Read this term paper to learn about the economic and social objectives of business.
Term Paper on the Economic Objectives of Business:
The business activity is carried on only for profit. But a good businessman cannot afford to keep profit as his sole objective.
According to Urwick, “Earning of profits cannot be the objective of a business any more than eating is the objective of living.” A business unit is an economic entity in which various factors of production are used. Capital is one of the factors of production and the reward for investing capital is given in the form of profit. Therefore, a business should not be run to maximise the reward of one factor of production only though it is true that existence of profit is necessary to induce the people to invest money in business ventures.
A company which is not earning any profit will not be able to attract investors as nobody is willing to assume unnecessary risks. Therefore, profitability to some extent is a necessary condition for the survival of an enterprise.
Profit is not an objective but it is a requirement that has to be objectively determined in respect to the individual business, its strategy, its needs and its risks.
Relevance of Profit Motive:
Profit serves as the basis of three important economic and social functions which are explained as follows:
1. It measures the effectiveness of the efforts of an enterprise. It is an important test of success of the business. It is a symptom of good business health in normal times. The existence of reasonable profits shows that the business enterprise is effective and efficient and the society appreciates the services rendered by it.
2. Profit is the ‘risk premium’ covering the costs of staying in business- replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as profit, but there are only costs of staying in the business. The task of a business is to provide adequately for these costs of staying in business by earning an equated profit.
3. Profit ensures the supply of future capital for innovation and expansion either out of retained earnings or through providing sufficient inducement for new outside capital. Hence, profit is needed for the survival and growth of the enterprise.
Term Paper on the Social Objectives of Business:
Every individual living in the society has social obligations towards it, i.e., to observe certain norms of behaviour which have social acceptance and sanction. Viewed in this perspective, businessmen, who are merely custodians of factors of production belonging to the society, have also an obligation to pursue those policies, to make those decisions and to follow those lines of action which are desirable in terms of the objectives and values of the society.
Business managers are also a part of the society. So their decisions must be influenced by their obligations towards the society.
A careful study of the concept of social responsibility reveals that it has two different facets.
Firstly, businessmen recognise that since they are managing an economic unit in the society, they have a broad obligation to the society with regard to matters affecting the public welfare such as employment, availability of goods and inflation.
Secondly, social responsibility indicates a businessman’s obligation to nature and develop human values such as motivation, morale, cooperation and self- realisation in work. Accordingly, the term ‘social responsibility’ refers to both socio-economic and socio-human obligations of the business.
It may be argued by some people that business is wholly an economic unit and, therefore, its responsibilities are limited only to economic aspect of general public welfare and it must be judged by its economic performance. If this reasoning is accepted, the businessmen might be concerned with the economic costs of unemployment, but not with the loss of human dignity and social disorganisation that accompany it.
However, this is not a right approach for it is very difficult to separate economic aspects of life from its other values. They are intermixed with each other. Even if economic aspect of life could be wholly separated out, the society does not seem to want business confined only to economic aspect.
‘Social responsibilities of business’ is not a new concept. It affects their decisions and their actions. Modern businessmen are more concerned with it than their predecessors. They recognise that since they are managing an economic unit in the society, they have an obligation to the society with regard to their decisions and actions affecting social welfare.
Businessmen are human beings. They have their emotions and value judgements which are influenced by social environment. So it will not be right to say that like a machine they respond only to economic and technical data. Businessmen, in making decisions, typically apply three separate value systems, alongwith overriding ethical-moral considerations.
These are:
(i) Technical — Based upon physical facts and scientific logic.
(ii) Economic — Based upon market values determined by consumers.
(iii) Human — Based upon socio-psychological needs other than economic consumption needs.
Human value system exerts some influence upon the decisions of the businessmen. For instance, when a businessman decides to raise the prices of his products, he is normally taking an economic decision. But while taking such a decision, he is guided by certain factors (other than technical and economic) like effect on inflation and poor sections of the society, which proves that his decision is being influenced by human value system.
A manager who is more particular about his social responsibilities will always be influenced by socio-economic and socio-human obligations while making decisions and putting them into action.
Arguments for Assuming Social Obligations:
The important arguments offered in favour of business assuming social responsibilities are as follows:
1. Business is a creation of the society and so it should respond to the demands of the society:
Since business uses the resources which belong to the society, it is necessary that every business enterprise should fulfill its social obligations. Business managers are obligated to use the social resources for the common good of society.
2. The long-term self-interests of the business are best served when business assumes social responsibilities:
There is a growing realisation on the part of the enlightened business managers that it is in their self-interest to fulfill the demands and aspirations of the society. People who have good environment, education and opportunity make better employees, customers and neighbours for the business than those who are poor, ignorant or oppressed.
