Prelude and Purpose
I am putting together my beliefs into this manifesto to best find like-minded individuals. To find people who have similar beliefs, have considered them, are willing to consider them, or potentially have even expanded upon them. In finding such individuals I hope to accomplish the following:
- To further discuss and refine my beliefs.
- To share these beliefs, to influence others, and put them into practice.
- To develop personal and business relationships.
I wish to state a set of beliefs that I currently think are novel and useful. A novel set of beliefs, that even though I believe them to be true, I haven’t found individuals or bodies of work that completely encapsulate them. A useful set of beliefs, that put into practice, will best help myself and others. The scientist/entrepreneur in me tells me that this is the time to now make these beliefs subject to the marketplace of ideas, and is why I am reaching out.
For sake of conciseness, I am quite blunt with stating my beliefs. I do not try to take much time to justify them, since that can take volumes of work to do (and still not be enough). Of course, upon finding people interested in some of these beliefs, my hope is to further discuss in as much detail as is necessary. Perhaps this manifesto can serve as a basis to stem discussion from.
I separate the manifesto into three categories: Individual and Personal Philosophy, Social and Political Philosophy, and Business Philosophy. I want to appeal to a large range of people, who may only be interested in one of the three. Perhaps the religious, spiritual, and philosophical will be most interested in the Individual and Personal Philosophy; while the economists, politicians, and legal theorists may be most interested in the Social and Political Philosophy; while the businessmen, managers, and investors may be most interested in the Business Philosophy. However, there is one unifying principle that guides all three, that of productivity. In my self-reflection, all three categories of beliefs have been heavily influenced by the others.
The final section discusses the measurement and dynamics of wealth, to put into more rigorous perspective the goals of these philosophies.
By no means do I want to offend people who read this, especially when I am the one seeking discussion from others. However, I think offense is only natural and inevitable when discussing or questioning our core beliefs, depending on how committed we are, or have been to them. A challenge to beliefs is almost always a challenge to authority, and those individuals who use their beliefs to justify their authority will usually be apt to resist an evaluation of their beliefs, just because it’s our nature to maintain our authority, even in realization of our mistakes. In the face of this though, I hope to change my beliefs to the extent that those changes get me closer to the truth. I then rest my actions on that truth.
Personal and Individual Philosophy
Productivism: Living a life of productivity, not consumption
I believe that life is about what you produce, and not what you consume. How do you best measure what you produce? Capitalistically. Your income is the best measurement of your productivity, and your expenses are the best measurement of your consumption. The difference, profits, is the net value that an entity creates for society. The productivist believes in the greatest creation of profits, manifested as wealth. It is through the attainment of wealth can we as individuals best decide what to do with our lives and property within a society. The attainment of wealth guides what jobs and careers we pursue, what products we consume, and what assets we invest in. How do we choose to buy a Mercedes or a Toyota? Well, is our increase in personal productivity (income) by owning a Mercedes vs a Toyota greater than the cost between the two? If yes, then we buy the Mercedes, if not, we buy the Toyota (let’s be honest, 99.9% of the time it’s a Toyota).
Living a life of profit is a choice. People can live their lives for other purposes, most often a subset of their emotions and feelings. They may be productive so that they can purchase things that make them feel good. Productivity is the means, consumption is the ends. They can purchase the Mercedes, not because it makes them more productive, but because they will enjoy it and it will make them feel good.
I don’t deny that making money, producing wealth, and being productive makes you feel good; but I am claiming there are many other actions and lifestyles that appeal to our emotions that are not consistent with the growth of wealth (e.g. drugs, luxuries, sex, video games). The fact that being productive makes us feel good, happy, and fulfilled is a fortunate blessing (besides, our species probably would have never evolved as far as we have if we didn’t feel good being productive).
The accrual of wealth is the net productivity that an individual has created within society, while the loss of wealth is the net productivity an individual has taken from society. If one wishes to best help society, the accrual of wealth, under the rule of law, is the best validation.
The pursuit of knowledge conditioned on the pursuit of productivity
Out of all the knowledge we can choose to learn from, I believe in the pursuit of knowledge that improves our productivity. Knowledge of how to use property improves our personal value of said property, which includes our bodies as well as our material possessions, increasing our overall productivity. For example, the more we understand thermodynamics and mechanics, the better we can design an efficient and useful engine. The more we understand what people want and need, the better we can engineer a product to be more valuable to consumers. The more we understand how to use excel, the more productive we are in calculations and data analysis. The more we understand gastronomy, the better food we can prepare.
