What Makes a Business Tick?

The first step toward understanding businesses is knowing what businesses do. All businesses have one thing in common. Businesses seek to create wealth. To create wealth a business buys resources, makes products, and sells the products. If the proceeds from the sale of products exceed the cost of the resources the business has created wealth.

A business starts with an idea about a way to produce wealth. The idea leads to a plan for setting up and operating the business.

The next need is investment capital to pay for starting the business and operating it until it sells enough products to pay its own way. The investors may be owners or lenders. The business also needs equipment, supplies, etc. If the business makes physical products, it will need materials. Add workers to manage and operate the business and it is ready to try to produce wealth.

All of the above will be pointless unless the business finds customers to buy its products. Management runs the business, but customers hold the business’s fate in their hands.

The investors who made the business possible are most committed to it. The other participants can walk away and pursue their interests elsewhere. The investors loose their investment unless the business is successful in creating wealth.

It is understandable that investors wouldn’t invest if they couldn't control the business. Any of the other participants could bankrupt the business providing benefits for themselves, and then walk away leaving the investors holding an empty bag.

The investors can’t afford to ride rough shod over any of the other interests. Unhappy suppliers, workers, and customers can simply move on leaving the business to flounder. For the investors to succeed they must balance all the interests in a way that everyone finds it beneficial to continue doing their part.

Interfering with the investor-owners’ balancing acts is all but certain to disrupt the business and decrease its productivity. Decreased productivity is detrimental to all the participants. With freedom in the marketplace there is no need to worry about the owners gaining excessive profits. Competition limits profits, constantly pulling them toward zero.

The only way a free market business can sustain its profits is to innovate. It must find better production methods, better products, or something else that the competition doesn’t have. Everyone benefits from successful innovations.

The profits earned by the business while the competition is catching up are the business’s reward for taking the risk of doing something new and different. This is true even if the profits are 1,000 percent. Profits will be proportional to the benefits that flow from the innovation.

I’m sure many businesses would like to exploit their customers, employees, and anyone else in reach. They can get away with it only when helped by government. Freedom in the marketplace protects everyone. Government and businesses endlessly seek to limit that freedom for their mutual benefit, and to the detriment of everyone else.

When government aids businesses in blocking competition it decreases productivity. If the blocked competition wasn’t more productive than the protected business, the blocking wouldn’t be needed. Government is the last refuge for businesses that can’t win in the marketplace.

In “An Inquiry Into the Nature and Causes of the Wealth of Nations,” Adam Smith concluded that the nations whose governments interfered least with the economy became the wealthiest. This is still true. Find a poor nation and you will find bad government.

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Copyright 2018

Albert D. McCallum