Friday, February 04, 2005

Straw corporations

Don Boudreaux criticizes the idea that corporations are under pressure to maximize short-term profits and thus neglect long-term gains.
[The new double-decker Airbus] won’t even begin to carry commercial passengers or freight until sometime next year. Yet already several companies have placed orders for the $250 million jet, including Virgin Airlines, UPS, and Federal Express. Federal Express, for example, won’t get its first 380 until 2008 – yet it has already placed orders for ten of them.... A company obsessed with maximizing quarterly profits would not spend millions of dollars today for a benefit that won’t begin paying off until several years down the road.
This strikes me as attacking a strawman. I don't think anyone is arguing that corporations ignore long-term profits entirely (another counterexample: industrial R&D) - rather that the drive for short-term profits produces a kind of myopia that makes corporations place less (not zero) importance on long-term profits than they would if they were perfectly rational. It's not clear how advance purchases of planes refute the latter argument in any way.


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