The Present State of Profit Theory: Asset or Liability?
In this lost essay Louis Spadaro, the economist writes that "If the part played by profits in the economy is found to be misrepresented for purposes of analytical tidiness, the need for correction is all the more urgent in an age of increasing recourse to government action. Inasmuch as realism in our economics points to the same need, it would be unwise to cling to any theory -- no matter what its other attributes -- which sacrifices this need for reasons of arbitrary neatness; more, it would be scientifically indefensible."FULL ARTICLE
Comments (9)
Very interesting! Thanks! It helps explain why, in my college text on micro, the author spent a chapter explaining the reasons that most businesses don’t apply profit maximization. The most common reason was the desire for a larger market share.
More businesses should attempt profit maximization. All of those that I have worked for, which amounts to dozens, have tried to maximize a margin per unit, but that approach leads to prices so high that the firm operates far below capacity and surrenders a lot of absolute profits. Boiled down, profit maximization is nothing but determining the price that will cause the firm to operate at maximum capacity with a little head room for emergencies. At maximum capacity, fixed costs are distributed over the maximum number of units and are therefore at their minimum per unit.
But that doesn’t have anything to do with the false assumption of profit maximization. As Spadaro points out, that assumption has more to do with society’s attitudes toward profits and capitalists (they have an insatiable desire for money) and unclear definitions of what profits are. It’s also due to the desire to shoe horn economics into equilibrium mathematics. I don’t think anything keeps mainstream econ in trapped in Alice’s wonderland more than the theory of equilibrium, but economists refuse to give it up because without it, their math falls apart.
Published: May 30, 2008 2:04 PM
Ya, I want all the shares I can get
Published: May 31, 2008 1:39 AM
Sorry to learn about Professor Spadaro's recent death. As a Fordham graduate student, I greatly enjoyed and profited from Dr. Spadaro's courses: 'The History of Economic Thought' (spring term 1970) and 'The Theory of Distribution' (fall term 1971). He was an effective instructor and well- versed in these subjects. Many thanks to Professor Spadaro. May he Rest in Peace (RIP).
Published: May 31, 2008 1:34 PM
Sorry to learn about Professor Spadaro's recent death. As a Fordham graduate student, I greatly enjoyed and profited from Dr. Spadaro's courses: 'The History of Economic Thought' (spring term 1970) and 'The Theory of Distribution' (fall term 1971). He was an effective instructor and well- versed in these subjects. Many thanks to Professor Spadaro. May he Rest in Peace (RIP).
Published: May 31, 2008 1:36 PM
Rest in peace Professor Spadaro.
Published: June 2, 2008 2:36 PM
what are the theories of maximum profit
Published: June 13, 2008 6:43 AM
Destiny: “what are the theories of maximum profit”
A short explanation is to make sure you’re operating at about 95% capacity. At that level, you have a small margin to use for a sudden increase in demand, but you are spreading fixed costs over as many units as possible. The key to average cost reduction is spreading out fixed costs (overhead) over as many units as possible (assuming you have reduced variable costs as much as possible). That makes the cost per unit as low as possible. And the key to adjusting volume to match 95% capacity is pricing. You have to have an idea of the elasticity of demand for your product/service so that you can reduce prices enough to raise volume to the 95% capacity level. Of course, if you operate above capacity, you need to either raise prices or increase capacity. This profit maximization approach will cause the firm to earn the highest possible absolute profit the firm can earn given its current size and structure. However, it will give a low profit per unit, which is what most mangers fixate on.
Published: June 13, 2008 9:54 AM
Please explain the profit theories. Thanks.
Published: July 20, 2008 11:24 AM
Please explain the profit theories. Thanks.
Published: July 20, 2008 11:25 AM