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 * * * * * PUBLISHED BY: Fernando Urias on Smashwords Copyright © 2011 by Fernando Urias The author acknowledges the trademarked status and trademark owners of various 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. * * * * * Disclaimer This book is designed to provide information and entertainment. It is published with the understanding that the publisher and author are not engaged in rendering legal, economic, accounting, political, financial, or any other type of professional service. If legal or other expert assistance is required, the services of a competent professional should be sought. 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. * * * * * Introduction This is the fourth book of the "Wealth of the People" series, an inquiry about the requirements for the production of wealth in society. The first book looked at the economics of one person living alone in an island. The book concludes that to produce wealth you have to work using your tools. The time and intelligence invested in your tools determines the income that you can make with your work. Your tools are your physical capital and your skills are your human capital. Your physical and human capital constitutes your capital structure. 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 [...]... which the livelihood of all the employees and the satisfaction of the customers depends The success of the business enterprise depends on how well the owner understands the needs of the customers and how capable is the business enterprise to meet them The expense of a business enterprise includes the salaries of the employees that are hired The owner is ultimately responsible to steer the business enterprise. .. 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. .. their respective wealth The Wealth of the Market The third book explains the opportunities offered by a free market to produce wealth for the people that participate in it This book explains the wealth production results when there is a market that brings the competitive advantage of every individual to the market The Wealth of the Business Enterprise The fourth book is about the function of the business. .. belonging to a wealth production and prefer the immediate wealth of a dishonest act These people can only last until they are detected The Wealth of the Business Enterprise In society, business enterprises become the producers and the workers in these business enterprises are the consumers A society needs a social capital in its capital structure where the business enterprises are the producers of wealth in... of serving the customer, taking care of the assets of the company, executing the wealth production process correctly, and acting with the understanding that the business enterprise is the means of everybody's survival Another responsibility of the owner is the management of the business enterprise The owner has to make sure that resources are used correctly and not wasted The owner has the responsibility... use the money to buy the goods from other business enterprises The business enterprise, as an employer and as a seller of products, is part of your efforts to survive and to become a wealthier person The existence of profit is a necessary condition for a sales transaction to occur and hence for the business to continue but it is not the main mission of the business enterprise The mission of a business. .. good for the buyers because it will give the greatest amount of product to the greatest amount of customers The business enterprise, by managing the wealth production processes and investing to improve them is the main vehicle by which the people become wealthier The Freedom of the Business Enterprise The restriction of natural freedom required to abide to the rules required to work in a business enterprise, ... know the needs of the market and organize the resources to meet these needs in a profitable way One of the biggest challenges for an owner is to transmit the owner mentality to the management and employees of an enterprise The probability of success of a business enterprise improves if all the employees think and act as if they owned the business The employees should have the owner mentality of serving... management could be toward the survival of the business enterprise instead of the maximization of profit The management of a corporation might tend to run the business as if it had been there all the time without the owner mentality An owner or founder would usually be a big part of the formation of a business enterprise and will remember how it was when it did not exist One of the biggest challenges for... service Another value is the pursuit for excellence The standard in the market is determined by the best producer If a business does not pursue the best possible service with the technology of the time, it will lose the business Another value is respect for its employees This is a reflection of the importance of the people that form the business Many businesses will depend on the value of their employees . 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. to the profit opportunity of any other business. The Business Enterprise Passing Profits to Customers Principle of Wealth Production The business enterprise