In a way, knowledge increases our liberty, because it increases our natural rights with regards to property (i.e. what we can do with our property). What good is a car, if you don’t know how to drive it?
Profit and productivity is the proof that we understand natural law and society’s needs.
Entrepreneurs are the scientists of the marketplace, where their experiments are business ideas (a specific arrangement of resources), and the proof of their experimental ideas is determined by the profitability.
Even if we may not be entrepreneurs of the marketplace, organizing capital and labor to best produce wealth, we are at least entrepreneurs of our bodies, seeking knowledge and truths to best figure out what is the best way to spend our time and labor to best produce wealth for ourselves and others.
The pursuit or maintenance of liberty conditioned on the pursuit of productivity
Just like how knowledge allows us to increase our productivity and actions of property, a productivist still believes in a limited government, because any infringements of individual liberty (what we can do with our property), infringes upon our individual productivity (what we can produce with our property). The laws are put in place to maintain the value of current property (security). If there was a state of anarchy, then an individual’s wealth and property would be much at risk and diminish significantly with time as others damage or steal that individual’s property without consequence or recovery.
End Game: Procreation, Education, Family, and Technology
Unfortunately, we are not immortal, so the productive person must plan for an end game (i.e. how they are to pass on their wealth). What good is spending a life of productivity, if it is to go to waste upon death? A natural extension of living a productive life is to produce individuals who will also go on living a productive life.
Once you have accepted this principle, how you transfer/transform your wealth then becomes more a discussion of strategy rather than moral principles. However, regardless of what strategy you choose, the end goal remains the same, “What can you do with your wealth such that future humanity on the whole becomes the most wealthy and productive?”
Just as the entrepreneur tries to figure out how to most profitably utilize resources they control, the productivist passing on wealth must figure out how to most profitably utilize the wealth they are passing on. In a way, this can be a significantly separate set of skills to the industrial entrepreneur. For example, the skills required to raise a business will no doubt be different (but perhaps in many ways similar) to raising a family.
Just as the entrepreneur must learn and become a master of their industry to produce a productive business, they must also learn and become a master of parenting, education, mentorship, and/or research to produce productive individuals. The physiology, strength, knowledge, skills, and ethics they have received from their parents, teachers, mentors, and role-models in becoming who they are, must now guide them in now becoming those very actors for the next generation.
The production of productive individuals is not free, there is a cost. The goal is that the wealth produced in other individuals will be greater than the wealth lost by the productivist. The productivist cannot expect to own the individuals they create or influence, just as they have not expected to be owned by their forefathers.
Of the potential strategies, a few are listed here: raising a family, sponsoring children’s education, funding research and technology and it’s publication, passing your wealth onto productive persons, passing your wealth onto productive institutions, sponsoring public goods (e.g. free library), or the reduction of public bads (e.g. cleaning up waste/pollution). Andrew Carnegie is a great resource to begin thinking about these strategies, but the optimal strategy will be dependent on the individual, society, culture, physiology, and technology, which is and always will be dynamic. Unfortunately, many of these strategies are not measurable (e.g. how much wealth does the discovery and publication of new technology create within society?), which should no doubt caution the investor, but regardless the aim is clear, the increase in wealth and productivity.
The inevitability of productive beliefs for a civilization is a natural law of social evolution
Individually, it is a choice to live a life of productivity vs consumption, however collectively, the beliefs consistent with productivity are the inevitable beliefs in a civilization, because those individuals who believe in a life of profit (consciously or unconsciously) will ultimately overwhelm (economically, demographically, and/or forcefully) all other individuals who believe anything else.
Even if individuals choose a non-productive set of beliefs, by whatever justification, their beliefs will perish with them.
Why certain beliefs or belief sets (e.g. religions such as Christianity) have survived so long, because their beliefs are consistent with productivity. For example, the ten commandments outline a set of ethics through which individuals can form a productive society, albeit conditionally. Namely, thou shalt believe and recognize God and his authority, shalt not murder, steal, covet, or bear false witness (fraud/lie). These codes of ethics establish, more or less efficiently, law (property rights) and the rule of law (belief in God and God’s servants and their retribution), allowing people to cooperate, while still maintaining security of their property and persons.
