Full text: Introduction

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.

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