capital x wealth
DESCRIPTION
Profit is the end for the capital and the reason of capitalism. However, to what extent such gain is real? To what extent this is not an inflated profit? To what extent this operation served to ensure or increase the capital's power of utility? From what moment the profit becomes wealth?TRANSCRIPT
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
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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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Capital x Wealth
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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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Capital x 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]