Social and Political Philosophy
Government as a natural law and constitutions are the technology to deal with them
Governments (institutions that establish law and the enforcement of law) are not a moral choice of individuals, but a natural inevitability of societies, a force of nature. It is irrelevant if an individual consents to a government for that government to affect them, just as it is irrelevant to consent to gravity for gravity to affect them.
Governments are inevitable outcomes due to the economies of scale of violence. A trained fist is many times more effective than an untrained fist, a gun is many times more effective than a trained fist, a tank is many times more effective than a gun, and a nuke is many times more effective than a tank. If there is a disagreement on property, the individual(s) who specialize in violence will naturally win and be able to claim said property, rather than the individual who specializes in civility or productivity, i.e. they produced the property or have rightful claim to property. Because of the economies of scale of violence, an individual who specializes in productivity cannot defend themselves from individual(s) who specialize in violence. These violent individuals naturally become the institutions that establish law, and the enforcement of law, regardless, more or less, of the will of the people who are affected by them. When governments collide, those who are better masters of violence, will win, assimilating their authority.
There is a natural tyranny that forms where those who specialize in violence take wealth from those who specialize in productivity. Without constitutions, there is no accountability or control on the tyranny.
Constitutions are technologies invented by productive persons, to take back control of the law and the enforcement of law. These constitutions hold to account the government officials to best serve the people, rather than themselves, establishing laws in accordance to the people’s will and best preventing tyranny over the people. There’s always going to be some tyranny, such as laws that some disagree with, as well as taxes. The purpose of constitutions is to minimize tyranny and maximize liberty and productivity.
People come together under these constitutions as social contracts that protect their property and persons. At any point can an individual withdraw from this contract, defying the laws established by it, and revert back to a state of nature in defending their own property and person. But given the nature of violence and government, reverting back to a state of nature is rarely a productive choice, since such an individual must then conduct war to settle disagreements.
The fallacy of egalitarianism, a prelude to the framing and purpose of a constitution
Egalitarianism is not universally true. Unfortunately, the founders are wrong in stating that all men are created equal. I think they were somewhat religiously motivated in that sentiment, and also that it was good rhetoric for people to ascribe to in order to push for a revolution and subsequent support of a new government.
Clearly, not all men are created equal. We all have diverse levels and types of intelligence, athletic ability, health, parental influence, education, culture, ambitions, etc.
Also, are we just ascribing to men? What of women? What of animals? What of property? What of children? What of corporations? What of future generations? What of objects? Who or what gets to be equal? Egalitarianism inherently says nothing on the scope of its equality. As such, egalitarianism has always been conditioned with another moral principle for it to make any sense. For the most part, historically, it has been culture (and not some universal truth) that has influenced the laws that define who or what is entitled to equality, as long as those laws didn’t conflict with the productivity of the society to the point of deterioration and collapse.
Government outcomes are egalitarian because suffrage is egalitarian
I believe many of the inefficiencies of government and the growth of entitlements is due to the equal distribution of voting power among citizens (universal suffrage). It’s not surprising that people will vote for free stuff (welfare), if they are not the one’s paying the bills (taxes).
Universal suffrage is premised on egalitarianism, which is a fallacy. The fallacy of our forefathers in being charitable with their surplus wealth, was that they forfeited their suffrage along with it.
The distribution of suffrage is the critical connection to what a government achieves.
Libertarians and conservatives can be biased towards having the belief that much of government action (i.e. laws and the enforcement of law) are inherently bad, because for the longest time, we have had an egalitarian political system, which has led to ineffective government action. Some libertarians become anarchists based on this belief. However, government action is not inherently bad, it is only accomplishing action compliant to the framing of the constitution that governs it. Government action compliant with egalitarianism is obviously not always going to be compatible with capitalism, libertarianism, or property rights.
Productivist Purpose of Government: Recognizing and Protecting the Sovereignty of Productive Beings
Government recognizes and protects the sovereignty and property rights of any individual or entity that brings in or produces wealth.
Productive individuals, who wish to cooperate and live in harmony, come together under a social contract defined by a constitution, which authorizes a government to establish property rights and the rule of law. Government eliminates war among these individuals, since disputes are now settled via the mechanics of government (law and courts) rather than through violence between disputers. Rule of law secures the productivity of these individuals through protection of their property.
