Growth Maximisation Model of Marris

Robin Marris in his book The Economic Theory of ‘Managerial’ Capitalism (1964) presented
a dynamic balanced growth maximising model of the firm. He concentrates on the proposition
that modem big firms are managed by managers and the shareholders are the owners who
decide about the management of the firms.
The managers aim at the maximisation of the growth rate of the firm and the shareholders aim
at the maximisation of their dividends and share prices. To establish a link between growth rate
and the share prices of the firm, Marris develops a balanced growth maximization model. If a
growth rate higher than the maximum possible balanced growth rate is chosen, managers will
have to spend more on advertisement and on R & D in order to create more demand and new
products. They will, therefore, retain a higher proportion of total profits for the expansion of
the firm. Consequently, profits to be distributed to shareholders in the form of dividends will
be reduced and the share prices will fall. The threat of take-over of the firm will loom large
among the managers.
As the managers are concerned more about their job security and growth of the firm, they will
choose that growth rate which maximises the market value of shares, give satisfactory
dividends to shareholders, and avoid the take-over of the firm. On the other hand, the owners
(shareholders) also want balanced growth of the firm because it ensures fair return on their
capital. Thus, the goals of the managers may coincide with that of owners of the firm in terms
of maximizing balanced growth rate (G) of the firm (in the sense of achieving a growth rate
that balances interests of both shareholders and managers). The interests of both shareholders
and mangers are represented in terms of their utility functions. The utility function of the
manager consists of his emoluments, status, power, job security, etc. On the other hand, the
utility function of the owner includes profits, capital, output, market share, etc.
The G itself depends on two factors: First, the rate of growth of demand for the firm’s product,
GD; and second, the rate of growth of capital supply, GS. Thus a balanced growth rate (G )
implies: G= GD == GS.
The firm may grow in size through the creation of new products. The introduction of new
products depends upon the rate of diversification, advertising expenses, R&D expenditures,
etc. As new products are introduced, the firm expands (grows) and profits increase. With the
further increase in the growth rate due to greater diversification into new products, the growth-
profits relationship becomes negative.
The higher rate of diversification requires higher expenditures on advertising and R &D. As a
result, beyond a certain growth rate, the higher growth rate leads to a lower rate of profit. This
is illustrated in the following diagram where the GD curve first rises (that is, initially both
growth rate and profit increase rate rise together), thereafter it reaches the highest point M (that
is, at point M we have a maximum possible balanced growth rate which implies: G=GD=GS)
and then starts falling (that is, an inverse relationship between firm’s growth and growth of
profits begins beyond point M).
The other aspect of the growth-profits relationship is the rate of growth of capital supply. The
aim of the shareholders is to maximise the growth rate of capital stock. The main source of
finance for its growth is profits. Thus profits determine growth on the supply side.
A higher level of profits provides more funds directly for reinvestment. It also allows more
funds to be raised on the capital markets. It, therefore, allows a higher rate of growth to be
funded. This gives a direct and positive relationship between profits and growth. This is shown
in the above diagram as a straight line GS from the origin.
For the equilibrium of the firm, the growth-demand and growth-supply relationship must be
satisfied. This is achieved when the two curves GD and GS intersect at a point where the
growth-profits combination gives the optimum solution. Suppose in the figure the GS2 curve
intersects the GD curve at point M where profits are maximised.
This point does not provide an optimum solution because the managers desire more growth
than is consistent with long-run profit maximisation. The extent to which they can increase the
growth rate beyond point M depends upon their desire for job security. Their job security is
threatened if the shareholders feel that the share prices and dividends are falling and there is
the threat of take-over by other firms. This will affect the growth rate of capital supply (GS).
Thus it is the financial constraint which sets a limit to the growth of the firm on the supply side.

Criticisms:
Koutsoyiannis and Hawkins have criticised the Marris growth-maximisation model for its
over-simplified assumptions such as, the assumption that the price structure is given,
production costs are given, there is no oligopolistic interdependence, factor prices are constant,
firms grow through diversification, and finally, that all major variables such as profits, sales
and costs are assumed to increase at the same rate. But despite all these points of criticism the
model is very useful for suggesting an approach for reconciling the conflicting goals of
managers and shareholders in the modern-day firms.