Capital x Wealth

Paulo PlanezPaulo PlanezPaulo PlanezPaulo Planez 2014201420142014

Capital x Wealth The profit as main agent for wealth growth and distribution

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Capital x Wealth

The profit as main agent for wealth growth and distribution

Paulo Planez Diniz 2014


Index

Why the wealth is so important? .................................................................................................. 6

The wealth generation .................................................................................................................. 8

The capital and the wealth generation ....................................................................................... 10

Understanding the profit elements............................................................................................. 11

The profit elements and the capital types .................................................................................. 15

The profit and wealth distribution .............................................................................................. 18


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Why the wealth is so important?

Defined as the abundance of valuable resources, the wealth and wealth

generation is one of most important economic topics and the reason is that the

ability of a nation generating wealth will directly impact the life quality of your

people. The wealth generation must follow the population growth under penalty

of submit people to poverty and, if this mismatch between people growth and

wealth growth extends for a long period, to the misery.

Passionate discussions about wealth, and the main reason for its

concentration, the profit happens because the wealth has the power to make

emerge inside the most virtuous men the worst feelings, and it happens just

because any Human Been forsaken on its own ambition will overbear his

neighbor.

The wealth concentration, assessed for some people as the result of

human greed and for some others as the result of human engagement and

endeavor is the main concerning point because the wealth concentration may

create a rich nation with wide poor population.

To the capitalism those, poverty and misery, are situations that will

directly impact the returns of the capital just because will dramatically reduce

the capital turnover due to society needs reduction, what will reduce the capital

growth and wealth generation power, what will directly reflect on a lowest

Capital’s power of utility. The Capital’s Power of utility is greatest as most

dynamic is its turnover due to widest society needs and plentiful risk reduction

possibilities.

This situation works against the capital interests because poverty and

misery will reduce the wealth increment required for its power of utility

maintenance, reducing the global level of wealth and impacting the capitalist.

It is known, especially by accounting sciences, that wealth does not

move by itself, but only by the action of an economic agent. And only the

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movement creates the potential to transform the patrimony, through their

functions, thereby nullifying the market needs and generating the optimum

patrimonial efficiency, increasing the wealth and, thereafter, distributing this

wealth to widest economic agents.

The capitalist will measure his gains based into the profit that those

movements generated and will assume that those gains represents the return

on capital, that is aligned with the idea about profit that describes it as the

amount which capitalist may expend without impact the capital. The point about

profit is that the definitions do not clarify what compose this kind of financial

return, bringing to this important economic agent a subjectivity, what will

generate a lot of problems, especially for its financial application and analysis

and will not help answering some questions as: What is the profit? How is it

composed? How does it increase the wealth? What part of it is dedicated to

cover losses due to invisible economic agents and what part of it will really

increase the wealth? How does it impact the wealth of other economic agents?

How good is it for society?

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The wealth generation

Wealth generation is the ability to increase the capital surpassing the

increase that would be possible considering the very low risk possibilities

available into the market which have a real potential to maintain the Capital’s

power of utility.

So, if Consider that profit is the way to increase the capital and the

wealth generation happens when surpass some unclear parameters, is possible

to suppose that exists two portions of the profit:

� The passive portion of the profit will be responsible to maintain the

Capital’s power of utility and will be represented by the economic agents

which capitalist have no possibilities to interfere, being affected by a wide

number of variables.

� The active portion of the profit will responsible to generate wealth and

increase the capital and will be represented by the active agents which

capitalist have the entire domain, being limited by the market standards

where capital will be invested and the capitalist own expectations.

Once the profit generated by a specific capital, for a specific period, did

not exceed the passive portion of the profit for that period, or even reach the

passive portion, this capital, beyond failing to generate wealth, also failed to

maintain its power of utility. In this period this capital just increase, or even lose,

the amount determined by the market for that period, what would not be enough

to guarantee the maintenance of its power of utility, what will generate the need

of an reinvestment into the main capital to recover its power of utility.

