May 17, 2022 7:26 am

What makes us rich or poor is the flow (of income and expenses), not the stock

The wealth of a person, a company or a society is not defined by the money they have, by the stock or stocks, but by the profits you are willing to generate, that is, by flow. Differentiating the stock variables from the flow variables will allow us to understand that someone with a good net worth who has no income will sooner or later cease to be rich. To live, a person, company or State needs at least one inflow of money, since outgoings are inherent to our existence, a reality that we cannot ignore. Even if we are very austere, stingy or thrifty, we necessarily generate a permanent outlay.

By the fact of existing there are expenses that we have to face. Whatever happens we will have to eat, dress, move. And we demand energy, communication, etc. The egress is assured, it is something that we cannot stop. How do we compensate for this flow variable? Necessarily, with income (flow variable). Our savings (stock variable) can be large, but if there is no income, that stock will sooner or later run out.

Therefore, a person, a company or a country is rich if they have more or less income, so Accumulated wealth can help, but it’s not the bottom line, at least in the long run. Let’s think about ourselves, if we don’t assure ourselves an income, sooner or later we would consume the savings (stock), becoming vulnerable actors. Our economic subsistence would have the days numbered or, perhaps, we would depend on someone else.

to generate wealth we need the so-called factors of production: land (also fixed assets), labor and capital (I like to add knowledge). A pizza delivery man uses factors of production as resources to generate wealth: with his motorcycle (usable good), his work (effort, know how, time) and his capital (gasoline and oil for the motorcycle) he carries on his business. This is how the economy works, someone provides the tools, the field, the machines, the truck… others provide the work (operators, managers, company directors), and others the capital (financier, capitalist) to buy supplies, pay salaries , and so on.

A curiosity: some actors, most of the entrepreneurs, contribute more than one of these resources to generate wealth, investing their capital, their work and machines or goods, and together with the work of others they manage to add value to these inputs to achieve good or service to sell.

Let us analyze the role of the State in all this. The State fulfills non-delegable functions: it must provide security (interior and exterior), public services, infrastructure, health and public education that ensure equal opportunities for all. For these actions the State collects taxes. The contribution of taxpayers helps maintain the operability of the State, which performs elementary and necessary functions.

The private sector will be able to comply with the payment of taxes as long as the fiscal pressure does not exceed a certain limit, so that your business, employment or entrepreneurship is not put at risk. If the tax burden exceeds that diffuse and invisible limit, the taxpayer will try to adjust to that situation by avoiding or reducing their activity, or directly leaving the ring. This typical reaction of the economic being is evidenced by the Laffer curve, which represents the relationship between tax revenue and tax pressure. As the pressure increases, so does collection, until a turning point in which tax revenues begin to drop, as a result of a “saturation” of the system.

This fine limit should be considered especially by those who make political decisions, to prevent productivity from being affected and to maximize the use of the money collected without putting the private economy at risk. Since the State depends on this sector to finance its actions, it seems unwise to increase the tax pressure beyond the limits described. But this is a very common error in populist governments that prefer to overextend the productive sector rather than curb fiscal expenditures.

Let’s go back to the differentiation of stock and money flow. Populism, and more dramatically communism, confuse these terms when they brandish the principle of wealth redistribution and assume that wealth is a static good and that simply distributing capital to those who have less would solve poverty.

What is erratic about this sophism lies in the fact that wealth is not a stock, since, by distributing stocks, sooner rather than later we will have managed to impoverish all members of society. Whoever receives the gifts from the State is by nature an economic subject that has its own expenses, therefore, receiving a part of the capital of the richest subject does not solve their problems in the long term. His evils can be definitively eradicated when this individual solves the problem of his income, when these become constant. Society must ensure that this individual has at least one of the factors of production to be self-sufficient and generate its flow; for example, having a trade. In this lies the importance of investing in education and training, so that we all have the possibility of contributing at least one of the factors of production.

One solution proposed by those in love with the State is for it to create or confiscate companies, so that they start producing and offering goods and services to the market. Thus, tax revenues could come from a source other than tax collection. These initiatives are usually dressed in idyllic clothes, such as the slogans of self-sufficiency, sovereignty or the defense of the poor.

Many examples support the idea that the State is inefficient in producing goods and services… “How do they pretend that the State can manage an export company if it cannot even cut the grass on Route 11″ (Dionisio Scarpín, mayor of Avellaneda, Santa Fe, in the debate over the expropriation of Vicentin, in 2020). Another way for the State to obtain resources is through financing. This is valid if the funds are used to finance investments, but it clearly does not work if they are used for spending.

This situation is like the short blanket that shrinks with each wash… State spending must be covered by taxes, and these cannot put the productive health of the private sector at risk. The only solution for the fiscal balance is the reduction of the expenses of the State, and the social expenses are a great portion of them.

The mere redistribution of wealth through social plans or subsidies does not solve the problems in the long term. When a society ate the eggs, it licks its lips when looking at the chicken. And that is dangerous. This happens when the productive sector, suffocated by fiscal pressure, reacts by lowering its productivity (effect described by Laffer), adapting to an adverse context. A healthy society should feed that hen so that it produces more eggs and that those eggs are enough for everyone; even some of them should be incubated to obtain more laying hens and thus enter into a virtuous circle of wealth generation.

Argentina has many resources. But She’s not rich, she’s poor. Why such nonsense? Because the rules are not clear, because we confuse stock variables with flow variables, because we do not understand that there must be friendly environments for business, in which the factors of production can unite and generate wealth. Because the tax pressure generated by the fiscal deficit, to a great extent a consequence of chronic and high social expenses, does not help to create a business or trust environment for the production of more goods and services that generate wealth for all.

In conclusion, the poor mentality of distributing stocks blinds us, and it does not let us understand that what makes us rich or poor is the flow, not the stock.

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