Business
A business is an organization of labor, capital, knowledge, skills, and other resources used to earn a profit by creating value for others.
One of the most important features of a business is specialization.
No one knows everything he needs to know in order to make everything he needs. It is far more efficient when individuals develop particular, specialized talents, skills, knowledge, tools, and technologies. Businesses bring these specialized forms of labor together with capital and other resources for productive purposes.
That organization allows a business to produce many goods and services far more efficiently than an individual working alone.
Smartphones
Consider the smartphone that is probably in your pocket right now.
You could try to make a smartphone yourself, from scratch. But almost immediately, you would discover that you could not truly do it by yourself. You would need scientists, engineers, programmers, researchers, manufacturers, miners, refiners, and many others with specialized knowledge and skills.
You could travel around the world acquiring the raw materials required for the phone’s components. You could hire people to refine those materials, design and build the machinery required for manufacturing, assemble the phone, develop its software, and determine whether the finished device actually works.
Perhaps, after years of work and millions—or billions—of dollars, you would have a usable smartphone.
Or you can buy an extraordinarily sophisticated smartphone immediately, and for a tiny fraction of what it would cost you to make one yourself, from a business.
Why is that possible?
Because businesses organize specialized labor, capital, knowledge, skills, technology, and other resources in ways that make production far more efficient.
A business that makes something every day can usually make it far more efficiently than you can. The same principle applies to services. A mechanic who repairs automobiles every day can usually repair your car more efficiently. A roofer can replace your roof more efficiently. A farmer can grow food more efficiently.
That efficiency is one reason people are willing to pay businesses for products and services.
A customer makes a purchase when he values what the business offers more than the money he must give up to obtain it. A business earns a profit when customers are willing to pay more for its products or services than it costs the business to provide them.
Profit therefore depends upon creating something other people value. A business that repeatedly produces things people do not want—or produces them at costs greater than customers are willing to pay—will lose money and may eventually disappear.
It’s Difficult by Yourself
Imagine trying to provide for yourself everything you routinely obtain from businesses.
Build, repair, and paint your own house. Plant, cultivate, harvest, and prepare all your own food. Build your own automobile from raw materials. Weave your own cloth and make all your own clothes. Manufacture your own computer. Develop and produce your own medicines.
The exercise quickly becomes absurd. One person cannot efficiently master and perform many kinds of specialized work.
Businesses solve this problem by organizing people, knowledge, capital, skills, and other resources around particular kinds of productive work. Specialization encourages individuals to become extraordinarily good at doing particular things, while voluntary exchange allows others to benefit from their expertise.
Why Business Matters
Businesses make large-scale cooperation possible among people who possess different abilities, knowledge, resources, and interests. A society in which people are free to organize businesses, specialize, invest capital, exchange with others, and compete can achieve levels of productivity that isolated individuals trying to provide everything for themselves cannot approach.
