Tài liệu The Wealth of the People: The Wealth of the Business Enterprise pdf

The Business Enterprise Mission Principle of Wealth Production It is the mission of a business enterprise to produce and sell the products and services needed by its customers and to in

The Wealth of the People:

The Wealth of the Business Enterprise

An Inquiry into the Relationship between

Wealth, Freedom, and Life

By Fernando Urias

* * * * * SMASHWORDS EDITION

products referenced in this work, which have been used without permission The

publication/use of these trademarks is not authorized, associated with, or sponsored by the trademark owners

Smashwords Edition License Notes

Thank you for downloading this free e-book You are welcome to share it with your friends This book may be reproduced, copied and distributed for non-commercial

purposes, provided that it remains in its complete original form If you enjoyed this book, please return to smashwords.com to discover other works Thank you for your support

It is not the purpose of this book to reprint all the information that is otherwise available to authors and publishers but instead to complement, amplify, and supplement other texts You are urged to read all the available material and learn as much as possible about economics and human organizations and tailor the information to your individual needs

Every effort has been made to make this book as complete and as accurate as

possible However, there may be mistakes, both typographical and in content Therefore, this text should be used only as a general guide and not as the ultimate source on

economic or social organizations Furthermore, this manual contains information on economics and social sciences that is current only up to the publishing date

The purpose of this book is to educate and entertain The author and publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to have been caused, directly or indirectly, by the information contained in this book

The second book looked at the requirements for the wealth production process to continue when a neighbor appears in the island An agreement to respect life and property emerges as the first requirement This and other agreements that are necessary for the production of wealth can be grouped under the concept of social capital The work that you perform using your capital structure, including its social component, determines the income that you can make.

The third book looked at the wealth production possibilities in a free market It assumes that there is sufficient social capital in a society to allow the existence of a free market The conclusion of the book is that a free market has many advantages that

contribute to the wealth production processes making it a necessary component of the social capital required in a society to increase the wealth of its people

This is the fourth book of the series It is a about the wealth of the business

enterprise The book assumes that there is sufficient social capital in a society to allow for the existence of business enterprises The business enterprises become the suppliers of the market and the people working in them become the consumers The business

enterprises are shown to be an integral part of the survival and enrichment process of the people

This fourth book assumes that you have read the first three If you have not, please

go to smashwords.com to read them in order

A full list of the "Wealth of the People" titles can be found at the end of this book

* * * * *

The Mission of the Business Enterprise

If you were in an island alone producing the goods that you would need for your survival, you could think that you were running a small business enterprise of one worker with one customer You would be the worker producing products and you would your own customer Alone in an island, there would be no question in your mind that the mission of your one-person business enterprise would be to produce the goods that you would need for your survival This is the first objective of a business enterprise

If you would invest in a tool to improve one of your wealth production processes, you would be going after a second objective that goes beyond survival You would be looking for a way to produce at a faster rate to increase your wealth production

capabilities You would be looking for a way to get out of poverty This would be a second objective of your one-person business enterprise: to improve your wealth

production capability by investing in tools that will make you wealthy and get you out of poverty

When your neighbor appears in the island and you would hunt an extra turkey to exchange for a pound of vegetables, you would become a worker hunting a turkey and your neighbor would become the customer buying it The worker and the customer would

no longer be the same person The separation of the production and consumption actions into two different people would not change the mission of your one-person business enterprise You would still be producing to survive and investing to get out of poverty The trade with your neighbor makes a profit that contributes to both objectives and becomes part of your survival and enrichment activities In the trade you would be

passing the advantage of your investment to your neighbor contributing to the same two objectives for your neighbor The profit that you would make in the sales transaction is a necessary incentive for the transaction to occur and a requirement for the trade to happen Making a profit in the sales transaction can be stated as a requirement for your business enterprise to ensure that the trade transaction is contributing to both objectives The investments in your business enterprise have to yield sufficient savings to leave a profit in

the sales transaction after passing some of the savings to your neighbor The mission of the people to produce wealth and invest to get out of poverty is delegated from the people

to the business enterprises

The Business Enterprise Mission Principle of Wealth Production

It is the mission of a business enterprise to produce and sell the products and

services needed by its customers and to invest in better methods of production yielding savings sufficient to make a profit in the sales transaction after passing some of the savings to its customers becoming in this way the vehicle for the people's survival and enrichment.