Government establishes an ultimate monopoly on force which is used to enforce the law, prevent individuals from becoming tyrants/criminals, and protect from foreign aggression. The mechanics of the constitution prevents the government itself from becoming a tyranny.
Property rights are extended to maintain the political authority over taxes that are taken from the citizen in order to fund the operations of government, such that suffrage (political authority) is in proportion to the taxes paid.
Productivity is the best measurement/definition of utility
In doing economic analysis, the best way to understand if an action (e.g. a law), will be beneficial to an individual/company/sovereign, is to calculate the expected increase in productivity/wealth of such an action for that person.
The difficulty in trying to measure a person’s preferences (and correspondingly utility) is in trying to understand that person’s feelings and instinctual desires. This is very subjective. However, I believe we as humans have evolved most, if not all, of our feelings and instincts because they have made us more productive through our evolutionary history. So, rather than attempt to try to increase emotional utility, it is more efficient to simply measure increases in productivity instead.
Some Improvements to Constitutional Framing
The proper quantification of suffrage is taxation
It is the moral principle of “whoever pays the bills, makes the rules”. No taxation without representation.
Suffrage should be distributed to an entity proportionally to how much that entity pays in taxes.
This is simply an extension of property rights. For common property, we grant authority over a good to the purchaser of that good. Sponsorship of government through taxation should grant respective authority to the taxpayer over it, as the consumer to the good.
Property rights derive from productivism in that those who produce wealth, own the wealth that they produce. Those who are productive in society will control more resources, and those who are consumptive control less resources.
It is not that all men are created equal, but instead, all wealth is created equal. Governments, companies, or individuals don’t discriminate the value of money or wealth based on where it came from. A thousand dollars of taxes from a wealthy individual is equivalent to a thousand dollars of taxes from a poor individual. As such, a hundred thousand dollars of taxes from a wealthy individual is a hundred times more valuable than a thousand dollars of taxes from a poor individual, and so on.
In order to achieve productivity rather than egalitarianism (i.e. all people are equal), capital and wealth must be represented equally rather than individuals.
Constitutional Capitalism is the structuring of a constitution based on the equality of capital, rather than the equality of humans.
When suffrage is derived from taxation, there will be a natural tendency towards fair taxation across the populace. If an individual or group is taxed dis-proportionally, they will have a disproportional amount of suffrage, inclining them to reduce their own taxes and raise taxes on others. When other groups become taxed more so, they will then receive more suffrage, and counter balance any more increases in taxation, and so a natural equilibrium of fair taxation will be achieved.
Representatives should proportionally represent the votes they receive
A citizen should be able to transfer their votes to anyone they believe best represents them, regardless of geographical location (but within jurisdiction). After an election, representatives then represent all the votes they received during the election. For example, Representative Smith receives 10 million votes, and Representative Gerald receives 1 million votes, Smith has 10 times more voting power regarding legislative action compared to Gerald.
This should hopefully abolish the party system and reduce the problem of democratic factions. Since your votes aren’t lost if your representative is unpopular, you can then vote for the person who best represents what you believe, rather than voting for the least detestable person of the two factions.
In the modern age, when you can understand and critique a person’s opinions and policies regardless of where they live, there really should be no geographical limitation to who you can vote for, as long as who you vote for is within jurisdiction of the government they are representing you for.
Productivity is the test of sovereignty. Property rights are earned, not self-evident.
An entity is entitled to sovereignty (has authority to do what it wants with its own body and property) if it is productive (produces more than it consumes). An entity that consumes more than it produces is entitled to ownership by the sovereign entity sponsoring their life (the one paying for their surplus cost). The greatest example of this being children.
The government recognizes and protects the sovereignty of productive beings. Taxation is the price of sovereignty, it is the price of property rights and their enforcement.
The enumeration of rights in the constitution is to establish political rights, not natural rights
There is no need to enumerate natural rights in the constitution (actions that you can naturally do with your property, for example the right to eat your food, or dance with your body). Besides, all laws infringe upon natural rights in some way, so to enumerate them would make all laws unconstitutional, which would be nonsense.
Instead, the point is to enumerate political rights. These are a subset of natural rights that maintain the suffrage of citizens and their political authority over government officials.
