The Nature of TVM
What is the purpose of economic activity?

At its most basis, the purpose of economic activity is to satisfy needs. Everything else derives from this.

COMMENTARY

Peter Burgess

What is the purpose of economic activity

At its most basis, the purpose of economic activity is to satisfy needs. Everything else derives from this. I do not remember the era when we lived in caves and the man of the cave was expected to go out and hunt the next meal. My mother always pointed out that if that had been the economy we were living in, our family would have gone hungry. My father was thoughtful, but when it came to the practicalities of hunting, not very good.

But in fact economic activity is all about getting basic needs satisfied ... water ... food ... shelter ... basic goods like clothing ... security.

This list may be expanded to include health ... especially for children, and the survival of the family into the next generation.

In modern 'development' for the progress of places that are labeled 'underdeveloped' the list of needs is further expanded to include education.

These are a reasonable set of basic needs for survival and not much more ... quality of life should include a number of other elements. Quality of life has other elements like friends, culture, religion or spirituality, entertainment, sport, leasure and so on. These things help to make people and society 'happy'.

And for a society to be efficient, there are other things ... like infrastructure, and the availability of critical utilities like electricity, water and sewage, communications and so forth.

And also for a society to be efficient, there should be organization ... and organizations.

And for a society to be just and fair, there should be law. It seems to be that human society has recognized the need for law from very early times ... certainly it seems it goes back as far as religion goes back. Society evolved with laws and integral part of the social compact. At some point the 'natural law' the evolved in society started to be supplemented with statutory law that got imposed on society. [This matter will be handled separately ... not here and now].

Because the purpose of economic activity it to satisfy all of the elements listed above, and because modern society is capably of the most incredible productivity, it should be ... and is ... possible for all these needs to be satisfied easily.

In reality, only a rather small proportion of the global population has a substantial part of these needs met. Maybe some 2 billion people ... about 35% or 40% of the world's population is obscenely poor and hungry. To make matters worse, a large number of people who have all their material needs satisfied are chronically unhappy.

The purpose of economic activity from a corporate viewpoint

In a capitalist market economy and from the corporate viewpoint, the purpose of economic activity is to make profit for the investor. In order to do this the resources of the organization ... the investors' resources ... will be allocated to those economic activities that are going to be mnost profitable. The business profit maximizing equation is very simple: increase revenues, reduce costs.

The problem with this equation is that it ignores the impact on society. Increased revenues for the business are increased costs to society. Redcuced costs for the business are reduced revenues for society.

A first impression is that this cannot make any sense ... what can be the point of economic activity if the result is essentially a zero sum situation. There is an answer, but it is not easy to see in conventional business money accounting or in the prevailing economic modelling and analysis