The Profit Incentive to Expand the Business Enterprise

The existence of profit in a wealth production process is an incentive for a person or

a business enterprise to hire people to increase production In the turkey hunting business,

if it would be taking two hours to hunt a turkey using a spear giving a turkey a price slightly above two bundles and you are able to hunt one in half an hour using a bow and arrows, you would be motivated to invest in as many bows and arrows and to hire as many people as you could to run a hunting business enterprise You could make one and

a half bundles of profit in every turkey hunted and sold

The origin of the profits is the more efficient production process that yields savings compared to the existing processes and market prices The task to improve productivity

by investing in physical capital and to expand production until the market needs are filled

is delegated from the people to the business enterprises through the profit motive The owner of a business enterprise is motivated by the incentive of profits to invest in the best processes and expand production as fast as possible The profits of a business enterprise motivate the owner to exercise his entrepreneurial function to look for investments that will improve the wealth production process, to organize business enterprises that can operate at a profit, and to design and manufacture products that can make life easier for the people

The existence of profit in a wealth production process is an indication that the market is willing to pay a price for a product that is higher than the resources that it takes

to produce it The business enterprise has to find these products and their wealth

production processes to meet these market needs

Profit is the incentive to make an investment The motivation to improve a wealth production process is passed to the business enterprise through the profit possibilities The business enterprise is motivated to find more efficient ways of producing to increase the wealth of its owner and in the process the wealth of every buyer The objective to become rich by investing in better production method in a free country is passed from the people to the business enterprise

Through the profit motive, a business enterprise becomes a group of people

organized by its owner to produce and sell a product for a price that pays for all the expenses, including salaries and investments, and leaves a profit after the sales

transaction

The Business Enterprise Profit Principle of Wealth Production

The profits of the business are the motivation for the formation of business

enterprises The work and investment required for every citizen to survive and become wealthier is delegated from the people to the business enterprises which become

responsible to produce the goods needed by the people and to look for investments that will make the wealth production process more efficient resulting in the enrichment of its customers, employees, and owners.

The Supply Curve for the Business Enterprise

The supply curve shows that suppliers are willing to supply a higher quantity of product at high prices The reason is that higher prices bring higher profits At high prices, the demand for the product would be less than the supply and the price has to drop

to sell all the inventories At a high price with a high profit, a single business enterprise would be motivated to increase production and one enterprise is be sufficient to increase production to the point where the prices would start dropping causing the effect of

passing some of the savings to the buyers

If you were working at full capacity in your hunting business hunting and selling twenty turkeys per day and the market maintains the price of two bundles per turkey, you

could invest in another bow and arrow, hire a person for ten bundles per day, produce twenty more turkeys, sell them for forty bundles, and keep thirty bundles of profit If the price does not drop, you could hire ten people, produce two hundred turkeys per day, make three hundred bundles of profit, and dedicate yourself to supervise the ten people The price of the turkeys will eventually drop if you continue increasing production Eventually, you would expand production until the price drops to a point where most of the profits are passed to the buyers You would stop increasing production when the product is selling at a small percentage over its cost and increasing production and

lowering prices any further would mean selling at a loss The percentage of profit at which you would stop can be called a normal profit rate and it would be roughly equal to the profit opportunity of any other business

The Business Enterprise Passing Profits to Customers Principle of Wealth

Production

The business enterprise has the capability to increase production by hiring people and it will increase production until the price of the product drops to a point where the profit rate is a small percentage over the costs of the product and similar to the profit in other industries This will result in most of the savings from the business enterprise investments to be passed to its customers.