As examples, the right to free speech is important so that citizens can voice their opinions and critiques of government officials without being punished. If laws or government actions are put in place that infringe upon the citizens ability to communicate their political opinions, these would effectively take away their political authority. The right to habeas corpus prevents the possibility of political prisoners, where political commentators or candidates can’t be detained or harassed from current officials without cause approved by an independent judiciary.
Constitutional Improvements: Objectives and Strategy
I don’t expect to amend the US constitution within the near future (or constitutions of other larger countries), however I do expect to improve upon the science and understanding of constitutions, so that it and others can be improved on in the future, when the political or economic climate is ripe.
Constitutions can take effect at many different levels. Constitutions are all around us. There are constitutions for states, companies, sports, games, and organizations (called by-laws). Constitutions are just a manifest of the rules of such organizations. Constitutional science is the understanding of how constitutional structure will effect and control the organization it governs, and subsequently, the individuals that the organizations governs. Successful constitutional structure applied at the lower levels will be prone to spread to all levels.
A hope is to take the learnings from effective corporate governance and by-laws, and be able to apply that to an effective constitutional framing, and perhaps even vice versa, to improve upon some inefficiencies of corporate governance.
Organizations like the Sea-Steading institute are trying to establish new governments. However, many of the enthusiastic individuals are anarcho-capitalist libertarians, who tend to reject constitutions, since they establish governmental authority. An understanding and proper execution of constitutions will make such an idea of new governments feasible and easier for investors to make the commitment to start businesses within their jurisdiction. We should convince libertarians and anarchists that the inefficiencies of government are not due to it’s existence, but the fallacy of political egalitarianism.
The seeking of higher income is the way individuals find where they are most valuable in society
Salary is the sorting algorithm that organizes where people, with a given set of skills, best create value in society. If an employer is willing to offer a higher salary for a given skill set than another employer, then the former has a better strategy to utilize that set of skills to create profits, effectively justifying the higher salary.
We, as individuals, should be compelled to find opportunities to gain more income so that we can best find our niche in the world, where we create the most value and wealth for society based on our unique set of skills, knowledge, intelligence, and ambitions.
The attainment of higher income is virtuous to the individual and to society.
The best investment you can make is in your own work: Entrepreneurship
Rather than investing your savings and surplus income into investments that you have little knowledge of (stocks, bonds, real estate, etc.), instead invest in the work that you are most knowledgeable of (your own work experience, hobbies, educational background). Examples being: a cook saving to open their own restaurant, a mechanic saving to open their own shop, a musician saving to become a producer, or a professional starting their own business.
Corporate entrepreneurship, employees having a stake in the profits of their projects
In most corporate situations, the manager knows how to solve the problem, and then delegates the solution to an employee to execute. The manager then appraises the work of the employee by comparing the employee’s work to the work the manager would have executed in their situation. Think of it like a master/apprentice relationship. The master knows everything, but doesn’t have time to execute everything, so they delegate the method/solution to their apprentice/employees.
But in some situations, the manager does not know how to solve the problem, and delegates the problem, rather than the solution, to their employee. The challenge in doing this though, is if the manager doesn’t know how to solve the problem, how do they know that their employee will solve it efficiently, and if the problem is even solvable? What can they compare the employee’s work to? How do they know their employee is doing a good job? In such a scenario, the manager can no longer effectively hold accountable the performance of the employee, since, in the case they succeed in solving the problem, maybe the problem was very simple and could have been solved in a tenth the time and spent resources; or in the case of failure, maybe the problem wasn’t even solvable and should have not even been investigated to begin with.
This is where assigning a proportion of the profits to the employee of solving the problem (corporate entrepreneurship) becomes powerful to the manager/company. In such a situation, the employee is now the entrepreneur, and the manager is now the investor, and they must negotiate their respective equity stakes of the problem (how much of the profits does each share).
Whether to be an entrepreneur as an employee or as a business owner depends on the industry. For some industries with cheap startup costs like the software industry, it’s relatively easy to go off on your own to find capital to start a company. However, for capital intensive and highly regulated industries, such as the chemical industry, it is tough to find a venture capitalist willing to front the expensive capital, since the risk is so high.
The employees tend to be the most knowledgeable about the success or failure of a project or task. It is the employees most skilled in the task they are assigned who best know (and can best guess) the probability and cost of success (amount of time and resources needed). When these employees have an ownership in the outcome of a project (rather than just being delegated a task), they have a strong incentive to speak up on the success or failure of the overall strategy and vision, allowing management to reallocate resources as quickly as possible to the most probable paths of success.
