Friday, November 21, 2008

The Purpose of Business

What is the purpose of business?

That is a question with many answers. The answer often reveals more about an individual's political  point of view than the truth behind the human "propensity to truck, barter and trade."

Putting politics aside, it appears self-evident that trading is inherent in human nature. Trading is an evolved survival strategy that appears in all times and in all places, from ice age settlements to POW camps. Trading is the logical consequence of a world that is too complex for one person to know it all. Life is better in societies where individuals specialize in useful knowledge and trade among themselves, what economists call the division of labor.

However, to say that trade is important is not to say that all trade is good. There are two basic trading strategies. One strategy is based on cooperation and mutual satisfaction. The other strategy is based on deception.

In repeated trades over time, the strategy of deception produces lower and lower yields. Try it yourself, and you'll quickly discover the truth in the old adage, "Fool me once, shame on you. Fool me twice, shame on me." Deception eventually destroys trust. 

Over time, the most successful trading strategy is to cooperate with those who cooperate with you, and to punish or avoid those who deceive you, a strategy that is known as "tit for tat." This type of trading is a non-zero sum, that is a two-person game with two winners. It also has the advantage of a built in mechanism for dealing with cheaters. 

The social consequences of business are important, but they are derived from its primary purpose as a survival strategy. When individuals trade for mutual satisfaction, they spread the benefits of trading far beyond what they originally intended. This kind of trading  strengthens the network of trust in society, making it easier to trade again and again.

When individuals trade deceptively, the social consequences are exactly the opposite. Such individuals must be identified and punished quickly before they strip others of their property, destroy the network of trust, and begin dismantling the social order.

The purpose of business is an individual concern. The consequences of business are social concerns. 

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