The Profit Effect on the Wage Rate

Lowering prices when there is a high price to clear the inventories is an income increase to the turkey buyers This income increase is equivalent to an increase in the real wage of the turkey buyers If a turkey buyer is working ten hours per day earning ten bundles and buys a turkey for two bundles, he would have a turkey and eight bundles after the purchase If the price of a turkey drops to one bundle, he will have nine bundles left after the turkey purchase or an equivalent income of eleven bundles His real income would have increased from ten bundles to the equivalent of eleven bundles This would

be a ten percent increase

The wage rate is also increased by business enterprises that are making high profits

by bidding up the wages in the market To increase production and increase the hiring of

employees, the business enterprise has to pay a higher wage to attract labor This is a real and a nominal increase in the wage rate This would cause the effect of passing some of the investment savings to the employees instead of passing them to the customers The wage rate of the turkey hunter will be higher than the bundle makers because of the higher profits of this industry will allow it to pay higher wages If the skill required for hunting is higher than for bundle making, then the business enterprises hiring hunters will

be able to hire the people that will have better skills since they are paying more The portion of profits passed to the employees as increased wages would be recorded as an increased expenses

The investments of the business enterprise increase the income of all the people in the supply chain but the income increase has different names as it goes through the processes from production to consumption The single person in an island working ten hours can produce eight bundles and one turkey increases his income to the equivalent of eleven and a half bundles by investing in a bow and arrows This is investment income but it is equivalent to an increase in the wage rate of this single person When a turkey is exchanged for a pound of vegetables, these are buyer savings, that are equivalent to an increased income to the buyer and there are sales profits that is an increased income to the seller When the business enterprise is formed, the income flows as salaries to

employees, savings to buyers, and profits to the owner and they all come from working in more efficient wealth production process

Higher wages result for positions that require higher human capital according to the supply and demand of each particular position The business enterprise will pay higher wages for managers to manage the increased number of people, engineers to design the products and the processes, and entrepreneurs to make the right decisions in the market

The Business Enterprise Passing Profit to Employees Principle of Wealth

Production

When the business experiences high profits, it will bid high in the market to attract employees of the skills needed to run the business enterprise raising the wage rate of the employees and passing in this way a portion of the profits in the form of increased

wages Positions that require higher human capital might require higher wages

according to the supply and demand of each position

The Division of Labor

Once a business enterprise has several employees, they can produce many times more efficiently by dividing the tasks among them using specialized tools for each

operation A classic example of this is mentioned by Adam Smith in his Wealth of

Nations where he describes how a group of people making pins can produce thousands of times more pins by dividing the labor amongst them and working with the appropriate tools in a way where they specialized in their tasks People arranged this way are able to produce thousands of times more pins that the same number of people would be able to produce individually The possibility of having a more efficient process using the

division of labor comes as a result of the existence of a market that demands high

quantities of product, the investment in the appropriate tools, and a business enterprise that can expand production pursuing higher profits

The Division of Labor Principle of Wealth Production

A market with mass production demands great quantities of product that allows business enterprises to organize wealth production processes in a very efficient way by having people specialize and using specialized tools in each operation.

Competition

The expansion of one business enterprise is sufficient to cause the need to lower prices to sell all the production If a business enterprise decides to keep high profits by not expanding production, it will lose the business to any competitor that will execute the expansion A wealth production process that has high profits attracts several business enterprises that would try to fill the supply making the price drop until the product

reaches a normal price The normal price would be the price where the business

enterprises would make a normal profit

When several suppliers increase production, sometimes they go after the same market share and overproduce The supply will exceed the demand at the current market price and the product will accumulate in unsold inventories Suppliers will lower prices

and cut production quantities until the inventories are sold The price at which suppliers will be willing to continue production will be at least the normal price level The

accumulated inventories might have to be sold below the normal price and sometimes at a loss

