Developments in recent years necessitate a new theory of the firm. Existing theories of the firm operating in a market economy, advanced by Scitovsky (1943), Baumol (1959), and Williamson (1964), narrowly preserve the importance of profit maximization and are thus inadequate for explaining the real-life functioning of the firm operating in the reformed Hungarian economy. Contributions by Ward (1958) and Kornai (1980), aimed toward advancing an understanding of the self-managed or state-owned firm in a planned economy, provide at best limited insights into the functioning of the contemporary Hungarian firm in a transitional economic environment, that is, one shifting from a planned toward a mixed-market economy. The task of this essay is to lay the groundwork and advance a theory of the East European firm whose logic is influenced by reform policies. The Hungarian firm functioning in the Hungarian reform environment is taken as an example. In the last twenty-one years, applied reform measures have created a unique economic environment in Hungary to which Hungarian firms have adapted. The result is that Hungarian firms have developed an internal logic uncharacteristic both of capitalist firms operating in a market system and of the state-owned enterprises (SOEs) in a traditional Soviet-type or even a self-managed system.