12 - Economic Survival (1995)

Summary

INTRODUCTION

Standard textbooks on microeconomic theory typically ascribe to consumers the goal of maximizing “utility,” and to firms the goal of maximizing “profit” or the “value of the firm.” Explicit consideration of the survival and failure of firms has scarcely been recognized by general equilibrium theory, in spite of the sophisticated development of the subject in the past forty years. The recent reawakening of interest in the evolution of economic behavior, especially among game theorists, implicitly brings with it a concern for the goal of “survival,” but thus far most game-theoretic models of evolution do not bear much resemblance to even stylized pictures of economic institutions.

Nevertheless, failure is a common occurrence in business. For example, during the 15-year period from 1967-1982, almost half of U.S. manufacturing firms exited from their industry each year. Even if we eliminate from each industry the group of smallest firms, producing 1 percent of the industry output, the annual exit rate was still about 37 percent. During the same period, more than 60 percent of such firms exited within their first five years in the industry, and almost 80 percent in their first ten years. (See Dunne, et al. (1988), especially pp. 503–510.)