27
THE GIANT CORPORATION
26 MONOPOLY CAPITAL
for profit through time, using coordinated programs stretching as far
ahead as practicable. The profit targets incorporated in these pro-
grams are sufficient to finance not only good dividends but also
desired illllOVative and growth expenditures. The programs are re-
vised frequently, as experience accrues and new opportunities are
discovered.
The tendency toward rofit maximization (i.e., highest ractica-
ble profit) appears in this system along vera imensions. In t e
process of revising and reformulating programs, more expensive and
less profitable activities are pruned or dropped and cheaper or more
profitable ones are added. Less costly processes and the more profit-
able product and market sectors serve as the standards toward
which others are expected to converge or be replaced. By steadily
selecting those methods and sectors that promise better returns,
these standards are kept high and, if possible, rising. Finally, the
overall profit and growth targets of the enterprise as a whole are
raised through time, unless adversity prevents.
These goals and programs and standards, it is true, represent at
any time certain ''aspiration levels," and the efforts to satisfy them
receive prime attention. But the two major points about them are
that ( 1 ) they are likely to be hard to reach and ( 2) they will
ordinarily recede (i.e., grow larger) through time. Even in good
times the firm's aspiration levels, therefore, are fairly taut, and they
are highly elastic upward. On the other hand, there is great resist-
ance to adjusting profit and other standards downward, so that in
bad times the business firm tries even harder to make the highest
practicable profits.
I readily agree that I have sketched the behavior of what might
be called the "exemplary firm'' rather than the firm that is quantita-
tiv~ly r~pr~sentative of the present business population. But my
main point is that the management techniques and the expertise that
ca~ validate my notion are developing rapidly, are increasingly
bein? made available to business, and are being rapidly adopted by
leading firms. Consequently, I suspect, the exemplary firm will be
the representative firm of the future. If so, its behavior will be more
rather than less appropriately analyzed by some of our time-honored
theoretical notions, such as profit maximization .... 8
Two aspects of this admirable statement call for comment.
First, it introduces a healthy corrective to what Earley calls
:'the. c?nv~nti,~~al notion of profit maximization and general
optimization. This conventional notion has been tied to a
8
American Economic Review, May 1957, pp. 333-335.
re or less explicitly stated assumption that the maximizing
m~repreneur has complete knowledge of all alternatives open
en ·m and of the consequences of choosing any comb"ina t"ion of
to h i h b"
them. Given this assumption, he can always select .t e com 1-
tion of alternatives which yields an absolute maximum. Fur-
~~er, if it is assumed that his knowledge remains eq~ally com-
lete in the face of changing conditions, it follows logically that
he can always make instantaneous and appropriate adjust~ents
to new circumstances. What is involved here is an assumption of
omniscience on the part of the entrepreneur, which, far from
being a useful abstraction, is of cours~ an absurdity. I~ practice,
to be sure, economists have usually given a more sensible mean-
ing to the maximization principle, but b~. failing expressly to
repudiate the omniscience postulate, by f~1l1ng to spell out. w~at
is and what is not involved in the assumption of profit max1m1za-
tion, they have left themselves vulnerable to attacks of the kin~
mounted by Simon. It is therefore valua~le to h~;~ ~arler s
carefully considered statement. By stressing the ~~m1ted in-
formational and computational resources of the firm, he makes
clear that no assumption of complete knowledge is involved,
and his entire argument is based on the rejection of any. id~a .of
an absolute maximum or optimum. The firm (whether ind1v1d-
ual entrepreneur or corporation makes no difference) always
finds itself in a given historical situation, with limited knowl-
edge of changing conditions. In this context it. can never do
more than improve its profit position. In pract1<~e, the search
for ''maximum'' profits can only be the search f~r the .grea~est
increase in profits which is possible in the given s1t~at1?n,
subject of course to the elementary provis~ that the ex~lo1ta~10~
of today's profit opportunities must not ruin. to~orrow s. !his is
all there is to the profit maximization prmc1ple, ~ut it al.so
happens to be all that is necessa1·y to validate the economiz-
ing'' behavior patterns which have been the very. backbone of
all serious economic theory for the last two centuries.
The second aspect of Earley' s statement which we want t.o
emphasize, and the one most relevant to o~r present ~urp~se, is
the convincing demonstration that the big corporation, if not