In a free market, competition brings the best products that can be produced Any business enterprise that is not able to offer a competitive product at a competitive price will lose its customers When this happens, there will be unemployment and a difficult time for many people This is an undesirable effect of competition but a necessary

condition for business enterprises and people to have the incentive of being the best wealth production processes survive and become wealthier Most important to keep in mind is that although unemployment is an undesirable effect, it is the result of the

voluntary choices of the customers If you do not have a product that people want to buy, there is no reason why they should be forced to do so Business enterprises that would become complacent and do not produce the best product possible will not receive the voluntary decision of the buyers to buy their product

In a market of free competition, business enterprises have to use the best practices

of the industry, even if they have to copy them, to stay in the business A business

enterprise has to be the innovator that everybody copies or copy the innovator to keep up with the market Any business enterprise that does not progress with the industry will eventually have to close its doors In a free market, a business enterprise has to invest in the best wealth production process available because the business enterprise that makes the right investments will be able to sell at a lower price while still making a profit Since the largest percentages of profit are available when the product or process is new, the business enterprises that are constantly innovating and investing correctly to make life easier for their customers are the one that will be the most profitable

If a business enterprise is experiencing losses but a competitor is not, it means that the competitor has found a better wealth production process The losing business

enterprise has to improve its cost structure and methods to be able to stay in the industry

If all the enterprises in the industry are experiencing losses, it means that the

demand has shifted to other products in other industry and the production in this industry must be adjusted downward The less efficient producers will be the ones experiencing

the biggest losses and would be the ones that would exit the market first.

Competition in a free market will result in business enterprises reducing their prices until their profits are a small percentage over their cost The business enterprise that does not reduce prices will have its market share reduced

The competitive strength of a company is not a specific idea or an invention but the constant execution of the best wealth production processes that will meet the customer needs The success of the company rests in the alignment between the work that needs to

be performed and the requirements of the customers

The existence of competition in a free market gives great power to the customers It gives great power to the people Any business enterprise that does not maintain its

performance will not be preferred by the buyers in the market and will lose market share.Competition protects the consumer in the purchasing decision How would the otherwise know that the price that you are paying for a product is a fair price? Producers will not share their internal costs A consumer can decide to purchase the best alternative

by evaluating several products, suppliers, their quality, and their prices

A business enterprise can get distracted in its wealth production process and neglect the market needs The mistake is usually not realized until an alert competitor takes away the business This happens sometimes when a business enterprise has a successful

business formula and the market changes Sometimes the business enterprise is not able

to abandon the once successful formula and it will lose customers for not following the new needs of the market

A business enterprise that aligns its mission and its actions to the natural mission of producing wealth for the people's survival and enrichment becomes a formidable

competitor This alignment should hold its employees from incurring in excessive costs and its owners from wanting excessive profits that would slow down the growth of the business enterprise A company well aligned should design, produce, and sell the

products that are wanted by the people at a reasonable price and capture a great portion of the market share

The Competition Principle of Wealth Production

Competition in the market requires that the business enterprises invest in the best

possible wealth production processes and sell the higher quantities of product resulting from these investments at prices that are slightly above the production costs having the effect of passing most of the savings to the buyers.

The Normal Profit Rate

If you could produce two turkeys in one hour with a bow and arrows and sell them for two bundles each, you would be making a profit of three bundles per hour This is a three hundred percent profit over the one bundle per hour labor rate At this profit rate, you would hire people to increase production As you increase the quantity supplied, you would find out that you have to lower prices to sell the higher production quantities At a price to one bundle per turkey, you would still be making a very high profit rate of one hundred percent You would keep expanding If the price drops to three quarters of a bundle, you would still make a high profit of fifty percent How low would the profit rate have to be to stop expanding? If you follow this logic, you should agree that the

expansion will continue until this business is no longer the best investment available This would be the price where the profit in the sale of turkeys is a normal profit rate and the resulting price can be called the normal price This price will be at the intersection of the demand and supply curves because it would be the price with a normal profit at which suppliers are willing to supply the quantity that is demanded

The investment will result in a larger number of people using the product because they are able to afford it at the new lower normal price

