"[Mainstream] economic analysis of economic behaviour relies heavily on decisions made by [so called] rational units customarily assumed to be seeking ... profit maximisation and utility maximisation. ...
"[And yet] the mark of success and viability is not maximum profits, but realised positive profits. It does not matter through what process of reasoning or motivation such success was achieved. The fact of its accomplishment is sufficient. This is the criterion by which the economic system selects survivors: those who realise positive profits are the survivors; those who suffer losses disappear.
"The pertinent requirement—positive profits through relative efficiency—is weaker than 'maximised profits,' with which, unfortunately, it has been confused. Positive profits accrue to those who are better than their actual competitors, even if the participants are ignorant, intelligent, skilful, etc. The crucial element is one's aggregate position relative to actual competitors, not some hypothetically perfect competitors. As in a race, the award goes to the relatively fastest, even if all the competitors loaf. Even in a world of stupid men there would still be profits."Also, the greater the uncertainties of the world, the greater is the possibility that profits would go to venturesome and lucky rather than to logical, careful, fact-gathering individuals."~ Armen Alchian, from his 1959 article 'Uncertainty, evolution, and economic theory'
Thursday, 28 November 2024
Entrepreneurs vs 'maximising man'
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5 comments:
From just reading this excerpt I don't understand the distinction he's drawing between 'maximum' and 'positive' profits or why the distinction might be important.
Ah: main point, in short summary, is that traditional neoclassical economics has no room for entrepreneurs because they just don't fit the maths.
In essence, the neoclassical models says that everyone is all-knowing, all-wise and the market has no process of discovery. So no need for these difficult creatures who, in reality, drive the whole process forward.
PC - Ok, so "maximum" in this context is a theoretical construct for what would only be possible in this all-knowing, all-wise (and unrealistic) scenario? A bit like the concept of 'infinity'. Whereas the focus should be on "positive" profit that incentivises the behaviour of individuals who move us closer towards it?
Zactly. And thus have economists 'discovered' they have no use for the very people they should be seeking to explain.
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