Business Environment

Introduction
 Business
• Business in economics is an economic activity involving basically production,
sale and exchange with a view to making profit.
• The business involves many activities like procurement of factors of
production, like labour, capital, raw materials etc, organizing these
procured factors of production, arranging mechanism to produce and
sell the production, making financial transactions at various stages.
• The activity of business is connected with market economy.
• Market economy involves production, sale and purchase for the
purpose of profit making.
 Free market economy and state – controlled
economy
• Karl Marx, famous economist and philosopher characterized different
historical stages of organizing production and business for the society.
• Four important stages, as per Marx, are Slavery, Feudalism, Capitalism and
Socialism.
• For some period, socialism prevailed in Soviet Russia but now world
business goes on the basis of capitalist principle.
• However, two leading economic power, USA and China follow different
brand of capitalism.
• USA – Fully market and corporate controlled capitalism and China – market
and state controlled capitalism.
Production
• Man is the only animal specie that masters the art of production by
utilizing nature.
• Prior to invention of the art of production, the human society was
based on hunting and fruit gathering. That society is called society of
hunters and fruit gatherers.
• In that society, there was no motivation for surplus accumulation.
Scarcity, however, was present that led to migration of people from
one place to another.
• Over the time, human being unearthed the mystery of agriculture,
that is, the art of food production.
• This reduced the scarcity of food but also brought to the fore the
motive for accumulation.
Surplus and greed
• Agriculture has brought a new type of society, where need for
protecting the crop arises, concept of property right comes in and
need for managing the surplus arises.
• Scarcity did not disappear, despite the ability to produce food,
because greed also arises.
• Society has enough to satisfy the need of mankind but not the greed
of the mankind. (Mahatma Gandhi)
• Therefore, the fear of loot and plunder arose in the society, theft
became a possibility.
• This needed an authority, called the king / government.
Laws and rules
• The king was given the responsibility of protecting the society from
loot and plunder by the outsiders, protecting the private property
rights against theft
• For this purpose, the king / government has to enact a host of
legislations, rules.
• Alon g with laws, several social norms also were developed that
helped to run a society with minimum discords and friction.
• These norms and behavioral pattern came up through narratives
(stories).
• Narratives help in coordination of human activities.
• Narratives, however, need not be true. What is important is whether
people believe them.
Market
• With development of production, it was realized that specialization in
production increases efficiency.
• If A specializes in farming and B specializes in weaving society can get
both corn and cloth more.
• But A can produce corn, only when there is scope for getting cloth in
exchange for corn.
• This possibility brings to the fore trade, which is the beginning of
business.
• But just exchange (barter) of corn and cloth makes the scope for trade
limited. It needs double coincidence of wants.
Invention of medium of exchange - money
• Double coincidence of wants can be avoided by use of a medium of
exchange.
• Thus money was evolved.
• With invention and use of money, the possibility of lending and
borrowing came up and accordingly institutions of lending. Borrowing
and credit came up.
• With business, need for contract came up and this needed
institutions to see the enforcement of contract.
 Evolution of production and business organization
• Earliest production system, was mostly agriculture. It was slavery– based
in many parts of the world.
• It evolved to bonded labour- based system, called feudalism. In feudalism,
labour was tied to land.
• With invention of new technology and new source of energy, industrial
revolution took place in West Europe. That has led to a new system, called
capitalism, where labour is hired and paid wages.
• Labour, in this system, is free in the sense that they can choose their
employer.
• Under capitalism, on the organizational side, biggesdt innovation is joint
stock company, which runs on investment by non – managing people with
the concept of limited liability.
Corporate dominance
• Large joint stock companies presently rule the world economy.
• But their business interests depend on the rules and regulations, set
by the government (political power).
• Therefore, in the drama of power acquisition, in act 1 hard
bargaining, maneuvering, manipulations take place in the political
arena.
• In act 2, the market functions as per the rulea and regulations, set in
act 1.
US and Chinese model
• USA holds that once the rulea and regulations are set, there should
be free play of invisible hand of market (Adam Smith). This ia called
laissez faire – no intervention by government.
• Thus, US model is a market capitalism.
• China feels that the business may be private – owned and run on the
basis if market principle. But there should be strict monitoring of the
business operation, so that the obnoxious inequitable distribution of
income and assets does not take place.
• In 2022, China had a crack - down on big business of China.
• Thus, Chinese model is a state capitalism.