Alternative Long-Run Goals and the Theory of the Firm: Why Profit Maximization May Be a Better Assumption Than You Think
For several decades, economists have subjected the assumption that firms maximize profits to a barrage of criticism. Firms maximize sales (Ref. 1). Firms maximize utility of profits and sales (Ref. 2). Firms maximize just about anything but profits.† And firms that have alternative goals, we are led to believe, do not exhibit profit-maximizing behavior. In this paper, we accept the fact that firms may have goals that differ from profit maximization, but we reject the conclusion that their behavior must differ from that of a profit-maximizing firm.
KeywordsOptimal Policy Capital Stock Optimal Path Profit Maximization External Finance
Unable to display preview. Download preview PDF.
- 1.Baumol, W., Business Behavior, Value, and Growth, Macmillan, New York, 1959.Google Scholar
- 2.Jorgenson, D., The theory of investment behavior, Determinants of Investment Behavior, Edited by R. Ferber, NBER, New York, pp. 129–155, 1967.Google Scholar
- 4.Williamson, O. E., The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm, Prentice-Hall, Englewood Cliffs, N.J., 1964.Google Scholar
- 6.Pontryagin, L., Boltyanskii, V. G., Gamkrelidze, R. V. and Mischenko, E. F., The Mathematical Theory of Optimal Processes, John Wiley, New York, 1962.Google Scholar