Just what is it that business is supposed to do in these times? How can – how should – the corporate world get on with making this a better place?
There’s an easy answer to this even if it’s not the one that gets the OBE upgraded:
British business needs to put its money where its mouth is or prepare for a social reckoning
We are potentially heading into a steep downturn that could be as bad as the Great Depression of the Thirties
Well, where should that mouth be would be a good start to resolving this problem. The answer being that business should be trying to make profit:
The coronavirus epidemic has quite rightly spurred a widespread and overdue appreciation of the heroic efforts of those who have stayed in their posts, at considerable personal risk, to serve the rest of us.
Whether it’s the amazing NHS staff, those operating our power plants and waterworks, or the all too easily overlooked rubbish collectors, shelf stackers and food delivery personnel.
But for those of us in the business community, the inevitable question has to be – what ought to be our contribution? I’m not just referring to philanthropic gestures at the peak of the crisis – important though they are. What must we do to make a difference to this country’s future economic health.
Again, try making a profit, that will make a difference to this country’s future economic health.
This is not, by the way, just Friedman’s point that the purpose of a company is to make the shareholders rich. It’s a more basic observation about the point of any type, form or unit of economic organisation. The aim is to make a profit.
For profit is the value added in the process. The prices, costs, of inputs are, by definition, their value in alternative uses. These are combined in our economic organisation – whether that’s the government, a workers’ co-op, a shareholder owned firm or a sole trader – to produce some output. The value of that output is, again by definition, what it is worth – if we wish to get more detailed, what portion of the perceived value that can be captured by the producer – to those it is offered to. What they’re willing to pay for it.
If it is true that the value of that output is greater than the value of those inputs then we can say that the organisation has added value. It is also true that this additional value is called profit.
So, what’s GDP? The value added in an economy. Our definition of profit changes a little here, as it’s that portion of the value added that flows to capital and entrepreneurs, not labour, but it’s still true that GDP is value added. The value added by an economic organisation is its profit.
So, to boost the UK economy business should be trying to make a profit.
This isn’t difficult, it’s been known for some centuries. At which point the advice to businessmen is probably please get on with it and stop ruminating.