What do Firms Want?

Here is another little sectionette from my book review  “Economics and Common Sense” on Steven Landsburg’s book “More sex is Safe Sex: The Unconventional Wisdom of Economics”, that just appeared on the AMS Notices site. Of course this topic can lead to a lovely discussion. Update (March 2011): Here is a related discussion on Noam Nisan’s blog in the context of research grants offered by Google.

What do firms want? Reading Landsburg’s book, one gets the impression that firms and their owners and executives just want to maximize their profits. They will avoid polluting the environment if and only if this is good for business. They will obey the law if and only if the cost/benefit tradeoff in violating the law are unfavorable.

It is not clear if this characterization of what firms want is just an assumption essential for developing the theory (which is reasonable), or an approximation of reality (which also sounds reasonable), or perhaps a solid precise description of reality (which as such sounds unreasonable), or maybe a normative teaching of economics theory (which sounds unfortunate), or perhaps even a representation of moral values (which also sounds unreasonable).

This description is simplistic even in the context of classical economic theory, which allows those of us not owning or running a firm to have multiple responsibilities, interests, obligations, considerations and desires. For some economists who subscribe to this view, responsibilities towards the employees, the costumers, the environment, or the law, which are not derived by the principle of maximizing of profits, are labelled as charity. Other economists sharply disagree.

Update (Oct 2019): See the following interesting statement on the purpose of corporation

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5 Responses to What do Firms Want?

  1. Pingback: Plans and Updates « Combinatorics and more

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  3. Gil Kalai says:

    Some discussion on a related topic can be found in Noam Nisan’s blog here http://agtb.wordpress.com/2011/03/20/google-grant-on-electronic-markets-and-auctions/

  4. Pingback: Is it Legitimate/Ethical for Google to close Google+? | Combinatorics and more

  5. Gil Kalai says:

    See the following interesting statement signed may many managers of successful US firms on the purpose of corporation

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