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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?
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Chapter 4: Profit maximization is only part of the answer

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn


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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