This is not mere theory…

“These look good on paper!” This is the most common sentence I hear whenever I try to explain certain things to business representatives. Such naïve statements, often said without being award of my long-term experience in private sector, always make me laugh, because only those who make mistakes, who have poor management skills or those who are lost in delusions of grandeur can say those words.

There are also some executives who are quite awful at managing human resources. For instance, they don’t refrain for one moment to rehire people s/he fired before, yet they avoid rehiring those who resigned voluntarily. These are the doings of those who manage their firms under the influence of their egos, unfortunately not using their brains.

We often tend to question whether young people we hire or we train are technically competent enough. But we never wonder whether they have any idea or what they think about the philosophy of the job they are about to undertake. In other words, we rather tend to gather personal information whereas we should find out why or for what purpose they are choosing this career.

“Let’s ask the simplest question…”

I asked the following question in an exam I held recently: “What is the prerequisite of increasing profit? Selling or producing?” Unfortunately, only a few students gave the correct answer to this seemingly easy question. I clearly remember, years ago, I asked the same question to a business person who answered, “Obviously this is not about the amount of sales you make” But, I knew that he wasn’t believing it either. Sadly, people are filled with some silly higher sales ambition, as if making profit doesn’t seem equally important.

But in fact, theoretical analyses, that business world usually tends to underestimate, provide answers to many questions. For instance, you can refer to analyses called microeconomics or price theory to find an answer to the question above. In those analyses, it can be seen that once the optimum factor combination rate becomes deteriorated in terms of both diminishing marginal product and short run equilibrium of a firm under perfect competition, in other words, when the employer decides to increase only the number of its employees, the labour productivity ratio constantly decreases, it even nears zero, while there is a decline in net profits vis-à-vis ever-increasing costs and unchanged prices.

This tiny detail which seemingly exists only in theory is actually happening in real life as well. Companies that keep increasing production so as to gain market share or keep up with customer demand have no choice but to face rapidly increasing costs after a while, causing their operating profit to decline. So, within the scope of factual instances both in theory and practice, it becomes even clearer that the prerequisite of making a lot of profit is to produce a lot. This being the case, I think it must be known by all employers that there is a difference between total profit peaks and profit rate per each unit sold.

On the other hand, firm equilibrium analysis under perfect competition is actually a field of experiment we create in our minds for the purposes of economics, which is in fact not an experimental science. In an environment there are a very large number of sellers and a very large number of buyers, and where any of these people have the power to affect prices in any way, we have the chance to analyse firm behaviour under the ceteris paribus condition. This analysis reminds us of the firm’s actual duty, which is to achieve an effective cost management and to increase production by keeping costs as low as possible and keeping up with constantly changing technology.

“Theory is an analysis of life experience…”

One of the defining characteristics of a perfectly competitive market, “transparency”, which is the fact that all information concerning market entries and exits as well as all buyers and sellers are known by everyone, served as an inspiration for the operating principles of modern stock markets.

On the other hand, the fact that the firms produce and sell homogeneous products in a perfectly competitive market (another defining characteristic) serves as a guide for firms, that produce and sell the same products or services in real life, how to compete with each other. Besides, the fact that, in a perfectly competitive market, profits and losses are eliminated because an infinite number of firms are producing infinitely-divisible and homogeneous products in the long run tell the firms in a real market how to behave in order to reach their target customer.

In short, the basic concepts of economics actually serve as a guiding light for those who are engaged in economic activity and show them the truth about its fundamental philosophy.

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