A business enterprise could try to continue operating at a high profit margin, but this situation can only be maintained for a short period of time and it is of very high risk for the enterprise because competitors will be able to take business away by being willing to work with a lower profit margin

The Normal Profit Rate Principle of Wealth Production

Business enterprises adjust production to the level of the quantity demanded at the price that produces a normal profit rate, allocating the people to the quantity of product work that is desired by the market in every sector of production In a free market, the business enterprises are motivated to expand production until the prices drop to a level

that is a small percentage over the costs This can be called a normal profit rate This will cause the effect that most of the savings from the investments of better wealth

production processes to be passed to the customers of the business enterprise.

The Limitation for Wealth Increase

If you were alone in an island with nothing but your hands, the first limitation to become wealthy would be the time that you have to work You would have to work to meet your basic needs and this will consume most of your time Once you would have achieved survival, you would have to make tools to make your life easier just like

Robinson Crusoe had to do Each tool would take a great deal of time The amount of time that you would be investing in your tools would be slowly increasing your capital structure For the business enterprise, you would think that the limitation to increase its wealth would be the resources available to invest but this is not so As long as a business enterprise is making profits, it can borrow money if the interest rate is below the profit and still make money The limitation for a business enterprise comes when the prices drop because the people do not want or cannot afford the production at high prices The limitation for investment becomes the quantity demanded by the people at a given price Production can be expanded only up to this point

The price and the quantity demanded is determined by the people that can fit the goods in their budget This in turn is determined by the wage rate This relationship closes a circle of survival and enrichment where the business enterprises supply the products required at a normal price and a normal profit rate after hiring all the people that they could, and paying the people with the money that they will use to buy the goods.The limitation for the investment resources comes when the profit rate comes down close to the interest rate of the market and it is no longer possible to borrow money to invest at rates that will yield a profit and the investment is no longer the best investment since the interest rate is so close and pays with less risk

The Business Enterprise Wealth Improvement Limitation principle of Wealth Production

In the same token that you time and your work would be the limitation for the

investment that you can make for your wealth improvement alone in the island The business enterprise will find a limitation on the quantity demanded of the product at the cost of the resources plus the normal profit rate that reflects the budget of society for that product.

Unemployment

When a business enterprise experiences losses because the prices of the product have dropped too low, the business enterprise will have to reduce production and let employees go If the business enterprise does not let go the employees, it would have to keep them in the payroll doing nothing and it would have to pay them with money from reserves This would result in wasted resources due to the people that would be paid but would have no productive output This adjustment to lower production levels will is cause unemployment

The Business Enterprise Supply Adjustment Unemployment Principle of Wealth Production

When a business enterprise expands pursuing high profits it will reach a point of no gain or loss where production is too high and the business enterprise will have to reduce production and let some employees go.

The Income Statement

The income statement is a report of the business enterprise showing the sales minus the costs in a period of time If the results are positive, the business had a profit If they are negative, the business had a loss

The first line of the income statement shows the total sales of the business

enterprise The total sales are a measure of the first mission of the business enterprise, which is to make a product or service and sell it

The last line shows the profit or loss, which is the third objective of the business enterprise, which is to make a profit by selling products for prices that are higher than their cost or making products for less than their price

The income statement does not show a measurement of the second objective This

is the reduction in prices that that the business enterprise achieves through time due to its investments This could only be measured by looking at the product offerings through time and showing that a company has been selling them at lower prices as time goes by These lower prices will only be evident if the graph is discounted for inflation.

