Business: Meaning and Definitions

Business and Economic System:

Economic system means different forms of business organisation through which people make their living. According to Loucks, “ An economic system consists of which a given people, a nation or a group of nations has chosen or accepted as the means through which their resources are utilised for the satisfaction of human wants.”[1] In other words, it is a setup, which comprises various institutions and bodies, with the ultimate purpose of satisfaction the wants of the people living within a particular territory and in the way in which those people want. Economic system is constituted of all those individuals, households, farms, firms, factories, banks and government that act and interact to produce and consumer goods and services.  “An economic system is an evolving pattern of complex of human relations, which is concerned with the disposal of scarce resources for satisfying various private and public needs for goods and services”[2].

Basic Features of an Economic System:

The basic features of an economic system are as follows:

a.       They are dynamic i.e. changing in nature as per the need of the people. Thus, it can be said that economic systems are not static.

b.      Economic systems have many problems in common within a mechanism of great diversity.

c.       They are all evolving pattern of human relations. With the help of institutions, they perform at their optimum levels to minimise cost and maximise profit.

d.      An economic system is the sum total of devices which through their interactions give effect to economic choices i.e. which translate choice from an idea into action. The goal here is to satisfy individuals and public by production of goods and services required by them.

e.       The system is operated by what Adam Smith called “invisible Hand” the market forces of demand and supply.

f.       A modern economic system is enormously complex in nature. Millions of people cooperate in the productive process in different capacities- as producers, traders, workers, consumers, and financers and so on. Thousands of people are involved in production and distribution of single commodity. A commodity before it reaches its final consumer passes through a number of intermediary hands.

                 Loucks observed, economic systems arise and are modified from time to time by the                            following factors:

                    i.            The historic cultural reasons of its peoples, ideals, desires and attitudes;

                  ii.            Its natural resources including climate,

                iii.            Its philosophies which some or many of its people possess and advocate,

             iv.             The present and past theorizing of its people about how to achieve chosen ideals and goals, and

                  v.            Trials and errors of its people in shaping  the economy 

Solving the various problems in various types of Economic Systems:

There are some basic or central economic problems common to all kinds of economic systems. These are:

               i.   What commodities are to be produced?  And in what quantities?

             ii.   How shall goods be produced?

           iii.   For whom shall goods be produced?

           iv.   How much to consume and how much to save and invest for future generations.

Free Enterprise Economy; the economic principles works on the principle of “laissez faire” i.e. The least interference by t he government or any external force. The primary role of the government, if any, is to ensure free working of the economy by removing obstacles to free competition and price mechanism.

A free enterprise economy or a capitalist economy is characterised as follows:

·         Means of production are privately owned by the people who acquire and posses them;

·         Private gains are the main motivating and guiding force for carrying out economic activities;

·         Both consumers and firms enjoy the freedom of choice, consumers have freedom to consume what they want to and firms have the choice to produce what they want to;

·         There exists a high degree of competition in both commodity and factor markets; and

·         There is least interference by the government in the economic activities of the people; the government looks after only internal and external security and public utility services. Adam smith says, “That government is best which governs the least.”

Centrally Planned Economy: The government-controlled economies are also called Commend Economies, or Centrally Planned economies. Such economies are controlled, regulated and managed by the government agencies. The other characteristics of the Socialist economy are:

·         Means of production are owned by the society or by the state in the name of the community- private ownership of the factors and property is abolished;

·         Motive of the economic activities is welfare of the people,

·         Freedom of the choice of the consumers is curbed what society can afford for all, and

·         The role of market forces and competition is eliminated by law.

Mixed Capitalist Economy: A mixed capitalist economy is a mixture of capitalist and socialistic society biased towards capitalism. The economies of highly developed nations like U.S., U.K., France, Japan etc. fall in this category. These economies have both public and private sectors. Private sectors work on the principles of free enterprise system. The government plays significant role in preserving capitalist mode of production, ensuring a workable competition in factor and product markets, providing infrastructure for promotion of private sector economic activities.

Mixed Socialist Economy: The Socialist economies are in fact mixed economies biased towards socialism. The former communist countries like Russia, China were in this category. These economies have now carried out drastic economic reforms and have adopted liberalised economic system, private property and profit motive. The government of these countries control and regulate economies in accordance with the plan objectives.

