Business Economics Role

The vital role which business firms play in increasing social welfare is quite clear. It is due to the working of business firms that a high rate of economic growth has been achieved in the United States and other western countries.

Benefits of this economic growth have been widely shared. The high rate of economic growth has resulted in improving social well-being and removing poverty. To put in the words of Adam Smith, the father of economics, business firms have greatly increased the ‘wealth of nations’ (that is, the volume of output of goods and services) in the capitalist world.

The social benefits conferred by business firms on the communities are despite the fact that businesses work to maximise their profits or maximise the value of their firms. In their bid to maximise profits, business firms organise the work of production by engaging and combining the various productive resources and bringing about coordination between them. The suppliers of capital, labour, raw materials and other resources receive rewards from the firms for their contribution to the production of goods and services.

These business firms generate income and employment for labour, the owners of capital, land and other resources. This has greatly benefited them and contributed to their well-being. Besides, consumers too have gained from increasing quantity of goods and services produced by business firms for their consumption.

Apart from the gain to the resource owners and consumers, business firms contribute a good deal of revenue to the government. Taxes on profits (i.e. income of business firms), excise duties on their production, sales tax on the goods produced by them and other such taxes yield a lot of public revenue which are used by the Government to expand the services provided by it and to increase public investment for economic growth.

All the above mentioned contributions of business firms to economic growth and social well-being depend on the efficiency with which they use national resources and allocate them among products and services, A fundamental question that has been often raised is how business firms, which in their productive activities are guided by maximisation of private profits, work to increase social welfare.

The answer to this question was provided by Adam Smith, the author of now well-known classic ‘Wealth of Nations’. Advocating for a free-market system he clarifies the role of business in promoting social well-being despite the fact that it pursues the goal of profit maximisation.

Adam Smith argues that it is the profit-driven market system (also called price mechanism) that drives business firms to promise welfare though they work for private’s gain. It is worth quoting him. “Every individual endeveavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it.

He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectively than when the realty intends to promote it.

Business economist applies economics in decision­-making. He uses the tools of economic analysis in clarifying problems, in organizing and evaluating information and in comparing alternative courses of action. He is concerned with analytical tools that are useful, that have proven themselves in practice or that promise to improve decision-making in the future.

The economist is an expert model builder and this is the most important thing which the economic theorist can contribute to the work of management science. In management science it is important to be able to recognize the structure of a managed problem. The second way in which economic theory can help management science is to provide a set of analytical methods.

A managerial economist can become a far more helpful member of a management group by virtue of his studies of economic analysis, primarily because there he learns to become an effective model builder and because there he acquires a very rich body of tools and techniques which can help him to deal with the problems of the firm in a far more rigorous a far more proving an a far deeper manner.

The economic department is a relatively recent addition to corporate management in most developed countries of the world the business economist is an important member of the management group. This is possible so because he has developed a technique which can help the company to manage its business more efficiently.

Modern business is a very complex affair because organizations have become vast in size and they can be run only with a well coordinated management cadre specialized in different aspects of business. In the words of Prof. Galbraith it is management by technically.

A managerial economist is an important piece in this zig saw puzzle. In countries like ours businesses are small but the management is no more a one man show. It consists of a number of specialized personnel and the managerial economist has now become a familiar face.