The economy comprises activities for living.
Today's economics recognizes the economy only as a monetary phenomenon.
However, economics is essentially a discipline for studying how to realize a better life.
This is because the economy comprises activities for living.
If we focus only on monetary phenomena, we lose sight of the actual conditions of the economy.
I'm not saying that things were better in the old days. I'm not saying either that things are better now.
I'm just saying that the premises that make the economy possible have changed.
The premise for living our lives, the premise for living, has changed.
Unless we understand this, we cannot clarify the meaning of economic phenomena.
In addition, we cannot understand how to live our lives.
What drives a monetary economy is the relationship between income, or savings, and expenditure, or borrowing.
The most important is income.
Today, we can live if we have income. On the contrary, if we don’t have income, the basis for our livelihood is lost. This is a prerequisite.
What drives a monetary economy in practical terms is cash flow.
This means that what drives the economy is selling, buying, lending and borrowing.
The mechanism of the economy cannot be measured only by cash flow. In order to supply cash, it is necessary to understand the cash mechanism structurally. That is why the concept of periodic profit or loss has been established.
The base of a monetary economy is income. Next, expenditure is set based on income.
If expenditure exceeds income, the shortage will be compensated by borrowing money or using savings.
If income exceeds expenditure, the surplus will become savings. The surplus is lent to the underfunded overall economy by way of financial institutions.
The income mechanism is defined by expenditure. The effectiveness of the income mechanism is determined by its relationship to expenditure.
If expenditure exceeds income, income cannot exert its utility and the economy falls into bankruptcy.
Namely, expenditure must be within the range of income. This means that income restricts the expenditure range.
Expenditure consists of financial expenditure and consumption expenditure. Financial expenditure is executed through loan transactions. Consumption expenditure is executed through profit and loss (selling and buying) transactions. Financial transactions control the cash flow, and profit and loss transactions control the cash mechanism. When financial transactions reach a certain level, profit and loss transactions are incorporated under the control of financial transactions.
Income is different from profit. The balance between income and profit plays an important role in a capitalistic economy. Profit is a phenomenon in which income is stable. Even if income is fixed, cash receipts are not always executed. Profit unaccompanied by cash receipts is treated as a loan and posted not only as profit but also as an asset account.
Profit represents the fund mechanism and income represents the fund flow. A processing method of recording a single transaction doubly is called double-entry bookkeeping.
Since financial transactions control the fund flow and profit and loss transactions control the fund mechanism, it is possible to control the fund flow using income, but it is difficult to measure and monitor funds. That’s why the concept of profit was established.
To clarify economic trends, it is necessary to understand the mechanisms of financial transactions and profit and loss transactions and the relationship between the mechanisms of cash flow and periodic profit and loss.
In order to apply to the concept of profit, expense has been established as a concept against consumption expenditure. Like profit, some expenditure does not accompany cash payment. Such expenses are treated as borrowing and posted not only as expense but also as the debt account.
There is a principal of raising funds from the outside and making an investment. When funds are raised externally, debt and capital are formed. The essential nature of the externally raised funds is the same as that of borrowing.
The current economy apparently allows private ownership but is actually negative toward it. Debt is at the other end of the spectrum of asset ownership. Tax is imposed on net assets at the time of inheritance.
Inheriting an asset means shouldering a debt of the same amount.
An economy premised on investment is impossible without mass production and mass consumption.
In the market, price has a decisive role.
What creates a market price?
A market price fluctuates on the axis of demand and cost.
Accordingly, demand, supply and cost are the factors that decide a price.
Demand is generated from the relationship between production and sales.
Mass production cuts prices.
Cost can be classified into fixed cost and variable cost.
For a unit price, variable cost forms the fixed part and fixed cost forms the variable part.
Variable cost is not affected by sales volume or production volume. In contrast, fixed cost declines in reverse proportion to production volume.
If you want to cut the unit price, there is no way other than cutting the fixed cost by means of mass production.
