Economists often use models where firms are assumed to maximize profits. Non-economists sometimes criticize these models, arguing that their assumptions about human nature are too simple. This debate over the behavior of humans won’t be resolved anytime soon.
Meanwhile, there is increasing evidence that fungi entrepreneurs respond rationally to incentives:
A study just published in Current Biology by Toby Kiers of the Free University of Amsterdam suggests that, like cunning merchants who know how to make a profit, fungi exploit resource scarcity by marking up their prices. They demand more nutrients from plants in return for their valuable mineral commodities. . . .
As [Toby Kiers] monitored the collection and trading of the phosphates from fungi to carrots she found that the fungi enthusiastically transported them across the hyphal network from areas of abundance to zones of scarcity.
Moreover, though she was unable to measure directly what price the carrots paid for their phosphates, she managed to do so indirectly. She found that hyphae growing in resource-poor patches put on more weight per unit of phosphate transferred to nearby roots than did those in patches of abundance. This, she argues, makes it clear that fungi in zones of scarcity are marking up the price of their products.
One argument in favor of the profit maximization model is that the forces of competition will gradually weed out human firms that do not behave in such a way as to maximize profits. Presumably, over the past 200 million years the forces of natural selection have gradually eliminated non-profit maximizing fungi from the gene pool.
READER COMMENTS
Thaomas
Nov 14 2019 at 3:54pm
But do we know they are MAXIMIZING, not satisficing, not taking account of all stakeholders? 🙂
Scott Sumner
Nov 14 2019 at 6:32pm
“Woke” fungi are happy to satisfice, and thus help other stakeholders.
Philo
Nov 14 2019 at 6:41pm
“A fungi”? (A fungus!)
Scott Sumner
Nov 15 2019 at 1:57pm
Yup, I fixed it.
Phil H
Nov 14 2019 at 7:32pm
It’s a nice study, but unfortunately that passage doesn’t really support the Economist’s argument. In a resource-poor environment, resources are more likely to be the constraining factor on the growth of a fungus (as opposed to space or competition from other species). In that environment, obtaining the same amount of resources from their carrot trading partners would likely spur more growth…
I’ve just read the TED talk (https://www.ted.com/talks/toby_kiers_lessons_from_fungi_on_markets_and_economics/transcript ) and it sounds like my counter-explanation could be wrong. It’s interesting, this Kiers sounds like she has a good grip on how she is using the economic metaphors. Good stuff!
Nick
Nov 15 2019 at 4:36am
“Non-economists sometimes criticize these models, arguing that their assumptions about human nature are too simple.”
Put those same people into the actual position of running a business, i’ll wager the vast majority do the obvious thing and maximize short term profits. You can always critique an analysis as too simple, but I’d say usually people are still maximizing profits subject to x, y, z real world complications, or they are maximizing profits over time.
Matthias Goergens
Nov 15 2019 at 6:57am
I’m not so sure. Eg firing aversion is very real, even when it costs money.
Well, at least business will have to break even in the longer run. And enough competition for labour, capital, land and customers then tends to make the behaviour you need to break even identical to profit maximizing behaviour.
Brian Donohue
Nov 15 2019 at 10:25am
My undergrad micro textbook (Hirschlifer) had several fascinating examples of animals applying classical micro rules that many think are unrealistic when applied to humans. It made a real impression on me.
Lorenzo from Oz
Nov 15 2019 at 8:05pm
The “go woke go broke” phenomenon is something of a challenge to the profit maximising thesis. But that comes from adding in other objectives by executives and others. So it seems a bit of a principal-agent problem.
I have no problem with maximising assumptions where discovery processes are sufficiently lost cost/low risk.
Pre-modern states often had very “sticky” tax rates, because once a tax had been established that did not provoke revolt, the “insurrection constraint” made raising it very risky for what were very low information states. That is why Parliaments evolved in the medieval period within Christendom: they gave kings extra information sources which allowed higher rates of taxation and more oversight of their officials. (Yes, I know that is not the standard story, but mine has the virtue of fitting the dominant historical patterns: Simon de Montfort trying to find a basis to oppose the King’s government is a much over-hyped exception, but he was following in his Parliament a template established by Alfonso IX of Leon and Castile, and Parliaments only “stuck” where kings could access the aforementioned advantages, as Edward I did once de Montfort was decently dead.)
They did not evolve in China, because it had too much of a unification tendency (not enough competitive pressure). They did not evolve in Brahmin India or Islam because law was mostly controlled by religious scholars and was “closed source” (based on revelation) so not available to entrench political bargains in law.
The only pre-modern autocracy that is plausibly an revenue maximiser was pharaonic Egypt and successor states, because the level of the annual Nile flood was such a dominant variable (no rain, consistent soil quality) as to make production so transparent as to make maximising plausible. Hence the use of the Nilometer.
https://en.wikipedia.org/wiki/Nilometer
So, you show me maximisation and I will show you low cost/risk discovery/feedback processes.
Hazel Meade
Nov 18 2019 at 2:50pm
Are the fungi marking up their “prices” or are the carrots simply outbidding each other for the scarce resource? In a competitive market, carrots may “offer” more nutrients in order to get the phosphates they demand. Fungi will naturally be attracted to these richer nutrient sources.
TMC
Nov 18 2019 at 5:05pm
Good point, and seems more logical as well.
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