Table. Capitalism, Socialism and Communism Compared

Characteristics	Capitalism	Socialism	Communism
Economic Markets	Freedom to compete with the right to invest	Limited competition with state owned industries	Absence of competition with State-owned markets and industries
Individual incentives	Profits and wages in relation to one’s ability and willingness to work	Profits recognised Wages fairly in relation to effort	Profits not allowed. workers urged to work for the glory of the state
Capital sources	Capital invested by owners who may also borrow on credit. Capital may be reinvested from profits. Depreciation is legal	Obtained from owners and from State-issued bonds for State-owned industries depreciation permitted	State provides all resources to start business owned by the state. No depreciation.
Labour	Workers are free to select an employer and occupation	Workers allowed to selected occupation. State planning encourages employment.	The state determines one’s employer and employment.
Management	Managers are selected on the basis of ability. Managers are free to take decisions	Managers in state owned industries are answerable to state. Non- monetary rewards emphasised	Key management must be party members. Absence of freedom to make decisions
Business	Individuals have the right to own a business and to contract with others.	State owns the basic industries. Other businesses may exist	State owns all productive capacity including communes
Risk Assumption	Losses assumed by owners. May transfer business risks to other business through insurance	People assume the risk of state –owned industries losses are taken from taxes.	Economic production owned by the state. Risks assumed by the state. Losses reduce standard of living.
Source : Vernon A Musselman and Eugene H Hughes, Introduction to Modern Business-Issues & Environment, p. 20)

Solving the Central problems

          All economies in the words face some central problems and they are common irrespective of the category they belong. The major economic problems may be micro –problems or they may be macro problems. Micro-economic problems are the basic problems, which are, related to the working f the constituents of the economic systems, and macro- economic problems relates to the growth, stability and full employment in the economy. The way in which these central problems are solved depends on the nature of the economy. The capitalist society solves these problems with the help of price mechanism whereas the socialist society solves these problems with the help of central planning. Though free enterprise economy is competent of bringing high economic growth it does not ensures the stable, sustained, and balanced growth. It becomes therefore inevitable for the government to introduce a free and fair competition and help the economy in achieving its goals- efficiency, stability, growth and social justice.

Now, the question arises as to what should be the role of government in the economy or what should be the form nature and extent of government intervention in the free functioning of the market forces. Nevertheless, the economic role of the government can be broadly categorised based on the three economic systems, which presently prevail in the world, viz., Capitalism, socialism and the mixed economy. In a capitalist system, the primary role of the government is (i) to preserve and promote market mechanism wherever it is possible to ensure a workable competition. (ii) To remove all unnecessary restrictions on the free operation of competitive market, and (iii) to provide a legal framework so that free competition can work effectively. Thus, the role of the government in a capitalist society is limited to (i) restoration and promotion of necessary conditions for efficient working of free market forces, ant (ii) to enter those areas of production and distribution in areas where private sector is not coming forward or the private sector is inefficient. 

In a socialist economic system, the role of government is more exhaustive and it controls almost all economic activities. In the socialist system, not only there is a complete disregard for free enterprise and market economy but also these systems are abolished by law. The private ownership of the factors of production is replaced by the government ownership. All economic activities are centrally planned, controlled and regulated by the government.  All decisions regarding production of resources, allocation, employment, pricing etc., are taken by the Central Planning Authority.

In a mixed economy, the private sector is allowed to function on the principles of free enterprise economy or market mechanism. The public sector on the other hand works based on socialist pattern. The public sector is created by reserving certain industries, trade, services, and activities for the government control and management. Another way of creating public sector is nationalisation of existing industries, which the government thinks necessary for promoting social welfare. Government also controls the private sector industries by enacting certain laws, rules and policies. If necessary, direct controls are also imposed.

The relationship between Business and its environment can be summarised as follows:

There is a symbolic relationship between business and its environment and among environmental factors. In other words, business is influenced by its environment and in turn, it influences the external forces. Similarly, political-legal environment influences the economic environment and vice versa. In the same way, the social environment influences all other factors.

These environmental forces are dynamic. They keep on changing with time, so do business.

The third influence is that a particular business firm by itself may not be in a position to change its environment.  However, along with other firms business is in a position to mould the environment in its favour.

Thus, the study of business environment helps in the development of broad strategies and long-term policies of the firm.  It helps to foresee the impact of socio-economic changes at the national and international levels on the firm’s stability. This also helps in development of action plans to deal with the technological advancements.

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[1] Loucks, W.W. Comparative Economic Systems, PP.5

[2] Gottlieb, M, Theory of an economic system, pp.8