What is the company theory?
In economics, the theory of the firm is a principle used to predict how firms will act based on what the theory claims is the purpose of the firm or business. In this case, it states that all decisions are made with the ultimate goal of maximizing profit. While this may seem like a statement of the obvious, theory helps to predict and explain other types of decisions made in an organization.
For example, while many people may not understand why a company would not mind the bad publicity that comes with closing factories in one country and moving to another country where labor is cheap and plentiful, the theory of company yes. predict such an occurrence. If the company's ultimate goal is to maximize its profit margins, then it is understandable to find the cheapest way to produce its products. Theory does not allow for benevolence, such as being a good corporate neighbor.
This theory, therefore, can also help explain why some laws are passed and others are not. For example, if a company can get away with spending less money polluting or ignoring some safety practices, it probably will, so the theory goes. However, if such actions carry a substantial penalty, such as fines or other similar actions, the organization is less likely to engage in such behavior. This is because these fines would work to minimize profits. The question, in these cases, is whether the fines would cost more than providing the additional equipment and processes needed to avoid punishment. In the end, the risk must outweigh the reward.
While company theory makes a lot of sense in certain cases and is a good start to explaining certain business phenomena, it doesn't explain everything. In some cases, different companies may have different profit-maximizing goals, and some, of course, may not have any profit targets at all. These nonprofit agencies may be operating under a different set of motivations, which are not addressed in theory.
For this and other reasons, some economists say that the theory of the firm needs a complete overhaul. The theory, published in the 19th century, does not fit neatly into the 21st century economy, as many stakeholders have a stake in the decision-making process. Also, some managers may not only be interested in profit, but also in building a good reputation for the company and having happy employees. In such cases, the theory would not always make much sense.