An example being when a manager asks an employee to try a specific process to improve on a product, when the employee is highly skeptical that there will be any improvement. If the employee has a stake in the outcome, they will be very adamant to reject the pursuit, and instead focus on the paths they think are most promising instead. If the employee doesn’t have a stake in the outcome, the employee will just silently agree, get back to the manager in 3 months (or whatever the feedback time is), and then tell him that it didn’t work, effectively wasting that segment of time. Besides, wouldn’t the manager rather have an employee who does believe that the process will make an improvement, rather than one who doesn’t? You are going to do your due diligence far better when you believe in the strategy than when you don’t. Having the employee have a stake in the outcome will bring to light whether or not they actually believe in it, rather than being silently complicit.
Entrepreneurship promotes automation and innovation from employees rather than monopolizing skills. If you have ownership in the profits of a business or project, you would rather reduce the costs through innovation, training, and automation, rather than stifle automation to maintain your job.
Entrepreneurship promotes creation of new products within a company rather than outside. If an employee has a new idea (for a product or service), what incentive do they have in working on it and promoting it within a company if they can’t own it? They have a strong incentive to leave the company and start their own venture outside the company regarding their idea. These are significant lost opportunities that many large and blue-chip companies miss out on. Considering the larger company should have an excess of capital specific to these ideas, there’s far greater efficiency when these ideas are launched within the company then outside (when the capital and cash must be raised by venture capitalist or banks that have little to do with those ideas). The chemical industry is a great example of this, where a multi-million-dollar reactor can be used for multiple products or ideas, which mitigates the risk of investing capital just for one idea. Same can be said of labs, analytical instruments, chemicals, and pilot facilities. Managers must see themselves as the venture capitalists of the company’s capital. They should always be looking for new ideas and ways to use the company’s capital efficiently, reduce costs, and create new revenue. They should see their employees as the entrepreneurs that they are willing to partner with in seeking new profits.
Reinvesting earnings. A growing company (with the intent to further grow) wants to reinvest their earnings rather than redistribute them to employees or shareholders. By giving employees equity stakes rather than dividends (bonuses), this keeps more of the earnings within to further accelerate growth.
The objective framework of new product development, the basis of corporate entrepreneurship
Laying out the framework of new product development outlines the different roles and processes required to take a product from conception to market. This framing is an important aspect of corporate entrepreneurship, allowing the employee/entrepreneur to make the business case to management for a new idea, showing that invested resources will provide a good return.
Product Development Scalars: Market Value, Marketing Cost, and Process Cost
Market Value is the market volume and the market price. How much of this product are people willing to buy, and how much are they willing to pay? This will dictate revenue. Market value is a deterministic function of the functional design and the marketing design of the product. People value the functionality, which is dictated by the product, but only if they know it has that functionality, which is dictated by the marketing.
Marketing Cost is the cost to market the product. This could be an up-front/investment type of cost, such as a marketing campaign, as well as a marginal cost, such as eye-catching product packaging. Marketing Cost is a deterministic function of the marketing design of the product.
Process Cost is the cost to make the product. This usually includes up-front/investment type of cost, such as capital expense, as well as marginal costs, such as cost of raw materials, labor, and energy costs. Process Cost is a deterministic function of the process design of the product.
From these product development scalars, the ROI can be calculated, and as such, the product feasibility compared to other prospective products.
Product Development Vectors: Marketing Design, Functional Design, Product Design, and Process Design
Marketing Design is the set of actions to sell the product, to increase product sales and price.
Functional Design is the set of product functions that customers value and are willing to pay more for.
Product Design is the set and organization of physical materials (i.e. the physical product) that delivers the set of product functions.
Process Design is the set of physical raw materials and processes that creates the product.
The arrows indicate deterministic functions, meaning nature determines them. To the extent that you understand nature (i.e. mathematics, physics, chemistry, biology, engineering, economics, physiology, psychology, and so on) of which humans are among, then you can better predict what these functions are, allowing you to calculate ROI for different designs, and then choose the design that will maximize ROI.
