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Logic failure

But what does this mean? I suggest three things.

The first is in economics. This subject still assumes, and so teaches, that businesses profit maximise. They don’t. Because they can’t. Because they don’t have the data to do so. And because the truth is they know that this is the surest way to destroy long term value. So they have other goals instead. Like growth. Or product innovation. Or stability. Or customer satisfaction. But never profit maximisation. So it is time economics stopped teaching soemthing that is false. Not just wrong. But false.

Sigh. Profit maximisation is the goal. The strategy. Quite what the tactic is to gain this is is arguable. But that’s still the goal.

Which is what economics currently teaches. Peeps try to maximise, now, how do they do this, let’s go have a look, shall we?

22 thoughts on “Logic failure”

  1. Because businesses cannot achieve the absolute, theoretical maximum profit, in the real world they don’t bother maximising their profit.

    The man is a walking, clanking sack of logical fallacies.

    Businesses innovate new products for a laugh.
    They maintain the highest customer satisfaction by giving their products away, and walking their customers dogs for free for good measure.
    They aim for maximum growth by employing as many people as they can and opening offices in 64 countries, shortly before going bust.

  2. He has form for this – states that a theory requires some unattainable thing or level of something, and so therefore it cannot apply in the real world.

    Even in the cases where he hasn’t completely misrepresented the theory, he cannot seem to grasp that there is a continuum between nothing and a theoretical limit, along which it is possible to travel a substantial distance in the real world

  3. perhaps this is part of the new comedy routine he’s developing for SOAS – as he’s going to be unemployed shortly. I doubt crowdfunding from his acolytes would raise much money.

  4. “This subject still assumes, and so teaches, that businesses profit maximise. They don’t. Because they can’t. Because they don’t have the data to do so.”

    They don’t need the data to do so. This is still thinking in a ‘centrally planned economy’ sort of way.

    Businesses do various things that they expect to make profit, and their success is measured. The funding and investment is transferred away from those that do badly and towards those that do well. The ones that do badly enough go bankrupt or get asset stripped and the parts are re-used by other more profitable companies. It’s like evolution.

    Organisms like bacteria evolve to maximise their rate of reproduction. But they don’t need data to do so.

  5. It would also be true to say that mainstream economists, such as John Kay, have studied the subject and concluded that firms that seek to maximise profits are not always, maybe rarely, the most successful in their industries. Boeing became the industry leader despite or because of being dedicated to solving aeronautical challenges , such as building the first jumbo jet. M&S was successful when it was about making life good for its staff and proving quality garments to as many people as possible. For both companies, profitability was a sideline. Etc etc. Firms that concentrate on maximising profits go bust or break up. Eg GEC or Hanson Trust. As usual Captain Potato is so far behind the curve that he is looking around for extinct creatures

  6. Hold on though. I don’t think Bezos does profit maximise. I mean its long gone past the point where that’s merely a strategy surely. And as Tim says, the contestable monopoly ones indicates its not a great strategy anyway.
    To counter my own point… if shareholder value grows, and shareholders seem to like tech companies that grow, then that’s another form of profit. So growth can equal profit.

  7. One problem not recognized: Most outsiders, including Murphy and the commentators here, lack the information necessary to actually determine whether a firm is attempting to maximize profit (as well as how, which is kind of important to know as well). Looking in from the outside via journalism, financial statements and press releases aren’t going to give the information necessary. Period.

    Carry on.

  8. Businesses always strive to maximize profit. Period.*

    That they may determine that deferring profit will result in greater profit doesn’t mean they aren’t trying to maximize profit.

    *If they aren’t, they are a hobby, and not a business.

  9. He’s worrying about the loss of his EU funded post

    From Ritchie’s IMF submission

    This, then, requires representation from:
    o Civil society groupings;
    o Trade unions
    We suggest the provision of funding in all cases

  10. Well, there are, in fact, businesses run by the lazy, the clueless, the inept, or the hampered, and they don’t operate to maximize profit. One could name a lot of US companies in 1970. On the other hand, they will eventually be outcompeted by those that do try to maximize profit.

  11. Well he doesn’t seem to understand NPV or other methods for assessing factors other than pure money, maybe that was something else he skipped as he didn’t agree with it, like his economics courses

  12. Maybe they are satisficing? Of course Richie would no what that means if he’d ever studied some economics.

  13. Murphy is dangerous. He’s attempting to invent new definations which fit his agenda.

    While over in Israel or wherever it was he gave a talk on the tax gap and started it by defining the tax gap as including “the maximum tax that could be collected from an economy” and “tax forgone by government reliefs”

    He took a complete panning when his earlier tax gap figures were reviewed so now he’s attempting to include illogical and meaningless concepts into the definition so he can continue to defend his bloated figures. He’s dangerous.

  14. The idea is to maximise the area under the line. Growth strategy is another term for if you extend the time axis of the chart out to the right.

  15. Bottom line is that you can never know if you are maximising profits, simply because concepts such as marginal cost and revenue are all too relative and not measurable objectively. So you do your best

  16. “They don’t. Because they can’t. Because they don’t have the data to do so.”

    This from Murphy, the man who thinks that governments have the data, and ability, to plan the economy.

  17. “So they have other goals instead. Like growth. Or product innovation.”

    OK, yes, some company managements do have different goals, typically CEOs wanting primarily to expand, because the bigger the company is, the more important they think they are.

    But the owners’ goal is profit maximisation.

    This is a long-established area of economics, the principal-agent problem. How long has it been around – fifty years? It was well established when I was doing bits of economics in the 1990s. But of course Murphy has far better things to do than actually learn the subject he is supposed to be a Professor of.

  18. More accurate to say companies seek to maximize the present value of the firm. That’s some combination of current profits, innovation gambles, new investment, spending on maintaining the brand image, etc. Maximizing profits this accounting period is rarely the way to do that.

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