Free to Fail

Free to Fail

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn

This challenging book tackles one of the most fundamental questions in economics: Why are commercial organizations more efficient than organizations in the public domain?

Chapter 4: Profit maximization is only part of the answer

Hugh van der Mandele and Arjen C. van Witteloostuijn

Subjects: business and management, organisation studies, strategic management, economics and finance, industrial organisation


The conjecture that forms the source of inspiration of this book is as old as economics – well, nearly as old. We could use very old formulations, we could use the formulations of Adam Smith or we could quote a more modern formulation. We chose to do the latter. Oleh Havrylyshyn and Donal McGettigan of the International Monetary Fund write: ‘In theory and practice of market economies, the advantage of private ownership as an institution stems from its profit-maximizing behavior conditioned by a competitive market environment’ (1999, p. 4). And Karl Popper (1979, p. 14) once wrote: ‘If the theoretician pursues this interest, then finding where a theory breaks down, apart from giving theoretically interesting information, poses an important new problem for any new explanatory theory.’ The theory that profit-maximizing behavior is the source of advantage of private ownership ‘breaks down’ because two anomalies are not explained. This is a central claim of this book.

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