Companies do not maximize profits

Contrary to the popular sentiment, companies do not maximize profits. Armen Alchian explains:

The pertinent requirement-positive profits through relative efficiency-is weaker than “maximized 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, skillful, 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.


First published Feb 11, 2013