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February 01, 2005
Sacrificing Short-Term Profit for Long-Run Gain
Don Boudreaux
Corporate managers are widely believed to work under intense pressure to maximize quarterly profits at the expense of long-term gains. I encounter this claim at least once a day, and oftentimes more than once.
Here’s just one example, from a 1999 paper that I found in my files. ("Organizational Downsizing: An Introduction," by Jack Rabin, a Professor of Public Policy at Penn State - Harrisburg.)
Financial markets put pressure on corporate managers to focus too much on quarterly profits and too little on patient investment for the long haul.
Similarly, the AFL-CIO believes that corporations are driven to focus on the short-run. So, too, does Noam Chomsky. And in his book, Exporting America, Lou Dobbs repeats this claim ad nauseam.
This popular belief that corporate managers are driven above all to maximize short-term profits came to mind today as I read this account of the new Airbus 380.
I have no opinions on the merits of this new jumbo-est of jets – I haven’t yet flown in one. And that’s my point. This jet 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.
I don’t know the dollar amount of FedEx’s down payment for its order of ten 380s, but I’m certain that it’s in the millions of dollars (and, likely, in the hundreds of millions of dollars). 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.
A simple but important point.
Posted by Don Boudreaux in Myths and Fallacies | Permalink
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