“Ends can be conceived as observable states of affairs only after their achievement.” -Israel Kirzner
In his book The Economic Point of View, Israel Kirzner notes that as the study of Economics has developed, economists have tended to miss key parts of economic behavior. One of the errors Kirzner detects is a tendency to forget that purpose is the key to human action. We cannot take “ends” as a given, because every person has her own. Though a person may achieve something that was desired, how the desire was fulfilled is where the economic activity happens. The choices between different possible means to the end involve weighing tradeoffs, using scarce resources, and sacrificing some goals for the sake of others.
So, we can’t just ignore the choices that led to the ends. In the case of business, it would be silly to say that the goal of a business is “profit maximization.” Not because it is untrue, but because it misses a step. The most profitable businesses do survive, but business owners can’t be successful by waking up in the morning and thinking, “I will maximize profits today!” It would be the same as a student declaring that she will get all A’s in her classes, without any plan to make it happen.
The process of profit-maximization is one of constant innovation. Some of these innovations will be amazing, like iPhones, and others will flop, like Kodak’s switch to digital photography. Arman Alchian likens this process to evolution, where some developments are beneficial to an organism, and others are not. Companies that innovate in a way that consumers like are profitable, and companies whose innovations are not embraced will fail.
Successful companies do maximize profits, but that is because they are making good decisions. They cannot make good decisions by trying to maximize profits. This may seem like a tedious point, but it is essential to keep in mind that individual decisions are at the heart of economics. Innovation cannot be taken for granted, because it is always the result of someone’s hard work.
So companies, like people, are trying to make the best decisions given the goals they want to achieve. In economics, as in other parts of life, it is the journey and not the destination that really matters.
The quote at the top of the post is from The Economic Point of View, 6.36