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The inverse invisible hand and heuristics in managerial decision-making

  • The paper points out that Adam Smith’s famous argument about the “iisible hand” (IH) of markets can be ierted. While the IH argument suggests that the baker and butcher do what is in their costumers’ interests not because they care for their costumers, but out of their own self-interest, one can also defend the coerse claim: if one cares for other people and finds a way to satisfy their needs, one can expect that those others will be willing to pay for the satisfaction of their needs. The paper argues that the IH argument has a strong link to the view that the ultimate goal of management should be “profit maximization” and to neo-liberalism’s tenet that in a market economy where companies attempt to maximize profits, a “socially optimal” allocation will be achieved. It is argued, however, that profit maximization is well-defined only within a mathematical model, while real-world decision-making requires one to choose the “relevant set” of options before any assessment of associated profits can be attempted. “Profit maximization” is therefore characterized as a heuristic for managerial decision-making, and it is pointed out that it is by no means essential for management to be successful and sustainable. The ierse IH argument supports natural alternatives, such as Prahalad and Hart’s “bottom-of-the-pyramid” and Yunus’s “social entrepreneurship” approach. Both require the manager to focus on people’s needs first, and regard the “money-making” aspect as secondary.

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Document Type:Article
Author:Arnis VilksORCiD
Chairs and Professorships:Chair of Microeconomics
Parent Title (English):Philosophy of Management
Place of publication:Schweiz
Publisher:Springer Nature
Year of Completion:2018
First Page:137
Last Page:147
Tag:Heuristics; Invisible hand; Managerial decision-making; Profit maximization
Content Focus:Academic Audience
Peer Reviewed:Yes
Rankings:SJR Ranking / Q3
Licence (German):License LogoUrheberrechtlich geschützt