[OPE-L:2423] Re: RE: Profit rate and profit share

From: Gil Skillman (gskillman@mail.wesleyan.edu)
Date: Fri Feb 25 2000 - 14:18:40 EST

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For what it's worth, there's a large mainstream literature concerning the
objective function of firms operating in capitalist economies. The generic
conclusion is that the nature of the maximand, especially for
multiple-owner firms (such as corporations or worker-owned firms) depends
on the existence and structure of markets for ownership rights. This first
came up in the literature on worker-owned firms. Benjamin Ward and early
followers assumed that these firms would want to maximize income per
worker, analogous to profit *rate* maximization for capitalist firms.
Murat Sertel, Greg Dow, and Ernst Fehr showed, under varying settings, that
if there were competitive markets for membership rights, then worker-owners
would want to maximize profit, because maximizing the stream of profits
guarantees the highest value of their membership shares. Equivalently,
capitalist firms would want to maximize profit (not profit rate) so long as
equity shares could be sold in competitive asset markets.

This raises a question as to what exactly is meant by "competitive" in this
context. This is especially an issue when markets are incomplete (the
real-world case, that is), meaning that there isn't a separate market for
every state of the world given risk, or for every aspect of workplace
environments that yields benefits or costs. In this case you have a form
of monopolistic competition--firms might be qualitatively different even if
there's a lot of them, and then you have to ask what competitive asset
markets could mean. This is studied from different angles by Oliver Hart
in Econometrica and someone else about the same time (I could get the cites
if you want them). Competitiveness comes down to this: if firm owners hold
negligible shares in each firm after asset trading, then they will (again)
care primarily about the value of the shares they sell, and thus will want
to maximize profits. On the other hand, if asset markets are not
competitive in this sense, markets are incomplete, and people have
different preferences toward risk or workplace characteristics, then no one
objective function will emerge.

Anyway, one implication of the foregoing is that of itself spatial
separation won't induce a desire to maximize profit rate rather than profit.

Gil Skillman

>In this connection, see also Paul S. Plummer et al. (1998) "Modelling
>spatial price competition: marxian versus neo-classical approaches", Annals
>of the American Association of Geographers, Vol. 88 pp. 575-594.
>Apart from also citing F&M, they argue that profit-rate maximisation is a
>more rational maximand than the total mass of profit in the case where firms
>are spatially separated (hence, presumably, in all cases).
>One of the co-authors of the above is Eric Sheppard, author, with T. Barnes,
>of "The capitalist space economy: geographical analysis after Ricardo, Marx
>and Sraffa" (London, Unwin, 1990).
>PS: I'll come back later on your well-taken points about individual firms'

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