It depends on the company management structure regarding who is responsible for each vector. Usually a company will be composed of employees skilled in knowing specific functions. In general, it will be the scientists and engineers who best know how products are a function of the processes. It will be the scientists or engineers who best know how process costs are a function of the process. It will be the industrial designers or engineers who best know how functionality is a function of the product. It will be the marketer or engineer who best knows how customers will be receptive to certain functionalities. It will be the marketer who best knows how customers are receptive to different marketing strategies. It will be the marketer who best knows the marketing costs for a specific marketing strategy. (you can see I’m a little biased towards engineers)
It will be then left to the project manager/director/leader/entrepreneur to then understand all these functions, and then choose the set of designs that will maximize ROI. The better the functions between each of the variables and vectors are understood (through research, knowledge, theory, experimentation) the more each choice of functional, product, process, and marketing design can be optimized to maximize expected return. The greater the research and understanding, the lower the risk and uncertainty. This is the job of the entrepreneur to optimize conditions with known relationships, and direct research on the unknown relationships, ultimately finding conditions that achieve an expected return with acceptable risk that out-competes all other investments.
Wealth, Its Measurement and Dynamics
Accounting: The Measurement of Wealth
I’ve been a capitalist libertarian for a long time, and I have believed that making money is a good thing. I thought the accumulation of money was the best way to measure the value you created in society, so as such, the more money you had, the more value to society you have created.
But there are some natural problems with using the accumulation of money as your objective goal besides looking like Scrooge McDuck.
- The value of money is transient. Inflation or deflation can occur for reasons completely outside your control. So if you are using money to quantify the value you created, it doesn’t really make sense that the value you created in the past can change in the present as the value of the money you hold changes.
- When we accumulate savings, we don’t just hold money. We invest it. If we choose to only keep a few thousand dollars in our checking account (let’s just assume here that money in the bank is money and not an investment), and we invest the rest of our surplus income in say stocks, bonds, real estate, commodities, businesses, and other assets, maximizing money doesn’t make much sense since we are converting our money into investments.
As you convert your earned money into investments and assets, there is something that is accumulating, but it’s not money, it’s wealth.
For the longest time, I was confused on how to differentiate investments and expenses. How can I differentiate the value of purchasing stock, a perceived investment, from purchasing a cheeseburger, a perceived expense? I don’t know for certain at the time of purchase what the future value of the stock or the cheeseburger will be. For all I know, in the case of the stock, it could plummet or at least reduce in value, and in the case of the cheeseburger, some person could offer me three times what I paid for it because the restaurant just closed.
Because of these reasons, I wrongly believed all purchases were to be seen as expenses, regardless of if it’s a stock or a cheeseburger. However this is somewhat nonsensical interpretation if living a productive life is about choosing to produce rather than consume. Studying accounting taught me better.
As a chemical engineer, I found something inherently fascinating about accounting. Chemical engineers do what we call balances. There are mass balances, energy balances, molar balances, momentum balances, and balances of other properties of matter. The idea is to relate the accumulation and generation of these properties within a specific volume/operation to the flows of these properties through the volume/operation. An example may be a crystallization operation which separates a single flow of liquid mixture (say of salt in water) into a flow of salt and a flow of high purity water. By using mass conservation, energy conservation, and other laws of nature, you can predict important process variables like required energy input, flow temperatures, flow rates, and operation scale which ultimately tie to required costs of equipment and operation.
Like chemical engineers, there is something that the whole profession of accounting keeps a balance on, and that is wealth, which they call assets. For a business entity, accountants keep track of when wealth is being generated, and when it is being destroyed; when wealth is entering the entity, or when it is leaving; all the different forms that wealth can take; and probably most importantly, who has ownership of this wealth.
There are four principles of the generally accepted accounting principles (GAAP), which are the measurement principle, the revenue recognition principle, the expense recognition principle, and the full disclosure principle. These principles help explain and differentiate money from wealth. Below is my amateurish understanding of these principles.
One idea that stems from these principles, is that when you purchase something, there is no change in net assets. You have simply converted one form of your assets (money/cash) into another form (goods/inventory). The value of the new asset is the exact value that was paid for it. In the case of purchasing a stock, say for example you spend $10 to buy a share of stock, all you have done is convert 10 dollars of cash into 10 dollars of stock. You still have 10 dollars of assets, it’s just in a different form. The exact same can be said of the cheeseburger, where you convert 10 dollars of cash into 10 dollars of cheeseburger. You still have 10 dollars of assets.
