Economic Theory Doesn’t Say That Small Business Owners Maximize Profits

to the best of my knowledge there is no economic theory that says small business owners maximize profits. Think about it from a workers’ perspective. People who work on commercial fishing operations earn a lot more money than most people with comparable levels of education. But nobody thinks it defies economic theory that America’s retail clerks don’t quit their jobs en masse to go fishing. Commercial fishing is dangerous and you have to live on a boat. All else being equal, people prefer to earn more money but they also prefer to do safe work and have the opportunity to socialize. What economic theory says is that workers maximize utility and therefore employers who want to get workers to do something that’s unusually dangerous or unusually unpleasant will have to pay a premium. A small business operator is in the same situation. She’s balancing income against other lifestyle factors, including the hours put in on the job, the pleasantness of the work, the sense of self-esteem that comes from having something to do, possibly a sentimental attachment to a particular location or certain employees. What economic theory says is that a profit maximizing small business person has to be someone with a very unusual utility function.

This can not be repeated enough. Small businesses rarely behave the way politicians describe.