The Challenge of Business
MARCH 01, 1967 by TOM ROSE
From a speech delivered at the Future Unlimited Banquet, May 5, 1966, Junior Achievement, Fort Madison, Iowa. Mr. Rose is Director of Economic Education, Associated Industries of Missouri.
Congratulations On the successful liquidation of your Junior Achievement Companies.
That none of your companies ended up its fiscal year with a loss in a way disappoints me, because losing money can provide a very instructive lesson: Our American enterprise system isn’t only a profit system — it is a profit and loss system.
As a Junior Achiever, these are some of the things you might have learned about business in general:
1. A business corporation is not a cold, impersonal, legal entity. Rather, it is a living and dynamic association of people. And each person in it has his own mixture of strengths and weaknesses, hopes and fears. Each corporate member has a worthwhile contribution to make. Each is a sacred creature of God — who, as such, merits your respect and cooperation, even your brotherly love.
2. If there is one word that denotes the essence of our modern business world, it is the word "voluntarism." Or, if we want to use two words to signify this essence, we would use the words "voluntary cooperation."
A company — whether it is a small one-owner organization, a partnership, or a large international corporation — is, above all, a voluntary association of individuals. Each participant is free to terminate his association whenever he chooses. And the mastic which is used to cement each individual to this voluntary association is his hope to gain personal profit from it. For some, this profit or benefit is received in the form of wages; others receive it in the form of dividends. And to many, the benefit is received as both wages and dividends. Many employees in modern corporations play a dual role of worker and owner. In this respect, they are self-employed.
The point I want to make is this: the catalyst of all voluntary cooperation between individuals is the hope of mutually benefiting through such cooperation, i.e., mutual profit. This is what makes big companies and little companies beneficial to all.
3. Now, a word about problems. A problem is an opportunity in work clothes. Never complain about problems in the business world; because without problems to be solved, a business isn’t a business at all. It’s an extinct fossil; it is dead.
Business problems — and they come in all sizes, shapes, and disguises — are simply opportunities for personal growth.
In talking about problems, let’s recognize that no one solves all of them successfully. At times, everyone pulls a boner; and at such times, it’s wise to remember the difference between failure and stumbling. Failure is what happens when a person quits. It is final. Stumbling — i.e., falling down and picking yourself up to go on —is turning temporary failures into profitable experiences. This happens when you use the stumbling blocks you encounter as building blocks for a stairway to success. James Russell Lowell said, "Mishaps are like knives, that either serve us or cut us, as we grasp them by the blade or handle."
4. Let’s back away from this word "business" and take a look at it. What is business? Isn’t it simply the cooperative process of anticipating and responding to consumer needs in hope of making a profit? And wasn’t the efficiency with which your own J. A. Company met consumer needs measured by the profits it earned, or by the losses it sustained?
Your Company provided you with a two-part lesson about our free enterprise system that some people never seem to learn. And I hope you have learned it well.
A. First, that everyone benefits from a profitable business in a free market economy. And why is this? Because, in the free market, every aspect of business is voluntary. Business owners and business workers voluntarily cooperate in the process of selling goods and services to consumers. In doing this, they can’t help but benefit each other. Consumers, on the other hand, are free to buy or not to buy what producers offer for sale. Since no one voluntarily continues an unprofitable relationship, the continuing cooperation of consumers, workers, and owners is proof in itself that each group benefits from the role it plays.
B. Second, that losses in the free market are limited to risk takers. Losses are limited to those dynamic entrepreneurs who are always seeking new ways to maximize profits. They personally stand all losses because, in the free market, there is no way for them to impose their losses on the public. And this is good! It is one of the essential differences between free enterprise and socialism. In a socialist state, the public is forced to share business losses through payment of government subsidies and taxes.
Now, to touch upon some specific lessons from your own J. A. Company which you can apply later on to real life situations:
1. Investment: When you ventured out to sell shares of stock in your Company, you learned that investment in businesses doesn’t "just happen." The tools, facilities, and materials you used to produce your products didn’t materialize out of thin air. They had to be rented or purchased.
This took investment money —money that first had to be saved. From your personal efforts in raising capital, you should have learned this basic economic fact: Investment money to buy tools of production results from saving, i.e., from postponing current consumption. In other words, in order to create a surplus for investment purposes, each investor had to refrain from currently consuming the amount he invested. And the incentive for people to forego spending in order to accumulate risk capital is the hope for profit. Remember this lesson for later in life. Some day you may want to start a business of your own.
2. Profit. The legitimate purpose of all business enterprise is to earn a profit. If it were not for profit, your J. A. Company would not have been formed in the first place. The same holds true for the companies where your fathers are employed. Therefore, the realization of profit calls for no apologies. Rather, the absence of profit can’t long be tolerated in any business. Samuel Gompers, the founder of the American Federation of Labor, said:
The greatest crime against the workingman is a company without profits because a company without profits means workers without jobs.
