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    Business Philosophy

    Business philosophy or philosophy of business involves a formal, academic approaches to answering question such as "what is the purpose of business?" and, similarly, "what is the role of business and society." Business philosophy paints a big picture from theories about the nature of business and market participants themselves, such as contract theory and rational choice theory. It is closely related to business ethics, which looks at what is right and wrong in the affairs of a business, which will be different depending on one's perspective of the role of business in society. 

    Capitalism: Capitalist markets use Adam's Smith's theories such as "the invisible hand" to underscore how profit seeking behavior on the part of individuals will lead to competition, productivity gains, better and more affordable products, and a resulting increase in quality of life for everyone. This notion, that free-markets would benefit society even without the benevolent intentions of market participants is still the main theory that underpins our free market economies today. 

    Free Market/Utilitarianism: seen as the traditional entrepreneurial viewpoint that encourages industry, it derives from the thinking of the likes of Thomas Hobbes and John Locke. Utilitarianism sees society as a mechanical system/body and all parts can be 'utilised', moved, influenced, accordingly to produce an efficient economic and social system.

    Rational Choice Theory: People want to maximize their utility, or the benefits that accrue to them. Often explained as people "want more not less than a good." Choices are based on rationality. For example, if you could by one apple for $1 or $2, you would buy the cheaper apple. Similarly, if two stocks have the same expected return, but one stock is more risky, you would prefer the less risky stock. People also adjust their choices when they receive new information. 

    Property Rights: John Locke said that people have inaliable natural rights such as the right to own property. Property rights make capitalism possible, since business's and individuals can own the means of production and collect economic rent from this ownership. 

    The Contract Theory: Basically, the business is seen as a community of participants organized around a common purpose. All participants with  a legitimate interest in the manner by which the business is conducted should have rights over the business's affairs. As a result, the business is seen as a sort of representative democracy that can correct itself when certain participants abuse or misuse their position at the detriment of others.

    Since the 1980s, many have criticized the theories of the Chicago School of Economics. These theories place a heavy emphasis on free market economics with little intervention, and have been blamed for the financial crisis and growing income inequality in the United States. This ideology puts at the heart of business the "economic man" and emphasis the primacy of the interests of shareholders. The manager may have different interests than the shareholders, however. As a result, because of the agency theory, we know that the business manager must have her interests aligned with the shareholders through her executive compensation plan. This idea has led to ballooning executive compensation over the last 30 years. As well, this practice has suppressed legitimate interests in the affairs of the business held by other stakeholders. 

    (In application, many "business philosophies" explain different ways of doing business that will allow for greater sales, lower employee turnover, lower costs or higher profitability. The philosophy of "Total Quality Management (TQM)" is a prominent example of a "way of doing business" being used as a "business philosophy." When we talk about business philosophy from an academic stand point, we are not talking about things like TQM.)


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