Read the following passages carefully and answer the questions at the end of each passage 

Asked what a business is, the typical businessman is likely to answer, “An organisation to make a profit.” The typical economist is likely to give the same answer. This answer is not only false, it is irrelevant. The prevailing economic theory of the mission of business enterprise and behaviour, the maximization of profit which is simply a complicated way of phrasing the old saw of buying cheap and selling dear — may adequately explain how Richard Sears operated. But it cannot explain how Sears, Roebuck or any other business enterprise operates, or how it should operate. The concept of profit maximization is, in fact, meaningless. The danger in the concept of profit maximization is that it makes profitability appear a myth.

Profit and profitability are, however, crucial for society even more than for the individual business. Yet profitability is not the purpose of, but a limiting factor on business enterprise and business activity. Profit is not the explanation, cause, or rationale of business behaviour and business decisions, but rather the test of their validity. If archangels instead of businessmen sat in directors’ chairs, they would still have to be concerned with profitability, despite their total lack of personal interest in making profits.

The root of the confusion is the mistaken belief that the motive of a person — the so called profit motive of the businessman is an explanation of his behaviour or his guide to right action. Whether there is such a thing as a profit motive at all is highly doubtful. The idea was invented by the classical economists to explain the economic reality that their theory of static equilibrium could not explain. There has never been any evidence for the existence of the profit motive, and we have long since found the true explanation of the phenomena of economic change and growth which the profit motive was first put forth to explain.

It is irrelevant for an understanding of business behaviour, profit, and profitability, whether there is a profit motive or not. That Jim Smith is in business to make a profit concerns only him and the Recording Angel. It does not tell us what Jim Smith does and how he performs. We do not learn anything about the work of a prospector hunting for uranium in the Nevada desert by being told that he is trying to make his fortune. We do not learn anything about the work of a heart specialist by being told that he is trying to make a livelihood, or even that he is trying to benefit humanity. The profit motive and its offspring maximisation of profits are just as irrelevant to the function of a business, the purpose of a business, and the job of managing a business.

In fact, the concept is worse than irrelevant: it does harm. It is a major cause of the misunderstanding of the nature of profit in our society and of the deep-seated hostility to profit, which are among the most dangerous diseases of an industrial society. It is largely responsible for the worst mistakes of public policy — in this country as well as in Western Europe — which are squarely based on the failure to understand the nature, function, and purpose of business enterprise. And it is in large part responsible for the prevailing belief that there is an inherent contradiction between profit and a company’s ability to make a social contribution. Actually, a company can make a social contribution only if it is highly profitable.

To know what a business is, we have to start with its purpose. Its purpose must lie outside of the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.

Markets are not created by God, nature, or economic forces but by business people. The want a business satisfies may have been felt by the customer before he or she was offered the means of satisfying it. Like food in a famine, it may have dominated the customer’s life and filled all his waking moments, but it remained a potential want until the action of business people converted it into effective demand. Only then is there a customer and a market. The want may have been unfelt by the potential customer; no one knew that he wanted a Xerox machine or a computer until these became available. There may have been no want at all until business action created it — by innovation, by credit, by advertising, or by salesmanship. In every case, it is business action that creates the customer.