Meeting all three objectives could be shown in a single graph with time in the horizontal axis and the objectives in the vertical axis A business enterprise that is

fulfilling its mission should show increasing sales, increasing profits, and a reduction of prices through time The reduction of prices will only show if the graph is adjusted for inflation

The expenses of a business enterprise have a degree of relationship to the volume of the business by which they can be classified as fixed or variable All expenses increase with volume but some of the expenses are more directly and closely proportional to the volume while others increase in big steps Raw material and direct labor are called

variable expenses for this reason Higher quantities of volume will require proportionally higher quantities of raw material and labor A building does not change for a volume range Its cost looks like a fixed expense until the capacity is filled up and more capacity has to be bought or rented

When you produce a product, you need to sell the product for more than its variable cost This way, each unit of the product will make a contribution to the fixed expenses You have to sell enough units of a product so that the profit made in all the units is more than sufficient to pay for the fixed expenses and the business can declare a net profit The profit made over the variable costs is called gross profit and the profit made over all costs

is called net profit

Most of the fixed expenses are the result of investments in the physical tools that are necessary for production The accounting term to recognize the usage of a fixed tool in a period of time is called depreciation The usage of the fixed costs is recognized in the income statement for the period that they are used up

The variable costs are incurred while working and are composed mainly of raw material and labor The physical capital structure of the business enterprise is what gives the ability to pay for the direct labor and salaries of everybody that works for the business enterprise as they work for the company

The Balance Sheet

To perform the wealth production processes, the business enterprise needs physical capital and other assets The assets and liabilities of the business enterprise are listed in its balance sheet The assets are the tools and other assets that the firm controls These assets can be owned and have been bought with borrowed money The liabilities are the part that the firm borrowed to buy tools

Some of the components of physical capital are the tools The business enterprise needs to have a capital structure that is as good as any competitor's to make its sales while making a profit The assets in the balance sheet represent the capacity of the

business enterprise to produce

Money is another one of the components of the assets Money is needed to buy the physical assets of the company when an investment is made Money is also needed to buy working capital This is the raw materials and inventories that are in the process of being converted or sold Money is equivalent to human time in storage To make an investment that will improve productivity, many hours had to be saved and invested in building a tool In a market, the tool can be made and sold for money A business that has a

successful business formula can purchase the tool with money and pay it with a portion

of the sales by putting the depreciation charge in every period The possibility to convert money into a tool makes money a factor of production It is also part of the capital

structure

When you were alone, before making any tools, your main assets, your hands, your mind, and your time were not written in a balance sheet The accounting in the balance sheet starts when you invest in the water pouch and the bow and arrows A water pouch costs twenty hours of work so when you finish one, you would have an asset with the cost

of twenty hours listed in the balance sheet The water pouch lasts for twenty days so every day you would consume one hour of the twenty hours stored until the pouch is totally consumed and you would have to build another The usage of the water pouch would be recorded in the income statement as a depreciation expense of one hour of depreciation per day and in the balance sheet as a water pouch with a decreased value as the days go by

The liabilities in the balance sheet represent what the business enterprise owes Some of the assets that are controlled by the business enterprise are purchased with borrowed money The liabilities in the balance sheet show the part of the business that is owed.

The Human Capital of the Business Enterprise

The balance sheet of the business enterprise lists the physical capital but it does not lists the human capital One reason for this is that the human capital of a company is not owned but it is hired Any employee working in a company can decide to stop working at

a given moment and take his human capital away

Running a modern business enterprise requires a great amount of human capital With the growth of the enterprise, specialization and division of labor, and the use of more complex tools, the business enterprise needs to have people with the ability and the knowledge to run the processes correctly and to communicate to each other This

knowledge is in the heads of the employees of the company and constitutes the human capital of the company

There is an ingredient of the human capital that is hard to quantify It is the drive and attention of its owner It is the entrepreneurship of a business enterprise This

entrepreneurship includes the ability to know where the market is going and to organize and direct the resources of the business enterprise to serve the market accordingly

The growing complexity of business enterprises require that they bid and pay for the element of intelligence and knowledge required to run its processes The requirement for the direction of the enterprises and the supply of this intelligence creates a market of very high salaries for the people that can show that they can execute these tasks well

The Owner

If you would be alone in an island, you would be the owner of your one-person business enterprise As the owner, you would have to decide which products to build This should be easy to do since you would be your own customer Your decision would result in committing your time to the production of the goods that would be of the highest value to you or the tools to produce these goods This would be your role of owner and