What is the role of business in the economy?

Business drives the economy in any market-based system. In addition to generating wealth for individuals, it funds the public sector of the economy through taxation.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Business has a very important role to play in a capitalist economy. It is business activity that generates most of a nation's wealth, creates the lion's share of jobs, and provides most of the funds that go towards government spending. Simply put, without business, there would be no capitalist economy to speak of.

It's notable that even in command economies, such as that of the Soviet Union, a handful of producers were occasionally allowed to operate like businesses in capitalist economies, albeit with far greater government control and many more limitations. This was a recognition on the part of the government that the profit motive, which is the whole reason for businesses to exist, has an important role to play in the production and allocation of goods and services.

As businesses are the prime engine of wealth and economic growth in the capitalist system, governments routinely attempt to craft policies that are beneficial to them. Business-friendly policies such as tax breaks and subsidies have often been used to stimulate economic activity, especially when the economy is at a low. Such measures represent a realization on the part of government of just how important it is for the overall health of the economy that businesses are encouraged to grow and invest.

Last Updated by eNotes Editorial on December 8, 2020
An illustration of the letter 'A' in a speech bubbles

Since business is the economic activity of individuals, corporations, partnerships, and other non-state entities, one might reasonably say that in a market system, business not only drives the economy, but essentially is the economy.

No economy is completely market-driven or completely state-planned. These are abstractions found only in textbooks. However, the closer an economy comes to being a market system, the more business driven it is. Even the most hardline communist economies feature some element of business, though the state is often one of the parties in the transaction. The only way for a state to survive without any business at all would be for it to operate on an entirely self-sufficient basis, with neither exports nor imports, and no currency, either.

In a market economy, business finances the public sector of the economy through taxation. Therefore, even though fifty percent of the country's economic activity may take the form of government spending and the state might be the largest employer, all this is financed by taxation derived from business. A rich country, therefore, is, by definition, one in which business is doing well, even though some of the outward signs of this prosperity may be manifested in activities of government, such as an outstanding system of transport, healthcare, or state education.

Last Updated by eNotes Editorial on December 3, 2020
An illustration of the letter 'A' in a speech bubbles

Business employs people within an economy. Without jobs, people cannot purchase goods and services. People employed in businesses also create goods and services for others to purchase. Sometimes this can include selling directly to the consumer, such as a hamburger chain selling food to a patron. Other times, businesses can sell to other businesses, such as when wholesalers sell goods out of a warehouse to grocery stores. All of these businesses operate under the laws of supply and demand where businesses compete by a combination of offering superior products and lower prices.

Business also drives the economy through investment. People looking to build wealth over time or to generate a stream of income from dividends choose to invest in businesses. Businesses encourage investment by keeping their profit margins large and their cost of doing business low. By doing this or even demonstrating the potential to do these two things, businesses help drive the economy by encouraging investment.

These aspects of business are true of a market economy, an economy driven by people's free choice to produce and consume.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

In any market economy, business plays a huge role.  Business is the engine of an economy.  Business provides jobs that allow people to make money and goods and services that people can buy with the money they make.  Without business, the economy would be very inefficient and/or very primitive.

In any economy, people need jobs.  In any but the most primitive economies, people need to be able to buy goods and services.  Businesses provide for both of these needs.  Most businesses provide people with jobs.  If I open a restaurant, I will need to hire cooks, wait staff, dishwashers, and other people.  My business is providing jobs for many people.  Now imagine how many people get their jobs from large companies.  A large company can provide thousands of jobs. This is incredibly important to an economy.

These businesses also provide the things that people need to buy.  If you need a cell phone, you have to buy it from a business because you certainly cannot make your own. Most people cannot make their own clothes and must buy them from a business.  Most people do not cut their own hair and must pay a business for their haircuts.  Without businesses, people would not have goods and services that they could buy.

Economies can exist without businesses, but they are not nearly as strong.  Imagine an economy where every person works only for themselves.  No one starts a business and hires other people.  This economy would be very primitive as people would only buy and sell things they could make themselves.  Alternatively, imagine an economy where there are no businesses because the government is in charge of the economy.  The government will provide jobs and goods and services, but it will not do so efficiently.  The government might not provide the things that people want.  It might run its factories and other operations poorly because they could not go broke if they failed to satisfy their customers. This would be an inefficient economy.

Business, then, plays a central role in any market economy. It is the engine that allows an economy to run because it provides jobs as well as goods and services.

Approved by eNotes Editorial Team
Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial