9.
Therefore, the main arguments of Chapter III retain their place in
this book, although the conclusions drawn are not relevant. (This is particularly
true of my unfortunate argument that the cost of the capital does not matter in
less than full employment, which becomes redundant if there is no increase in
capital-output ratio). Indeed, that the profit rate should decline in the
highese size classes (taking it as a fact, although the evidence may not be
wholly conclusive) could be explained by reasons more convincing than a
supposed tendency for capital-output ratio to rise. The first of these reasons
is the safety preference of the large concerns. Since they are less indebted
than smaller firms their net profit rate on the average can be expected to be
lower. The safety preference can also bring about similar effects in other
ways. If the integration of sources of raw materials and power is motivated
only by the wish to reduce risks, and yields less than the average profit rate
of the firm, then we might interpret this as a case of "buying safety" which is
fully analogous to the reduction in debt. Thus, the high apparent capital-output
ratios of Table IX (see above) may indeed contribute to the explanation of falling
profit rate (unless the raw material investment as happens often in backward
countries, are very profitable), but the interpretation of this is quite differ
ent from the argument of Chapter III.
A second reason why the biggest concerns may have lower profit rate is
that they may be less efficient and, especially, less innovative than others for
reasons of internal organisation. The big concerns have often a monopoly (or
oligopoly - ) position which may reduce their interest in technical progress.
More important probably, they tend to be overconfident as a result of a successful
past, and to become rigid due to traditions and routine which again is fostered
by a history of success.
I think this factor is more important than other more conventional
diseconomies. In this book I played down diseconomies too much, and this was an
error. In principle it must be recognized that the growth of the firm leads to
serious inconvenience. The mere geographical size of the market increases, and
with it cost of transport to the customer. The plant itself covers more space,
therefore, there is more internal transport, much more important, with the
increase in the number of people cooperating, the difficulties of communication
between them increase disproportionately.^ This leads to increasingly
H. A. Simon, Decision Making and Operational Design.
J. G. March and H. A. Simon, The Dysfunction of Bureaucracy: Organization
Theory, Ed. Pugh, Penguin Books 1971.