Maximizing Short-Run Profits
By David Henderson
I was one of three speakers on a panel at the San Francisco Federal Reserve Bank on Wednesday. The other two speakers were Kevin Lansing of the SF Fed and Atif Mian of Princeton University. The event went well and I’ll have a few posts on it in the next few days.
But I want to focus on something that one of the audience members raised with me in a conversation after the formal event ended. He said matter-of-factly, as if there were no doubt, that profit-maximing companies maximize short-run profits at the expense of the long run. “If that were true,” I replied, “then drug companies should end all R&D today. Their R&D expenses would fall and their profits would rise. And yet we don’t see them doing that. They invest hundreds of millions of dollars in drugs that, in many cases, will not bring good earnings to them for a few years and maybe for 10 or more years.”
The man replied that he knew that because he had been a top manager at Amgen. Later I looked him up on the web and, sure enough, he had been. “So that’s my point,” I said. “You know from personal experience that drug companies are not maximizing short-term profits.”
Here’s the interesting thing: I don’t think I made a dent in his thinking. I’m not sure, but there was no acknowledgement on his part of the connection between my drug-company evidence, which he admitted, and his claim.
This could be an instance of someone who just has trouble admitting in real time that he’s wrong. I see that all time, and I put a substantial probability on it. But my gut feel is that it’s something else: I think he heard this line about for-profit companies maximizing short-term earnings at the expense of the long run and is just repeating it as a good line but one that he hasn’t really thought about.