In normal times, examining the changing nature and purpose of business firms would be a very challenging assignment, but we are not living in normal times. As well as all the usual topics globalisation, sustainability, ethics and stakeholders, there is a need to assess the impact of the recent global recession on the nature and purpose of business firms.
As business has moved from bartering rabbit skins for sacks of potatoes, to electronic trading of mortgage back securities, the purpose of business remains the same: to fulfil the needs and wants of individuals and this boils down to creating wealth. As John Roberts wrote in The Modern Firm, “Firms exist to coordinate and motivate people’s economic activity.” (2004, p. 74) This suggests that the purpose of business is to generate wealth.
Current discussion in the aftermath of the 2008 credit crunch and the government bailouts of modern firms, centers on the assignment question, too. A recent statement from an editor of the Economist puts things in perspective,
“Though it is possible for firms to increase their profits in the short run by doing things that hurt society, long term profit maximization for business as a whole requires that companies operate sustainably and give back to society...for too long capitalism’s supporters have been content to agree with its opponents that it is a system built solely on greed. The road straight ahead involves preserving the much that is good in capitalism while finding ways to make it work better.”
Matthew Bishop, U.S Business Editor, The Economist cited in Under the Buttonwood Tree blog, Edelman, R. October 2009.
While the purpose remains constant, to a certain extent, but with an ever changing business environment the way a company achieves its purpose is also ever changing and this defines the nature of the firm. The spirit in which a business firm approaches these changes determines the business’s character and nature. The values and morals that underpin the spirit and character of the business firm come from the individuals that make up the firm and these individuals make up society. Management theorist, Charles Handy, takes a different tact to that of Roberts, in his article, “What’s A Business For?” (2002). “The purpose of a business, in other words, is not to make a profit, full stop. It is to make a profit so that the business can do something more or better. That ‘something’ becomes the real justification for the business.” Harvard Business Review, Dec., 2002, p.51.
As businesses adapt to the changing business environment, caused by legislation and regulation, technology, crisis and innovation, the nature of these businesses change, but the purpose of business remains the same: to make money. Businesses will change what they do and how they do it, to achieve the same purpose, to make money.
In The Wealth of Nations, economist Adam Smith discusses the importance of the division of labor playing a role in commerce and an iindividual’s benefiting as a result of the group’s success was central to Smith’s theory. Smith introduced the role of the individual and the invisible hand in commerce in the following way,
“Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” The Wealth of Nations, Book IV Chapter II, 1776.
Another approach this paper considers important is the role of the modern firm recently discussed by American journalist Thomas Friedman in The World Is Flat. One of the biggest limits to making money, Friedman contends, was limited markets, but this...
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