What is a Business?

1

If you ask a regular person what a tree is, they’ll give you a different answer than a biologist will. 

Regular people can tell you that trees are big, tall plants with lots of leafy branches. This is accurate enough for everyday usage. But a biologist will tell you that “tree” is not actually a real taxonomic group—many genetically distant species of plants independently evolved into similar shapes. If you wanted to find a common ancestor between a pine tree and a maple, you’d have to go back millions of years and widen the family group to include thousands of species that are definitely not trees. To a biologist, trees are simply plants with cellular mechanisms that grow thick main stems capable of bearing significant weight and height, which enables them to successfully compete for sunlight.

Similarly, you can define “business” in a common or technical sense. Regular people can tell you that a business is an organization that makes money by selling things. But we can go much deeper than that. And it is useful to go deeper, because it helps us understand not just the nature of businesses, but of all economic behavior and wealth creation. To the extent we understand these things, we can have more control over them, and increase our odds of success. Definitions determine destiny. The more clearly we can articulate what a business is supposed to do, the more clearly we can see how it should function and accomplish our goals. I've often seen founders get distracted and expand the scope of their business until it dies. We don’t want that!

But, more importantly, learning how things work is just inherently interesting :)

2

If you want to understand the nature of something, it helps to go back to when it originally emerged to understand why. So here’s a passage from The Origin of Wealth that tells the story of the very first business:

“About 2.5 million years ago, Homo habilis began to use its relatively large brain to begin making crude stone tools. We can think of these stone tools as the first products, and we can imagine that at some point two of our hominid ancestors, probably from the same band of close relatives, sat in the dust of the savanna and traded tools. We will use this very approximate point of 2.5 million years ago as the market for the beginning of the human ‘economy’.”

Of course we can’t know for sure if any of our pre-human ancestors actually set up shop and formally specialized in making these stone tools to trade for food or other resources. But we do know that they had an incentive to trade. When one person focuses on making tools, and another person focuses on using those tools to hunt, they will collectively outperform a group of “jack of all trades master of none.” 

Once an economy learns a new trade, more trades become apparent. (I mean this both in the general sense of “trade” as a type of transaction, and the more specific sense of “trade” as a profession.) After the first toolmaker succeeds, someone else tries to make a different type of stone tool. Then a third person develops a knack for finding good rocks and bringing them back to camp for the two tool makers—the first raw materials supplier! And the complexity just keeps growing from there.

Technology is like a ratchet for complexity. It’s hard to go back to simpler times. But there’s good news: wealth increases proportionally with economic complexity.

Take, for example, cars. As they gained popularity there was demand for more smoothly paved roads, which led to the invention of asphalt. Fast food and motels became a thing, because people wanted to dine and sleep somewhere recognizable when they were on the road. Auto repair shops sprung up, highway sign printers, windshield wiper blade manufacturers, etc. You get the idea! All of these new things make the economy more complex, and made our lives better in many ways (though perhaps worse in some), while generating money for the business creators.

Now that we understand this fundamental dynamic, we can see what a business truly is: the atomic unit of economic complexity.

3

For most of pre-human history, our level of complexity in specialization and trade remained stable. Most tribes figured out some basic operating procedures, and had little reason to shake it up. But then homo sapiens emerged, with superior language and memory skills, and exponentially compounding complexity was unlocked.

Some scholars believe our language and memory skills enabled better social record keeping of debts, which created an incentive to gather a bunch of surplus food and give it to people in your tribe so everybody would owe you. With that incentive in place, now there was a reason to get efficient at gathering a lot of extra food, which created a reason to have better technology.