Marginal productivity

Many have criticized the marginal productivity that deals with the assumption of profit maximization. The forces that drive a firm to make the calculations of marginal revenue product versus marginal cost of labor is the goal of maximizing profits. The critics of this view argue however that private firms particularly in state of limited competition markets or in corporations where ownership and control are separated are more accurately characterized as satisfying with respect to profit. In this view the managers of business firms strive to achieve a minimum level of profit in order to protect their survival and that of the firm. Once this minimum goal is satisfied the managers tolerate some slack in the operation of the firm and no longer strive to fully minimize production cost. One important way firms exhibit satisfying behavior as many have observed is by employing more people that really are needed as evidenced by the bloated ranks of middle management as well as the inefficient organization of production - does this ring a bell?

However one cannot ignore the marginal production problems which play a role into the business decision making process. One can argue however that the ultimate goal of each firm is survival and that survival in a competitive economy requires keeping costs and employment down while keeping profits up. Thus while it may not be literally true that management squeezes out of the business every last dollar of profit possible (this one reminds us of the previous CEO Jay H Walder - with his ‘making every dollar count policies’) the pressure on the firms to survive is sufficiently strong that all other goals in the long run are subordinated to the single goal of maximizing profits. The necessity of making profit in turn assures that business firms will be induced to economize on labor and make hiring decisions that broadly accord with the predictions of marginal production. Many would defend this and argue that this is true even for regulated firms or not-for-profit organizations since their survival and growth requires conscious efforts to minimize cost.