ELEMENTS OF A COGNITIVE THEORY OF THE FIRM. In this paper I employ the perspective of embodied cognition to develop a ‘cognitive’ theory of the firm and organisations more in general | ELEMENTS OF A COGNITIVE THEORY OF THE FIRM Bart Nooteboom INTRODUCTION In this paper I employ the perspective of embodied cognition to develop a cognitive theory of the firm and organisations more in general. An organisation is any form of coordinated behavior while a firm is a special form of organisation with a legal identity concerning property rights liability and employment. A possible misunderstanding of terminology should be eliminated from the start. In this paper the terms knowledge and cognition have a wide meaning going beyond rational calculation. They denote a broad range of mental activity including proprioception perception sense making categorisation inference value judgments and emotions. Following others and in line with the perspective of embodied cognition I see cognition and emotion such as fear suspicion and body and mind as closely linked Merleau-Ponty 1942 1964 Simon 1983 Damasio 1995 2003 Nussbaum 2001 . The perspective of embodied realism provides the basis for a constructivist interactionist theory of knowledge that does not necessarily wind up in radical post-modern relativism. According to the latter the social constructionist notion of knowledge entails that since knowledge is constructed rather than objectively given any knowledge is a matter of opinion and any opinion is as good as any other. This would lead to a breakdown of critical Cognition and Economics Advances in Austrian Economics Volume 9 145-175 Copyright 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN 1529-2134 doi S1529-2134 06 09006-5 145 146 BART NOOTEBOOM debate. Embodied realism saves us from such radical relativism in two ways. First our cognitive construction builds on bodily functions developed in a shared evolution and possibly also on psychological mechanisms inherited from evolution as argued in evolutionary psychology Barkow Cosmides Tooby 1992 . Second by assumption we share the physical and social world on the basis of which