economics in the 20th century was largely the preserve of men.
ANGELA PENROSE: I think that sums her up – that of all the things was this independence of spirit. And I did try to determine where this came from. I think it was perhaps, you know, the Californian spirit of that time.
HERSHIPS: I’m Sally Herships, in for Stacey Vanek Smith.
GARCIA: And I’m Cardiff Garcia. This is THE INDICATOR FROM PLANET MONEY. And today we bring you the second episode in our series about unsung economists. These are economists whose lives and work we think deserve a second look. On this episode, the groundbreaking work and remarkable life of Edith Penrose.
Edith Penrose was born Edith Tilton in 1914 and grew up in California. And her young adulthood was marked by tragedy. Her first husband was killed – probably murdered – in 1938 when he was running for district attorney of a small county in California where they lived. Her first child with her second husband died of an infection, and two of her brothers died in aircraft incidents, one of them a pilot shot down near the end of World War II. And Angela Penrose said that all of these tragedies might have shaped a big part of Edith Penrose’s personality.
PENROSE: I think it didn’t exactly harden her, but it allowed her to – she had an extraordinary sense of what was important. She hated pomposity. She hated formality for the sake of it. She just wanted to get on with what she saw as important.
HERSHIPS: After her husband’s death, one of Edith’s former teachers at Berkeley offered her a job in Geneva in 1938 doing economic research at the International Labour Organization, the ILO. His name was Ernest Francis Penrose, but everyone just called him Pen. Pen and Edith had kept in touch in the years since she had graduated. In Geneva, they started a romance. And later, they would get married.
GARCIA: And it wasn’t just economic research that they ended up doing while at the ILO.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED PERSON #2: September 1939 – a German fall begins its ruthless march of conquest.
GARCIA: As the German military continued advancing deeper into the rest of Europe and the ILO needed to find a new home in North America, Edith and Pen also had to help some of their colleagues get out of Europe, including some of her Jewish colleagues fleeing the Nazis.
PENROSE: They literally did help many people escape with new documents. Pen found them places to work in the United States.
GARCIA: Then later, in 1941, Edith and Pen went to work for the U.S. Embassy in London where, among many other things, they worked on how to rebuild the European economies once the war was over. And then after the war, the very first meeting of the General Assembly of the United Nations was also in London. In 1946, Edith found herself assigned to Eleanor Roosevelt, helping her draft the Universal Declaration of Human Rights.
(SOUNDBITE OF ARCHIVED RECORDING)
ELEANOR ROOSEVELT: We stand today at the threshold of a great event, both in the life of the United Nations and in the life of mankind.
GARCIA: And all of these experiences had come before Edith Penrose had started her advanced economics training.
PENROSE: This decade where she’s at the ILO then in wartime London and then working for the very, very new United Nations is what inspires her a lot of the time.
GARCIA: Shortly after that in the late 1940s, Edith finally started studying for her master’s and Ph.D. at Johns Hopkins University, where she would stay to become a research economist.
HERSHIPS: And it was during this time in the 1950s when Edith did her best known work as an economist – work that was eventually published in a book called “The Theory Of The Growth Of The Firm.” So get ready. We are going to start talking about that now.
GARCIA: Here comes the deep dive. Oh, yeah.
HERSHIPS: Get ready to delve.
Edith wanted to understand what causes a firm, a business to grow, to successfully make more of a product, make new products and sell them.
GARCIA: And she also wanted to study what barriers a firm confronts when it is trying to grow – in other words, what makes a firm not grow. Back then, there were already some prevailing theories about firms and the managers who run them. For example, in some of their models, economists thought of firms as kind of static. A firm makes a certain product. A firm tries to maximize its profits. And if a lot of people want to buy that firm’s product, then its price goes up. If not, its price goes down and so forth.
HERSHIPS: Other scholars drew an analogy between a firm and a biological organism, like a tree or a person. And some even believed that a firm’s growth depended on its age in the same way that trees or people – people are born small. You’ve got babies. Then they grow fast – the teen years. And then aging sets in. It takes its toll, and eventually they die.
GARCIA: Yeah, but Edith Penrose concluded that the existing theories were not useful. She was not convinced, for example, that firms grow based on the laws of nature the way trees do. Instead, she thought that a firm’s growth depends, at least in part, on the specific decisions made by the specific people that worked for it. So yes, a firm can be affected by its environment, but a firm can also take steps to shape its environment.
PENROSE: So she’s already decided, you know, with this extraordinary independence of mind and confidence that has built up that she couldn’t reject mainstream theory and set about developing one of her own.
GARCIA: Edith studied how actual people inside of actual firms behaved. And she came to define a firm as a pool of resources – not just physical resources, like equipment or buildings or raw materials, but also human resources, which include things like the knowledge and the wisdom and even the imaginations of a firm’s workers. And the growth of a firm depended on how well all those resources were being used.
HERSHIPS: For example, do some managers within the firm have the entrepreneurial skills needed to introduce a new product and hire the right people to make more of it? Do other managers know how to raise money from the markets to fund its operations?
GARCIA: Edith saw that a firm’s human resources changed over time. So not only do workers inside firms get better at their jobs, but sometimes, for example, they might also learn from their customers about what product the firm should make next. And crucially, a firm is a place where workers collaborate with each other to come up with new ideas.
PENROSE: Innovation comes in in a completely different way. I mean, innovation is a huge part of business management studies now, but it certainly wasn’t then.
GARCIA: And that insight at the time was a big deal because it suggested that the knowledge you need to grow the economy as a whole often takes place within firms, not in a small team or because of a solitary genius or whatever. Now, some of these observations might sound kind of obvious – at least if you’re not an economist. And it’s true that there isn’t one big, sweeping conclusion or model that you should take away from this work by Edith Penrose. Instead, what Edith did was to provide economists and scholars of management with a new systematic way to study firms, a new framework, one that captured a lot more of the complexity of a growing business than had existed in the work that came before her.
HERSHIPS: And although it would take several decades, eventually, this approach to studying a firm by looking at its resources became mainstream. And her original contributions are still studied to this day, even enjoying a kind of renaissance lately.
GARCIA: Yeah, and by the way, Edith Penrose’s contributions to economics didn’t end there – not even close – and nor did the incredible events in her life. What we covered is just all we have time for. This was Edith Penrose 101. You want Edith Penrose 201 – you should read Angela’s book about her. It’s called “No Ordinary Woman.” And we’ll also post a few helpful links to interesting stories about Edith and her work on today’s show notes, which you can find at npr.org/money.
This episode of THE INDICATOR was produced by Darius Rafieyan. It was edited by Paddy Hirsch and fact-checked by Nadia Lewis (ph). THE INDICATOR is a production of NPR.