Alexander Kaltyrin, Vice President, Chief of Staff CEO OJSC URALSIB, Doctor of Economics

 Sergey Antonchikov, Advisor to CEO OJSC URALSIB, NFP “NISSE” expert

During the process of production, distribution, exchange and consumption of goods, people develop relationships which are called economic relations in an economic theory.[1]

Subjects of economic relations are economic agents, involved in the production, distribution, exchange and consumption of economic goods.[2]

Typically, every economic agent constantly and simultaneously enters a variety of economic relations. Stable economic relations take place when economic agents enter such relations periodically.[3] The category of economic interest is used to define incentives which designate activity of economic agents.

The incentives of the economic agents’ activity are cost rise or income gaining from the financial operations and other economic activities. In a course of economic activity people interact with each other in accordance with their interest. Their interests are represented by a complex system, which affects substantially all relationships in the society.[4]

Are economic relations a balanced system? Institutionalists believe that they are not balanced. Economy and, consequently, economic relations are not mechanical balanced system. It is primarily an evolving system which is controlled by cumulative processes.[5]

Evolution of the economic relations’ system is based on the assumption of a “reasonable man” who is an economic agent, guided solely by the profit.

According to the scholars of institutionalism an individual’s actions cannot be predicted due to the factors (economic and non-economic) influencing human behavior. In the context of decision making, the economic entity is definitely driven by an interest or desire to benefit, but unfortunately, the economic entity is not always able to take into account all factors affecting a particular economic situation. The economic situation is affected not only by prices. Along with the prices there are such factors as inflation, unemployment, economic crises, political instability etc., that should also be taken into account.[6]

Founder of the institutional theory Thorsten B. Veblen believed that in a market economy, economic agents are subject to the various activities under social and psychological pressure, that force them to make unwise decisions.[7]

From the viewpoint of the institutionalists the task of economics is not only to predict and understand the system of relationships, but as well to make recommendations and to substantiate recipes corresponding to changes in policy, behavior, social consciousness.[8]

Business administration is one of those recipes of institutionalism based on the rich arsenal of tools like the ethical theory, the game theory, the contract theory and the theory of the firm, which provides the understanding of the relationships system and gives specific recommendations on how to manage a business.

One of the most important tasks of business administration is building a business management process to achieve stability, growth and profitability of organization.

The main aim of business administration is to ensure the balanced and successful business operation in uncertainty.

Under ideal conditions, when all economic agents are rational, mechanism of company operation is based on the basic regulators of human interaction or norms within the company, as well as regulators of interaction (norms) with all the external parties. Along with the norms, the behavior of economic agents in the market is determined by the agreements or the set of norms that make up the “rules of the game”,[9] by which the interaction between economic agents is carried out.

However, according to H. Simon, people cannot be compared to the “perfect calculator”,[10] people’s behavior is irrational as determined by the goals, values, traditions, the individual’s current emotional state and etc. In addition to that, it is necessary to take into account the cognitive limitations of the individual and the degree of information completeness. Describing rationality as a norm of behavior, it is appropriate to use the term “reasonable action”.[11]

And what is it about the irrational, unreasonable actions of economic agents? Some of these unfounded actions may have a positive impact on business inadvertently, while the rest would either have no impact at all or have a negative impact on the stability and the efficiency of business.

Let’s call the irrational actions of economic agents, affecting the business, business destroyers.

Business destroyers are any actions of economic agents, leading to events that cause imbalance in the normal (ideal, rational) business functioning; for example, “black swans”, “business killers” that are adversely affecting stability, growth and profitability of the company.

In particular, the main aim of Business Administration is to identify and eliminate the mechanism of business imbalance as the cause of instability and threat to business growth and profitability, to define the economic nature, causes and contributing factors of business destroyers and to effectively combat them, in order to improve the financial sustainability of the business.

[1] http://ru.wikipedia.org/wiki/Экономические_отношения (Economic relations);

[2] http://ru.wikipedia.org/wiki/Экономический_агент (Economic agent)

[3] http://ru.wikipedia.org/wiki/Экономические_отношения (Economic relations);

[4] http://ru.wikipedia.org/wiki/Экономический_интерес (Economic interest)

[5] http://ru.wikipedia.org/wiki/ Институционализм (Institutionalism);

[6] http://ru.wikipedia.org/wiki/ Институционализм (Institutionalism);

[7] http://ru.wikipedia.org/wiki/ Thorstein Bunde Veblen;

[8] http://ru.wikipedia.org/wiki/ Институционализм (Institutionalism);

[9] Oleinik A.N. Institutional economy.- Moscow.: INFRA-M, 2002.- p. 48;

[10] Oleinik A.N. Institutional economy.- Moscow.: INFRA-M, 2002.- p. 58.