Economics: The Purpose Of Business
    By Gerhard Adam | October 23rd 2009 04:57 PM | 8 comments | Print | E-mail | Track Comments
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    If the question were asked, what is the primary purpose of business, the most likely response would be "to make money".  However, this is an unsatisfactory answer since it clearly doesn't provide sufficient justification for businesses to exist.  There is no question that we all need and use money in our daily lives, but similarly this would be an unsatisfactory answer to justify why we work.

    If we considered economics from the barter perspective, the answer of "making money" would seem peculiar because we could only loosely translate it as "wanting stuff".  Clearly if we were bartering for goods and services there would be more specific items that we want and need, but also what is our personal motivation in such a scenario?

    There's probably a part of us that wants to feel useful and also to contribute to the general group.  This isn't altruistic behavior, but rather it is rewarding because we may gain recognition because of a particular skill or function that we can perform, so it is satisfying to engage in that activity.  With the use of money in place of barter, we are still in a similar situation whereby we would like to spend our time doing something we enjoy, while still earning a living.

    As society becomes larger, the older systems that may have worked within tribal societies are no longer adequate, so we have to find a place for everyone, including doing jobs that people may not enjoy.  In many cases this is due to lack of skills or education, but invariably most people find a way to derive some pleasure out of doing a job well, even if it's not one they particularly like.

    While there are certainly exceptions to this, the point is not to suggest some panacea of existence, but to reconcile that it is the "doing something" that counts rather than simply the money one can make1.  This is precisely why people will volunteer for many functions without any possibility of monetary reward.

    Some people will start businesses that extend their individual capabilities and expand the goods/services provided to a larger group of potential customers.  While they certainly want to be profitable, they are still largely motivated by a sense that they can provide something that someone else can't.

    Eventually such businesses can grow and become some of the large corporations that we see today.  

    So to revisit the original question, "what is the point of business?", the only legitimate answer can be to provide goods and/or services and make money as a result.  

    There may be those that disagree with me, but it is important to recognize that the failure to focus on goods and services invariably results in a failed business that is no longer capable of making money.  Unfortunately too many businesses have fallen into the view that stockholders are more important than customers, so we see companies exploiting the very customers they depend on for their existence.  It's as if they haven't realized that, even temporary success in this will inevitably lead to long-term failure.  

    Another consequence to large companies is the sense of entitlement whereby they assume that their historical successes are destined to be future successes.  As a result they often lack the vision of entrepreneurship and simply assume that they are part of the natural order of the world.  Without naming specific industries, the current economic climate is filled with examples of companies that are clearly thinking of their own survival, rather than considering the longer-term consequences of their role in society.  It would be difficult to expect companies to behave altruistically, therefore it is incumbent on the government and society to ensure that it doesn't prop up deficient industries while creating obstacles for their potential future replacements.

    What is clearly unsustainable is for companies to maintain the level of antagonism that exists between them and their customers.  While much of this is currently supported by the government and the laws, it is inevitable that consumers will find ways to avoid subjecting themselves to such abuse, with the result that many companies are setting up an evolutionary path they may be unable to adapt to.

    Perhaps one explanation can be extended from Oliver Williamson's work on corporations and the cost of market transactions.  In effect, the point is that often a business may be more efficient in absorbing outside goods/services to avoid the costs of having to negotiate transaction in the open market. As a result, a business may become more profitable by eliminating variables in the market that are amenable to direct control.  My suggestion is that many companies may have erroneously concluded that the customers can also be controlled through the power of media advertising and the lack of alternatives in the marketplace for many consumers.  Far too many companies are consistently behaving as if the notion of customer service is an imposition on their profitability.

    The underlying presumption of many companies is that people are too disorganized and that they can be exploited by leveraging their own interests against each other.  However, it doesn't require any level of organization for economic attitudes to change, but only that enough people reach a critical mass to where they simply won't or can't engage with such a company anymore.

    Interestingly enough, the common viewpoint is that the biggest bulk of economic and job growth occurs from small businesses, which raises the obvious question; why do we persist in protecting the survival of large corporations?   

    Most famously,Charles Wilson, then chairman of the now financially shaky General Motors (GM), testified at his 1953 Senate Armed Services Committee confirmation hearing to become US defense secretary that keeping his existing job would entail no conflict of interest since “what is good for the country is good for General Motors, and vice versa.”
    Plausible arguments imply the opposite. Schumpeter (1912) attributes economic growth to upstart innovative firms arising and ruining doddering behemoths, a process Schumpeter(1942) dubs creative destruction. A feedback ensues, for today’s upstarts not only become tomorrow’s behemoths, but also inspire a new generation of upstarts that eventually repeat the cycle.

    1 There are certainly people that are motivated solely by money, but they are not representative of the work force at large.  


    Steve Davis
    So to revisit the original question, "what is the point of business?", the only legitimate answer can be to provide goods and/or services and make money as a result.
    That's almost identical to my view Gerhard, that provision of a public service, a contribution to the community, is the only legitimate motivation. If money flows as a result, so much the better.
    Try digging a little deeper. Yes, businesses provide goods and services, but in the end, it's the most efficient way to provide incentives to raise people's standard of living.

    Gerhard Adam
    Your statement makes no sense, since there is no standard of living without the goods/services. 
    Mundus vult decipi
    I make this point when I give leadership training, under the heading "setting direction" - the first of the eight tasks of leadership. The point: Predict which of these three companies will be most successful:

    1. Provides innovative and valuable products and services.
    2. Takes care of its customers exceptionally well.
    3. Focuses on maximizing shareholder value.

    It's a trick question. The point is how easy it is to predict which will come in third.

    Steve Davis
    Bob, numbers one and two will maximise shareholder value.
    The problem arises when clever managers think there are other paths to number three.
    Yeah but.

    The question isn't about the result. The question is where executive management focuses its attention. We all know the trend, especially among the largest enterprises, is to state that maximizing shareholder value is the goal. We also know that companies that state this as their goal invest significant time and energy treating shareholder relations as a marketing activity.

    We've also seen plenty of companies that state this as a goal taking self-destructive steps so as to "impress the Street," such as layoffs that aren't warranted by operational issues and outsources that make no business sense.

    So while we're in agreement as to outcomes, I stand by my statement with respect to executive focus, which is what matters in this discussion.

    Steve Davis
    Unfortunately Bob, maximising shareholder value is a legal requirement. The means to that end is up to the management team. The results are as you describe, and can be partly attributed to the deplorable legal decision to give corporations rights that citizens do not enjoy, a subject that I think Gerhard has covered elsewhere.
    We aren't disagreeing, Steve. Maximizing shareholder value is legally required as an outcome. It's important to keep this distinct from it being what management focuses on.

    And please don't get me started on the corporations-as-legal-persons issue. Ugh.