New Horizons in Institutional and Evolutionary Economics series
Chapter 4: Production Attributes and the Capital Structure
Most expositions of theories of production start with a set of assumptions. Neoclassical economics for the most part uses a speciﬁc set of assumptions that implies that ﬁrms maximize proﬁts through the eﬃcient combination of labour, capital and land. I do not use that set of assumptions in this chapter, and consequently there is neither an explicit nor an implicit focus on proﬁt-maximizing or ‘eﬃcient’ ﬁrms. A compelling argument for rejecting proﬁt maximization is that businesspeople do not have access to perfect information, which is one of the assumptions of the proﬁt-maximizing model. This is an argument that Harrod (1939) made long ago. We should also note that even if people had access to all the relevant information, the common assumption of perfect information additionally implies that nothing is ‘lost in translation’. Individuals are assumed to possess powers of perfect interpretation as well as perfect access to raw data. Economists subscribing to proﬁt-maximizing models do not defend the indefensible. Instead, instrumentalist defences abound. Friedman (1953) uses a variant of ‘survival of the ﬁttest’, where selection mechanisms act to exclude those ﬁrms that do not act as if they were maximizing proﬁts. But since Friedman (ibid.) also claims that prediction is the only goal of science (see Chapter 1), he considers the realism of whatever assumptions the economist makes irrelevant. Nevertheless, the predictive performance of the proﬁt-maximization assumption depends on the absence of change in the selection environment. Any changes to...
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