(Are welcome the guidance and indications -emails, web
addresses, name of head of area publications, etc. - about publishing houses
and institutions that could publish the book).
Maximize
profits or minimize losses?: the problem of risk
The problem
of uncertainty we have just analyzed inevitably leads us to consider
another important business decision problem: the problem of risk. This
essentially means that entrepreneurs, by always acting under conditions
of uncertainty, are constantly faced with the possibility that their actions do
not achieve the expected results. In other words, their decisions always involve
risk.
The
consequences of this for the orthodox model of business rationality are truly
destructive because, in conditions of risk, the rationality of businessman will
consist more on ensuring a minimum level of profits or minimize losses than in maximize
profits. And this for three reasons:
First, by the direct relationship
between benefit and risk. Entrepreneur are well aware that if they want more
benefits will have to take greater risks. Therefore, seek maximum profits would imply also assume the greatest risks. But because practically no one wants to do that we
will have that entrepreneur do not necessarily be governed by the maximum possible
but rather will accept a net income in accordance with the conditions (think in
the cases of economic crisis). There is no reason, therefore, to believe that
the entrepreneur has to act in a position of maximum, that is only a
theoretical possibility.
Second, due to the stability
that businesses require to plan. In effect, every company needs to maintain a
minimum level of income to carry out their plans. Otherwise, if you search
always maximum profit, the company may end up having a level of profit too
fluctuating and therefore, it will be extremely difficult to make long-term
plans due to financial uncertainty. So not only must take into consideration
the profit but also the stability and security. That's why Japanese economist
Shigeto Tsuru, after reviewing several cases of real companies, refers that: “It
became clear that the determinant essential criterion of the behavior of the
company was rather that of stabilize the benefit for a period of time long
enough. Even more recently, it has been suggested an amendment in the sense
that the goal of the companies should target to “maintain position of stability
for a long period”. In other words, it means that in the description of the
behavior of the company, the term maximization of security is more accurate
than the term maximization of profit” (1).
Third, because the managers are
more punished for incurring losses than rewarded for make profit. Effectively,
given the context of separation between management and ownership, managers are more
interested in avoiding losses than in achieve the maximum profit. Why? Because
while managers and executives do not receive the benefits that may result from
assume higher risks (shareholders take these), they may be dismissed if incur significant
losses. Therefore, they will seek carry out their work efficiently obtaining
for shareholders an acceptable profit level, but not necessarily will seek the maximum profit because this could also
endanger their own job security.
Thus, if, as often happens, the maximization of profits increases the
risk of losses, the manager will not accept the bet for basic considerations of
interest. And more even if it is a large company with market power. It's no
wonder that Paul Samuelson himself accepts that “as the company gets to have
significant size and to have some control of prices, it can afford to loosen up
a bit in its maximizer activity” (2). Or that the orthodox economist Carl
Kaysen says: “While in the very competitive market the company has no choice
but to seek maximum benefits, because the alternative to it is a insufficient
benefit to ensure the survival, in the less competitive market the company can
choose between seeking maximum profits or conform with a profit “aceptable” and
pursue other goals” (3).
References:
1) Shigeto Tsuru, “¿Ha cambiado
el capitalismo?”, in: ¿A dónde va el
capitalismo?”, Oikos Press, Barcelona, 1967, p. 47
2) Paul Samuelson, Economics, McGraw-Hill, New York, 1976,
p. 508.
3) Carl
Kaysen, “The Corporation: How much power? What scope?”, in: The Corporation in Modern Society,
Edward S. Mason ed., Harvard University Press, Cambridge, 1959, p. 90.You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and dante.urbina1@gmail.com (email)