Profit isn’t a cost borne and paid for by consumers. Profit isn’t added on to the market price of what we buy. It is residual. Profits are earned by companies which are successful in reducing and keeping production costs under market prices. Because profits are so hard to come by, some businessmen occasionally say something to the effect that "every company is entitled to a fair profit." If so, who is to determine what "fair" is? The owners of a company?… certainly not. The workers?… no, again. The government?… heaven forbid!
No, only consumers can fairly determine what rate of profit a company should earn. They do this through buying or refusing to buy the company’s products on the competitive market. Sometimes this rate of profit will be very high. Other times it will be very low — or even nonexistent. Whatever it is, if consumers determine profit by free choice, it is sure to be fair. When allowed to function freely, the free market is absolutely fair to all concerned.
3. Losses: We’ve been talking about profit. How about the negative aspect of profits, that is, losses?
The fear of financial loss is a good thing. It is a necessary part of our free market system. The fear of losing money, like the hopefor profit, acts as a powerful spur in stimulating businessmen to serve consumers more efficiently. In short, profits and losses serve as traffic signals to businessmen: The red signal of loss says "Stop! You’re not doing too well." The green signal says "You’re doing fine! Keep up the good work!" With the red light of loss, consumers signal a businessman to reduce investment and employment. With the green signal of profit, they invite him to increase investment and employment where he is meeting consumer needs most efficiently. Thus, losses as well as profits serve a useful purpose in directing production to benefit consumers.
4. Wages: Wages depend on productivity. And high productivity takes good tools, good technology, and willing cooperation with management.
An increase in real wages goes hand-in-hand with increasing productivity. A good wage structure needs a solid foundation of productive effort to support it.
5. Costs and Prices: Many people have the mistaken idea that there is a direct relationship between production costs and prices. They think that businessmen can compensate for increased production costs by boosting prices to consumers. People who hold this mistaken idea forget about the voluntary role of consumers in our free market system. They forget that consumers are free to find cheaper substitutes or, in many cases, to do without.
Production costs don’t determine market prices. Rather, it’s the other way around: market prices limit the total amount of costs a businessman can allow to go into the product he sells. The fun and challenge of producing something for use in the free market is to determine what consumers will pay for it, and then to manage your company so that production costs will be less than this figure. This is the challenge of the free market.
6. Business-Workers and Business-Owners: There are elements in our society that strive to create dissension between business-owners and business-workers. They divide society into little compartments called "labor" and "management." Then they try to foment "war" between the groups they themselves have created.
The well-being of employee and employer cannot be separated. They are two sides of the same coin. What is good for one is good for the other. The mutual interest of employees and employer far outweighs any artificial differences that might be created between them by others. This common interest is to serve consumers, a company’s only source of income—and to serve them at a profit. This calls for helpful cooperation instead of harmful strife.
Class warfare is a Marxist idea. If workers and owners serve consumers efficiently, a competitive labor market will assure fair distribution of the consumer dollar.
The reason a free market society will out-produce any other society is individual freedom; i.e., the right and freedom of each person to use his property and talents as he sees fit, with a minimum of interference from others (and especially from government). The reason why individual freedom works to the advantage of all is that the owners of land and capital can’t get much benefit from their wealth unless they use it to serve the needs of consumers.
And, in considering the challenge of business, may we remember that the difference between mediocrity and outstanding success is seldom very great. The difference is not found in brilliant flashes of genius. Rather, it lies in a small degree of extra performance and hard work put out over an extended period of time. This also applies to organizations. Thus, a company’s economic success depends on the number of individuals who understand and cooperatively apply this secret at all levels of the organization. I would close with this inscription, dated 1692, from the wall of Old St. Paul’s Church in Baltimore:
Go placidly amid the noise and the haste, and remember what peace there may be in silence. As far as possible, without surrender, be on good terms with all persons. Speak your truth quietly and clearly; and listen to others, even to the dull and the ignorant; they too have their story. Avoid loud and aggressive persons; they are vexatious to the spirit. If you compare yourself with others, you may become bitter or vain, for always there will be greater and lesser persons than yourself. Enjoy your achievements as well as your plans. Keep interested in your own career, however humble; it is a real possession in the changing fortunes of time. Exercise caution in your business affairs, for the world is full of trickery. But let this not blind you to what virtue there is; many persons strive for high ideals, and everywhere life is full of heroism. Be yourself. Especially do not feign affection. Neither be cynical about love; for in the face of all aridity and disenchantment, it is as perennial as the grass. Take kindly the counsel of the years, gracefully surrendering the things of youth. Nurture strength of spirit to shield you in sudden misfortune. But do not distress yourself with dark imaginings. Many fears are born of fatigue and loneliness. Beyond a wholesome discipline, be gentle with yourself. You are a child of the universe no less than the trees and the stars; you have a right to be here. And whether or not it is clear to you, no doubt the universe is unfolding as it should. Therefore be at peace with God, whatever you conceive Him to be. And whatever your labors and aspirations, in the noisy confusion of life, keep peace in your soul. With all its sham, drudgery and broken dreams, it is still a beautiful world. Be cheerful. Strive to be happy.