The Corporation: Investment, Mergers and Growth

The Corporation: Investment, Mergers and Growth

The Corporation: Investment, Mergers and Growth

The Corporation: Investment, Mergers and Growth

Synopsis

This book reviews the theory of the firm and the large modern corporation. Examining the process of entrepreneurial capitalism in which firms come into existence, then managerial capitalism and the changing motives of management in corporations - The Corporation is a thorough and thoughtful account. Of interest to students and academics in the area, this book will also prove to be an intriguing read for professionals.

Excerpt

The nature of profits

The driving force behind the competitive process is often referred to as “the profit motive. ” Although every first-year student of economics knows that “profits are the difference between revenues and costs, ” many do not understand why such residuals exist, and why the competitive process tends to drive them to zero. Since we shall devote considerable attention to the workings of the competitive process in a modern capitalist economy, it is useful to pause briefly at this juncture to examine the peculiar characteristics of profits. Our discussion draws heavily on the ideas of one of the great Chicago economists Frank Knight.

Uncertainty and profit

Definition. Profit is the residual that exists after all contractual and potentially contractual costs have been met.

In discussing why profits exist, Knight (1921) made the important distinction between risk and uncertainty. Both words describe situations in which the future is not known with perfect certainty. But in situations that only involve risk, one is able to calculate the probabilities of the different possible unknown future events occurring. For example, the probability of two ones coming up when one throws a pair of dice is 1/36, the probability of a one and a two coming up is 1/18, and so on. It is thus possible to calculate exactly the probability that someone will throw “snake eyes” or a seven on a given roll of the dice. Thus, someone with a lot of money could in principle sell insurance to dice rollers at a casino at a price equal to the amount of money at stake times the probability of it being lost. If a lot of dice rollers bought this insurance, the insurer would break even.

Of course, there is no reason for someone to go into the insurance business if they just break even, and the types of people who frequent casinos are typically risktakers who would not be interested in buying insurance if it were available. (Even at casinos some insurance gets sold, however. If a blackjack dealer has an ace showing, the other players can insure against the concealed card’s being a ten or a face card.)

In the commercial world, there are many activities that occur with sufficient frequency that probabilities of various events occurring can be calculated and . . .

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