So, it would be correct to declare that wealth generation happens when

the capital’s power of utility is increased, considering this the main way to

escape of the profit reduction and bankruptcy, what will create a dependency

from capital related to society with respect to consumption. So, the best way to

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improve the capital’s power of utility is to add a part of the profit as production

capital, being this the reinvestment.

So, what would happen if a reduction into market needs happens? Would

not this event increase the capital’s power of utility?

The power of utility for a capital will define how useful is this amount of

capital to surpass the passive portion of profit for a specific segment when

invested into a specific market. Considering that the invested amount will define

the ability to answer the market needs with a lowest cost, is possible to say that

a most useful capital trend to biggest profit probability with lowest risk once do

not exceed the optimum patrimonial efficiency.

The reduction of market needs will just reduce the opportunities for the

capital and will scramble the optimum patrimonial efficiency parameters,

increasing the risks of an investment, what will requires the adjustments into the

active portion of the profit: The risk. So, is possible to consider that a reduction

into the market needs will push down the passive portion of profit and will push

up the active portion of the profit. This movement will generate the same overall

result but with a highest risk.

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The capital and the wealth generation

When an economic agent takes some actions to put the capital on

movement, will start the capital turnover and the expectation for wealth

generations. We can consider four the capitals that will suffer this kind of

actions: The financial, the land and property, the goods and the labor. All of

those four kinds of capital will be moved by their owners with the goal to reach

the highest profit as possible. The definition for those capitals is:

• The financial: Is the monetary amount accrued by a specific economic

agent.

• The land and property: Is any land or property with real condition to

produce or generate some kind of income.

• The goods: Is any kind of product with real condition do be negotiated.

• The labor: Is any ability owned by a particular person valued by the

market.

Once one capital starts its movement, it will define new parameters for

the market it is inserted, impacting whole market. The new parameters for

passive and active portion of the profit and for the patrimonial efficiency should

drive the actions for the market players that will need to adjust your actions to

keep the goals planned when it started its plan execution. The level of utility for

this new entering capital and the kind of capital will define the level of

adjustments required for each player on the market.

Each of those capitals will need specific analysis for each portion of the

profit but all of they will consider the same profit elements and the same profit

variables, what will affect the wealth generation for each one.

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Understanding the profit elements

Understand how the profit is composed is important to understand how

the economic variables will affect the wealth generation. The profit is composed

by two relevant parts: Active and Passive.

The passive portion of the profit will be affected by the variables which

the capitalist will not have any kind of actions over it. They are:

The cost of the opportunity

This is the most important variable to mark out the decision to invest on a

specific segment. Depending on the cost of opportunities available into the

market, the effort to surpass the passive portion of the profit will not

compensate for the capitalist that will trend to take advantage of the existing

opportunity than to invest into a new opportunity, assuming all the risks involved

on this decision. So, we can realize that as highest is the opportunity cost, most

difficult will be to generate wealth. So, is possible to say that business

environment that offers lowest cost of opportunity trend to generate wealth more

efficiently.

Let’s suppose a business environment that, due to any specific condition,

trend to remunerate their investor with 10% with satisfactory level of risk and

monetary stability. Any new investor that intend to entry into that business

environment will hold on his decision until the cost of this opportunity be

reduced or will look for opportunities that request higher power of utility for the

capital, what may restrict his entrance. This kind of environment trend to reduce

their wealth generation due to the reduction of the opportunities for all the

capitals available, once that trend to restrict the capital turnover to take

advantage of the exceptional financial condition that will offer lowest risk than

the operational condition.

Greater will be the opportunity cost as more dynamic, sophisticated and

balanced be the markets. This will generate higher profit needs for the operation

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in order to compensate this cost and cover the profit's variable, allowing this

way a real return for the capital and a real wealth growth.

So, the cost of opportunity is a mobile economic function and will vary as

per the abundance or restrictions for wealth available on this economy.

The Monetary adjustments

The monetary stability is very important to mark out the decision to invest

on a specific market. High variations may create an additional effort for the

capitalist to guarantee the expected return for its capital. Very high variation into

short periods will increase the uncertainty about the operations due to

patrimonial efficiency parameter variations, what may result in a lost into the

operations. Normally, monetary instability walks together with the raise for the

cost of opportunities, what will increase the needs of high results to cover the

passive portion of the profit.

