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Published online by Cambridge University Press: 10 December 2009
The classic defense
If the function of the orthodox theory of consumer behavior is to justify the notion of negatively inclined demand curves, the function of the orthodox theory of the firm is to justify the notion of positively inclined supply curves. The orthodox or neoclassical theory of the single-product firm, using only output or price as a strategic variable in a static but highly competitive environment, has been with us for 140 years (ever since Cournot more or less invented it in 1838), during which time it has been repeatedly criticized, particularly in respect of its central assumption that businessmen strive to maximize money profits subject to the constraints of technology and the prevailing pattern of demand.
It has been argued that business firms actually maximize a multivariate utility function that includes profits, leisure, prestige, liquidity, control, etcetera; that they maximize total sales subject to a minimum level of profits rather than profits themselves; that they do not maximize at all but “satisfice” by adjusting their profit targets in the light of experience so as to reach aspiration levels; that they cannot maximize because of prevailing uncertainty and, therefore, adopt rules-of-thumb like full-cost pricing; and that they do not want to maximize but instead to survive and hence operate in terms of administrative rules that serve to keep them one step ahead of their rivals.
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