3. It is the moral and right thing to do:
It is agreed that businessmen today have considerable social power. This power is virtually granted to them by the society which must have a general relationship with social responsibilities. The social responsibilities of business managers must be proportionate to their social power. If the business managers do not assume social responsibilities, their social power will be taken away by the society through Government controls and regulations and other measures.
4. Public image of business is improved:
The business will retain the needed credibility with the public if it performs its social obligations. It will also avoid conflict with the society in its own interest. Good relations with the workers, consumers and suppliers will lead to success of business.
Arguments against Assuming Social Obligations:
The classical view has been against the business assuming social responsibilities. It has argued that business is an economic institution and as such its primary responsibility is to produce goods and services efficiently and to earn profits for its owners.
Milton Friedman said, “In a free enterprise and private property system, a manager is an employee of owners of the business and is directly responsible to them as their employee. Since stockholders want to make as much profit as possible, the manager’s sole objective should be to try to do this. If a manager spends stockholders’ money in the public interest, he is spending stockholders’ money without their approval and perhaps in ways stockholders would oppose. Similarly, if the cost of social action is passed on to consumers in the form of higher prices, the manager is spending their money also. This is taxation without representation.”
He further goes on to observe that there is one and only one social responsibility of business, i.e., to use its resources efficiently and engage in activities designed to increase profits without deception or fraud.
In addition to the observations made by Milton Friedman, some more arguments advanced opposing the idea of business assuming social responsibilities are as follow:
1. Conflicting Considerations:
A business manager will be guided by two considerations, namely, private market mechanism and social responsibilities, which are opposite to each other.
2. Arbitrary Power:
Business managers will get arbitrary power in the matter of allocation of resources in the welfare of the society. They should have no right to interfere with the external environment of business.
3. Disregard of Market Mechanism:
The doctrine of social responsibilities implies acceptance of socialist view that political mechanism rather than market mechanism is the appropriate way to allocate scarce resources to alternative uses.
4. Responsibility of Government:
Business should have no relationship with welfare schemes. It is the sole responsibility of the Government of the land to adopt schemes and measures for the upliftment of the weaker sections of the society.
Increasing Concern for Social Responsibilities:
Howard Brown has tried to answer the question in a very interesting way. He feels that answer to the question can be divided into three parts:
(i) Because they have been forced to be more concerned,
(ii) Because they have been persuaded to be more concerned, and
(iii) Because, owing largely to the separation of ownership and control, in the big companies conditions have been favourable to the development of this concern.
Businessmen have been persuaded to consider their social obligations. Enlightened businessmen have always appealed to the business community to act with constraint. Various associations of businessmen have also worked a lot to persuade their members to perform their social obligations voluntarily. Government also tend to persuade the businessmen by advising them on various occasions.
Persuasion has proved to be effective in many cases. This has avoided direct action by the Government. As a result of separation of ownership and control in large business houses, the managerial function is vested in the professional salaried managers. This has made conditions favourable to the recognition of social responsibilities.
The new generations of managers are well educated and fully acquainted with the expectations of the society They think in terms of the long- range welfare and interests of the enterprise which can be achieved if they are able to satisfy the customers, society, owners, workers and the Government.
Since they are professionals, their motivation and point of view tend to differ in important respects from those of owner-managers. They give the required weightage to social and human values in their decisions as they realise that the business undertaking is the creature of the society and it cannot afford to maximise profit at the cost of social welfare.
Do Social Obligations Conflict with Profit Objective?
Though social responsibilities have come to be recognised by most of the businessmen, it does not mean that they are to be taken as the mere guidelines for taking decisions. And if the social responsibilities are taken care of at the cost of economic objectives, the survival of the business will be in danger. The management should consider the earning of profit and performing of social obligations simultaneously.
A business enterprise which is earning profit can serve the society in a better way than an enterprise which is running into losses.
Profit objective cannot be eliminated as the very survival of the business will be prima facie an evidence of the fact that it is being run efficiently. A part of the profit can be retained every year and re-invested in productive channels. This will help in the growth of the enterprise.
At the same time, an enterprise is under an obligation not to exploit the customers. It should provide high quality goods and services at the lowest possible price and should decrease the cost of production by minimising wastes and delays, and by efficiently using the resources. Similarly, the profits should not be maximised by keeping the wages at the low level.
To sum up, earning of profits is necessary for any business enterprise. But it is also the responsibility of management to reconcile the interests of owners, workers, customers and society.