Let’s suppose a business environment where the raw material is

suffering a variation of 2% by month. In this scenario the capitalist will need to

transfer this price variation to the product sales price, what may generate a lot

of problems, especially if the level of wealth generation is falling down, creating

difficulties for the customer to pay higher price.

The reinvestment percentage

Once the capital is always on movement looking for the best profit, some

kind of reinvestment may be required to maintain the same power of utility for

the capital into the market which the capital is invested. Those movements may

change the patrimonial efficiency parameters that will requires some kind of

adjustments into the operation of the capital and, even, create a new level for

the capital’s power of utility requirement for that operation, putting the capitalist

into the condition to reinvest or leave the segment.

Let´s suppose a specific local segment that requires an entry level of

technology and have a stable local supply chain also using an entry level

technology. On a specific moment, an specific capital develop this segment

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turning it to a global market, getting raw material from a supply chain that

adopts high level of technology and using high level of technology for

production and distribution, what impacts the local price and the quality. A

reinvestment will be required from other capitalists to keep running into this

market or will start dealing with high risks on the operations, what may generate

loses for the capital. In other condition, the same situation may increase the

price and quality, devaluating the products that do not reproduce the same level

of quality.

The capitalist must know the business environment and foresee the

needs of reinvestments to create a profit structure that will support new

reinvestments without involve new capital. The capitalist should always use the

profit to keep the Capital’s power of utility because this is less expensive than

using your own capital or take some capital into the market to do that.

Considering as a portion of the profit, this cost will be paid by the operations, it

means that will pass on those costs to the market. The need of recomposing of

capital's power of utility may grow until become unfeasible to pass on to the

market and the capitalist will need to recompose it by himself. What will avoid

this situation is the ability to run the business the most efficiently as possible

The active portion of the profit will be affected by the variables which the

capitalist will have any whole control over it. They are:

The risk of the operation

Every capital movement represents a risk for the capitalist but the

problem is not related to the risk itself but with the idea that the capitalist is not

aware about the risk, hence, is not ready for its impacts.

The capitalist will need to identify the risk of the operation and identify

how it will prepare himself for those risks, so, this is the reason the risk is an

active portion of the profit: Depends on the ability of capitalist to identify the risk

of the operations.

The risk is something presumed by the capitalist that might happens or

not. In case it did not happens, will be converted to the portion of the profit

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dedicated to wealth growth. So, this way is possible to presume that for biggest

risks biggest returns, considering that risks did not happen.

Estimate the risk is the most critical skill for the capitalist. If overestimate

the risk, may derail the business but if underestimate the risk, may compromise

the capital’s power of utility.

The return of the capital

The return of the capital is the portion of the profit defined by the

capitalist that will increase his wealth and will represent the real growth for the

wealth and the growth of the capital’s power of utility. Despite to be defined by

the capitalist, it will be limited by the market.

To maximize the wealth growth, the capitalist should always consider the

risk of the operation. High risk operations with high level of operation control

may transfer the risk rate integrally or partially to the return of capital, bypassing

the limits defined by the market for the return of capital, improving the wealth

gains.

The profit formula

So is possible to consider the profit as a function like this:

Profit = (The cost of the opportunity + The monetary adjustments + The reinvestment percentage) + (The risk of the operation + The return of capital)

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The profit elements and the capital types

Each one of the four capital types will have different characteristics but all

of them move themselves in search of profit. If the capital do not move will lose

his power of utility and the lose level will depends on the type of capital. The

more dynamic capitals will lose more than the more static capitals. Financial

and goods are the more dynamic capitals; labor and land and properties are the

more static capitals.

The static capital is represented by that one which will cover the basic

human needs: The need to own a land or property to live, produce and sustain

themselves, reaching life stability.

The dynamic capital is represented by that one which will cover the

secondary human needs: The ego needs that will move a person to the wealth,

reaching characteristics that will make him different from the other ones.