Regardless of the perceived or market value of these assets over time, on the books, the value remains the purchase price until revenues or expenses are recognized. It is when assets are sold, written off, or used do revenue and expenses get recognized, which then affect the net assets/wealth.
In the case of the stock, it is only when you sell the share of stock do you recognize expense and revenue. If you sell the share of stock for $15, you then record as your expense $10, which is the cost of goods sold, and you record as your revenue $15. The difference between revenue and expenses determines your income, which in this case is positive $5, which then increases your net assets from $10 to $15.
If your share of stock went down in value since you bought it, say to $8, and you decide to sell it to cut your losses, you would then recognize as your expense $10 and your revenue as $8. Your income would be negative $2, resulting in a decrease in net assets from $10 to $8.
In the case of the cheeseburger, it is only when you consume/use it (or sell it) do you recognize it as an expense. The act of eating it is considered an expense, and at that point, you would recognize as your expense $10. Your income would then be minus $10 (since you have no revenue), and your net assets would decrease from $10 to $0.
And in the off chance, shortly after buying the cheeseburger, you sell it for triple the price, $30, to someone desperate for it, due to the restaurant closing or whatever reason, you would then recognize as your expense $10, the cost of goods sold, and recognize as your revenue $30. Your income would be positive $20, resulting in an increase in net assets from $10 to $30.
These principles allow you to quantity your wealth, regardless of all the potential forms it may take, along with quantifying your income/productivity, which is the net change in your wealth. Accounting is our instrument to objectively measure and quantify wealth.
Organization: The Dynamics of Wealth
Now, given an objective way to measure wealth, what is it’s nature? We can understand how wealth changes, through accounting, but why does it change? What laws of nature govern its dynamics?
Income, the change in wealth, is strictly determined by the organization of wealth. Since wealth can take many different forms, as we have seen with accounting, the specific combinations of assets is what ultimately determines the combined income of those assets, manifesting as more or less wealth.
Think of a smartphone. A smartphone is a unique combination of microchips, display, casing, wiring, programming, and hundreds of other components. Only in its provided organization, do all the components work in harmony to produce a functionality valued by the customer. If just some of the components are organized in a slightly different manner, perhaps a misplaced wire or transistor, could the functionality of the smartphone, and respectively the value, completely diminish. However, when organized properly, the value of the resulting smartphone, respectively the price, can exceed the book value of the sum of all the individual components, resulting in a positive income when the smartphone is sold.
Think of a business. A business is a unique combination of capital, including equipment, buildings, instruments, computers, and machinery, all with their unique functionality, in concert with a unique combination of labor, including the outputs of engineers, scientists, marketers, admin, finance, technicians, and managers, all with their own unique functionality (skills and knowledge over the capital), that when properly organized, produce a revenue greater than the respective book value of the sum of all the components (or depreciation of components). If the components of capital and labor are even slightly misorganized, perhaps in producing a slightly faulty product that has to be ultimately recalled or refunded, the profits of the resulting business can completely diminish.
Think of a government. A government is a unique combination of rules, laws, and administration that governs over its citizens. Only in its provided organization of laws and the rule of law can the governed citizens work in harmony with one another in the recognition and protection of their property and persons. If the set of laws were to change, perhaps the illegalization of trucks on highways, the collective productive output of its governed citizens could significantly diminish. The increase in wealth and productivity of its citizens minus the decrease in wealth and productivity of its citizens (which includes taxes) determines it’s productive output as a government.
Think of a human being. A person is a unique combination of atoms, chemicals, cells, neurons, bones, veins, blood, flesh, and organs, such that in its specific organization, the person can fend off decay and disease, digest food and water, observe and learn the world, communicate with others, get a job, procreate, and be productive. Just a slightly different arrangement of chemicals or neurons, notably in the brain, could easily lead to severe disorder and possibly death. An accounting perspective would recognize the expenses gone into the formation and maintenance of a human being, including the costs of food, shelter, transportation, health care, clothing, education, and labor of the parents, and recognize as revenue the income due to labor and capital management. A different arrangement of parental labor (manifesting in genetics, upbringing, ethics, nourishment), education, and health care can easily lead to different productive outputs of the person.
Nature determines the productive output of wealth/assets given its organization. To the extent that actors, sovereign over wealth, understand the laws of nature, or are ignorant of them, can they arrange their wealth in such a manner that will create or destroy wealth.