Mass production is supported by mass sales. Thus, without mass sales, cost rises and profit is not gained.
The underlying problem is the rate of operation, namely, the relationship between fixed cost and variable cost.
Mass production is premised on mechanization. Mechanization is impossible without facility investment. Today’s facility investment requires a huge amount of funds.
The nature of the economy greatly differs in a labor-intensive economy and a facility-intensive economy.
Amortization cost dramatically declines as a result of mass production. In contrast, labor cost is rigid because of the limitations of production capacity. Therefore, in companies where mechanization has advanced, expenses relating to the unit price can be reduced dramatically.
Mass production and mass sales enable fixed cost to be reduced.
People try to increase their sales volume, and their production volume, even though they are selling products for bargain prices. Such acts generate excessive production and excessive competition resulting in an unstable economy.
Mechanization changes the nature of industries from a labor-intensive type to a capital-intensive type.
The means of production and debt come into existence as a pair. If only one factor is focused upon, we cannot measure the cash mechanism.
The means of production is divided into assets which are amortized for a certain period and assets which are not amortized. Amortization just exists on the accounting books. Actually, funds are not exchanged.
Amortization forms a fixed part of the economy. Amortized assets are also expendable assets.
Generally speaking, the amortization expense is recognized as an expense unaccompanied by cash. This is a serious mistake. Behind the amortization expense, the repayment of long-term borrowings is hidden.
Behind the relationship between profit and cost, the relationships of income, amortization expense and repayment of borrowings are hidden.
The other side of an economy premised on investment is an economy premised on borrowings.
Borrowings means money obtained in advance, and this is money that must be repaid.
I think the implication of this fact is not understood well. If people borrow money all together, the market has plenty of money temporarily. And it makes the economy appear to be booming.
However, the debt payment continues monthly and yearly and gradually money becomes short. In a word, when a person borrows money, he has plenty of money temporarily and feels as if he were rich. But, in actuality, a monthly debt payment is incurred on the other hand. Debt payment is expenditure which has a rigid nature and should be undertaken strictly.
An increase in debt means an increase in the rate of monthly fixed expenditure. This is not limited to household budgets. The same is true for public finance and corporations.
That is to say, today's economy is based on mass production and debt.
When debt increases, the expenditure structure changes its character. An increase in the fixed part makes expenditure rigid and constrains disposable income.
A debt mechanism like this cannot be clarified unless the fund mechanism is measured.
This unintentionally constrains household budgets and profit and makes life difficult. The same is true for public finance.
When debt exceeds a certain level, economic measures must be changed so that financial transactions and profit and loss transactions are balanced.
Income consists of financial income and production income.
An increase in debt changes the income structure, too. An increase in debt invites an increase in the amount of monthly repayment. This constrains earnings and invites a reduction in disposable income. The amount of debt to be repaid is rigid and is not influenced by changes in economic conditions. Therefore, an increase in earnings invites an increase in disposable income. On the contrary, when earnings are decreasing, disposable income also decreases. In addition, inflation lightens the burden of debt and deflation makes the burden of debt heavier.
When the rate of financial expenditure to income increases, it becomes necessary to balance income. This heightens the need for leveling of income and builds the momentum to instill paid labor. Leveling of wages improved the technique of borrowing through the penetration of housing loans. Also, the relationship between the amount of debt to be repaid and rent has seriously influenced economic conditions.
Leveling of income is one of the important mechanisms of management entities.
When a market becomes mature, it is necessary to establish the market structure so that an appropriate number of management entities can be maintained against the market scale.
The final objective of the economy is distribution rather than production. Production is the premise for distribution. It is necessary to clarify this point. That is why we lose sight of the actual conditions of the economy if we are overly concerned with monetary phenomena. Money is not an objective but a means. Money is the means for production and distribution of wealth.
The objective of the economy is to distribute produced wealth to those who need it.
Making money is not an objective. Getting a profit is not an objective either.
The objective is to produce as much wealth as necessary and to distribute as much wealth as necessary to those who need it.
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