Despite of they have the same movement, they will be affected by

economic variables in different way.

The Cost of Opportunity

• For the financial capital, the cost of opportunity is represented by the

market opportunities that will allow the capitalist to cover the passive

portion of the profit with a reduced risk.

• For the land and properties capital, the cost of opportunity is

represented by the income possible to be generated on the property

without need to work on it and with a reduced risk to do not receive

the agreed amount for the property.

• For the goods capital, the cost of opportunity is represented by the

amount paid for a specific product which will allow the product

replacement.

• For the labor capital, the cost of opportunity is represented by the

minimum income for a specific skill.

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The cost of opportunity will vary depends on the market the capital is

inserted. For example, a skill may generate a lower cost of opportunity in a

small city but may generate a higher cost of opportunity in a big city; or a

specific financial amount may be able to generate high returns on an unstable

country due to interest rates than in a stable country.

The Reinvestment Percentage

• For the financial capital, the reinvestment is represented by the

percentage need to be reinvested to maintain the ability to take

advantage of the market opportunities.

• For the land and properties, the reinvestment is represented by the

amount need to maintain the property useful to generate any type of

income.

• For goods capital, the reinvestment is represented by the amount

need to maintain the product interesting for the market.

• For labor capital, the reinvestment is represented by the amount need

to maintain the skills useful for the marked

The amount required for reinvestment may vary depends on the segment

the capital is allocated. For example, if you consider a commodity, the amount

to keep it interesting to the market is lower than a high technology product; or

the amount need to maintain the interest for the physical labor will be different

from the intellectual labor.

The risk of the operation

• For the financial capital, the risk of the operation is represented by the

possibility to have into the end of the operation an amount lowest

than the initial capital added with the passive portion of the profit.

• For the land and properties capital, the risk of the operation is

represented by the possibility to have revenue broken or create a

situation where property becomes useless.

• For the goods capital, the risk of the operation is the possibility to do

not be able to replace the sold products.

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• For the labor capital, the risk of the operation is the possibility to

revenue broken or do not be able to keep the revenue in long term.

The risk of operation will determine the risks the capitalist wants to run to

increase the wealth. For example, a financial capital invest on a specific factory

on a country which politic systems is unstable and may get his investments

confiscated; or a people who want to change the job for a company that is

starting their operations with a new product which have no history about how

successfully that product could be.

The common variables

• The monetary adjustments refers to the price variation into the Market

the capital is inserted. Will represent the amount need to cover the

losses due to inflationary process.

• The return of capital refers to the percentage the capitalist wants to

make his wealth grow up.

Wherefore, the portion that will effectively increase the capital’s power of

utility is that one which capitalist consider the real capital reward, being the

other portions only to keep the power of utility. So, the wealth increased by

profit is that one who gave to capitalist a concrete power of utility growth, hence,

increasing the opportunities for new wealth growth.

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The profit and wealth distribution

Every time a capital moves it will impact optimum patrimonial efficiency

for entire segment and the significance for this change will depends on the

volume of this movement.

The first characteristic of this movement is the change for the cost of

opportunity. Every time a new capital starts moving in a specific segment, it will

create new parameters for efficiency, productivity and competitiveness what will

increase the opportunity to increase wealth for entire supply chain for the

segment.

The labor will absorb some benefits of this movement when change up

the minimum value paid for that segment due to new requirements for labor.

This new baseline for payments will not directly impact the wealth but will

increase the overall income for the region where capital being inserted,

increasing the average income, what will generate opportunities for other

segments. The main benefit to increase wealth in this case will happen when

new capital needs people to higher positions, what generate a real opportunity

to surpass the cost of opportunity, generating this way a real wealth.

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Paulo Planez Diniz was born in 1970,

graduated in Business Administration

and post graduated in Finance and

Controllership. Have more than 25 years

of experience in Information Systems

and 15 years deploying Financial

Systems.

Contact:Contact:Contact:Contact: [email protected]

Date post:	23-Jan-2015
Category:	Economy & Finance
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Capital x Wealth

Economy & Finance