The Inverse Invisible Hand and Heuristics in Managerial Decision-Making
- 126 Downloads
The paper points out that Adam Smith’s famous argument about the “invisible hand” (IH) of markets can be inverted. While the IH argument suggests that the baker and butcher do what is in their costumers’ interests not because they care for their costumers, but out of their own self-interest, one can also defend the converse claim: if one cares for other people and finds a way to satisfy their needs, one can expect that those others will be willing to pay for the satisfaction of their needs. The paper argues that the IH argument has a strong link to the view that the ultimate goal of management should be “profit maximization” and to neo-liberalism’s tenet that in a market economy where companies attempt to maximize profits, a “socially optimal” allocation will be achieved. It is argued, however, that profit maximization is well-defined only within a mathematical model, while real-world decision-making requires one to choose the “relevant set” of options before any assessment of associated profits can be attempted. “Profit maximization” is therefore characterized as a heuristic for managerial decision-making, and it is pointed out that it is by no means essential for management to be successful and sustainable. The inverse IH argument supports natural alternatives, such as Prahalad and Hart’s “bottom-of-the-pyramid” and Yunus’s “social entrepreneurship” approach. Both require the manager to focus on people’s needs first, and regard the “money-making” aspect as secondary.
KeywordsInvisible hand Heuristics Managerial decision-making Profit maximization
Helpful comments by Martin Kelly, Andreas Suchanek, Nigel Laurie and two referees are gratefully acknowledged.
Compliance with Ethical Standards
Conflict of Interest Statement
The author states that there is no conflict of interest.
- Arrow, K. 1951. An extension of the basic theorems of classical welfare economics. In Proceedings of the second Berkeley symposium on mathematical statistics and probability, ed. J. Neyman, 507–532. Berkeley: University of California Press.Google Scholar
- Arrow, K.J., and F.H. Hahn. 1971. General competitive analysis. Amsterdam: North-Holland.Google Scholar
- Baye, M.R., and J.T. Prince. 2013. Managerial economics and business strategy. 8th ed. New York: McGraw-Hill.Google Scholar
- Cadsby, T. 2014. Closing the mind gap: Making smarter decisions in a Hypercomplex world. Toronto: BPS Books.Google Scholar
- Debreu, G. 1959. Theory of value. New Haven and London: Yale University Press.Google Scholar
- Elkington, J. 1998. Cannibals with forks: the triple bottom line of 21st century business. Gabriola Island: New Society Publishers.Google Scholar
- Fleischacker, S. 2004. On Adam Smith’s wealth of Nations: a philosophical companion. Princeton: Princeton University Press.Google Scholar
- Foley, D. 2006. Adam’s fallacy. A guide to economic theology. Cambridge, MA: Belknap Press of Harvard University Press.Google Scholar
- Friedman, M. 1970. The social responsibility of business is to increase its profits. The New York Times Magazine, September 13, 32-33, 122-124.Google Scholar
- Gallup. (2016). Honesty/Ethics in Professions. Retrieved February 25, 2016, from www.gallup.com: http://www.gallup.com/poll/1654/honesty-ethics-professions.aspx.
- Gigerenzer, G., and P.M. Todd. 2000. Simple heuristics that make us smart (evolution and cognition). New York: Oxford University Press.Google Scholar
- Griswold, C.L. 1999. Adam Smith and the virtues of enlightenment. Cambridge: Cambridge University Press.Google Scholar
- Hart, S.L. 2005. Capitalism at the crossroads. The unlimited business opportunities in solving the world's most difficult problems. Upper Saddle River, NJ: Wharton School Publishing.Google Scholar
- Hill, C.W., and G.R. Jones. 2004. Strategic management. An integrated approach. 6th ed. Boston: Houghton Mifflin.Google Scholar
- Hirschey, M., and E. Bentzen. 2014. Managerial Economics. 13th ed. Andover: South-Western.Google Scholar
- Johnson, M.D. 1997. Customer Orientation and Market Action. Upper Saddle River, NJ: Prentice Hall.Google Scholar
- London, T. 2016. The base of the pyramid promise: building businesses with impact and scale. Stanford: Stanford Business Books.Google Scholar
- Mankiw, N.G., and M.P. Taylor. 2011. Economics. 2nd ed. Andover: South-Western.Google Scholar
- Mas-Colell, A., M.D. Whinston, and J.R. Green. 1995. Microeconomic theory. New York: Oxford University Press.Google Scholar
- Pólya, G. 1957. How to solve it. Garden City: Doubleday.Google Scholar
- Prahalad, C.K. 2006. The fortune at the bottom of the pyramid. Eradicating poverty through profits. Upper Saddle River, NJ: Wharton School Publishing.Google Scholar
- Prahalad, C.K., and Hart, S.L. 2001. The fortune at the bottom of the pyramid. Strategy + Business Issue 26, Retrieved from http://www.stuartlhart.com/sites/stuartlhart.com/files/Prahalad_Hart_2001_SB.pdf.
- Rappaport, A. 1986. Creating shareholder value: the new standard for business performance. New York: Free Press.Google Scholar
- Rubinstein, A. 2006. A Sceptic’s Comment on the Study of Economics. The Economic Journal 116, C1-C9.Google Scholar
- Schumpeter, J.A. 1926. Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus. 2nd ed. München and Leipzig: Duncker & Humblot.Google Scholar
- Schumpeter, J.A. 1954. History of economic analysis. New York: Oxford University Press.Google Scholar
- Tversky, A., and D. Kahnemann. 1974. Judgment under uncertainty: heuristics and biases. Science, New Series, 185: 1124–1131.Google Scholar
- Yunus, M. 2007. Creating a world without poverty. Social business and the future of capitalism. New York: Public Affairs.Google Scholar