Why the Capitalist Theory is no longer fundamentally flawed PDF Print E-mail
Written by Prof. Paul Douglas Katchings   
Monday, 25 May 2009
Why the Capitalist Theory is no longer fundamentally flawed
The death of credit, debt, boon-bust cycles and unemployment
By Paul Katchings All Rights Reserved Wednesday, May 20, 2009

Click here to complete reading...The death of credit, debt, boon-bust cycles and unemployment!

The capitalist theory was fundamentally flawed because of an incomplete understanding of the exact meaning of capital.  This inexact meaning of capital is what causes credit, debt, interest, boom-bust cycles, unemployment and poverty.

The concepts of credit, debt, and interest are the negative components of capitalism.   It can now be argued that these three concepts are not actually part of true capitalism.  These three concepts can no longer enjoy a dominant status within a new body of knowledge of capitalism where consumers are included in the distribution of shares in new publicly traded companies.

According to a new study, capitalism is far greater than what the capitalists with their current limited understanding ever imagined for the elimination of economic inequalities.  This new study proposes an intertwining of the dual concepts of capital and the consumption function in economics. This intertwining effectively puts an end to debt-based consumption and deficit spending.

A clear understanding of “capital” and “the consumption function” requires the use of the energy laws of physics for comprehension and the redesign of the corporate model, thus ending credit, debt, boom-bust cycles and unemployment as we know it.  Without this understanding, the problems with various national and global economies – especially the ones without stock markets – cannot be effectively addressed.

The formula correcting the flaw in capitalism was derived from this question to end poverty, hence a “new consumption function.”

"What if we applied the laws and a theory of physics to global commerce?  Can we engineer more value from each individual’s purchase in the same manner that one unit of uranium is at least 235 times greater than one unit of coal?  Can we make this excess value immediately available to the purchaser by a simple adjustment to a single existing financial instrument?"

To wrap your mind around this astonishingly simple economic revelation, let coal represent the revenue to a publicly traded company from a customer’s $1 purchase.  Then let uranium represent a $235 capitalization derived from the customer’s purchase.  Now combine the representations of coal and uranium into a nuclear reactor that represents a “new business model” for the corporation.

The base formula used to create the value-equity between $1 and $235 is stock price (SP) which is equal to revenue (A) times gross margins-earnings (B) divided by rate of return (C).   SP=(A*B)/C.

What this investigator did was to apply the Einstein formula of e=mc2 to the global economy as the energy system that it is.  The results are astonishing because we can now say that e=mc2 is also equivalent to gwp=(a*b)/c.  The old concepts of credit, debt and interest are retired into obsolescence.  A more powerful and universal consumer tool driving balanced demand emerges.

The new energy-economic formula and new consumption function bring some remarkable realities into people’s lives.  They turn regular purchases for the everyday consumer on items like food, cars, clothes, TVs, education, medical, computers, etc… into 11, 20, 40, and 235 times more value than the price of the product and service.  Since energy can neither be created nor destroyed per the second law of the conservation of energy, these purchases must be made at a new type of company – a new model of publicly traded companies using fifteen variables.

Yes, the inclusion of the discipline of physics in this discussion may be a cause for consternation among some.  But we are witnessing an absolute reevaluation of economics and the corporate business model.  Times of global economic crisis require new ideas and new thinking, hence the inclusion of physics in this discussion.

The definition of capitalism is to “capitalize” or to bring cash from the future into the present for use.  In accounting turns this bringing forward of cash is called net present value based on future earnings allocated to each share.  It is the publicly traded corporation that does the bringing of cash from the future best by its ability to issue shares.  It is inside the “gap between the present and the future” where the publicly traded company creates “equity.”

It is the laws of physics that explain the energy difference or “energy gap” between a unit of coal and a unit of uranium.  Now the energy laws of physics can be applied to produce a new economics, thus causing the redesign of the corporate model to produce sustained value.  Therefore “equity” is the single existing financial instrument requiring adjustment.  Equity is created out of “capitalizing the gap between the future and the present” for immediate use.

The universal reach of modern communications technologies will speed up the value creation process from initial consumption by customers to business capitalization, in particular the capitalization of publicly traded companies that are owned by their customers.  These companies must use the excess profits derived from the customers’ spending for investments and dividends.  Time lags or delays are not necessary for bringing cash from the future for present use.  Earnings and an acceptable rate of return will produce a stock price immediately available to the consuming customers for free.

The closure of this “energy gap” or time delay eliminates the necessity for customers to make new investments in stock.  Why?  The process is automatic, from product purchase to free equity ownership.  This stock ownership by the customer will be explained into further detail in latter paragraphs.

“Consumption” is the initiator of value creation and has a dual nature – just like anything in the universe as viewed from the realities of physics, now applied to economics.

The first or old “consumption function” is when income becomes consumer spending.  The second “consumption function” – an extension of the first – is when consumer spending becomes revenue and then capital available for reinvestment, thus completing an energy cycle where cash can be brought in from the future continuously.  This means the obsolescence of boom-bust economic cycles.

The old consumption function - spending by consumers as a function of income – is the trigger of “free value” creation which can now be extended to include the entire economic process from jobs, to consumption, to businesses.  The businesses must be formatted to apply profits for investments and dividends using just two conditions.  These conditions will be explained in detail in latter paragraphs.

Thus the primary flaw in capitalism, and indeed in many disciplines when viewed in isolation, is not recognizing the dual relationship between the energy laws of physics and economics.

When economic systems are viewed as a system for the transfer of energy, then the laws of physics can be applied for novel results.  For example, the multiple consumption habits of people will trigger new financial value for them.  How is this possible?  This is possible with the design of a new publicly traded corporate model that captures the energy existing between now and the future.  An integral component of this new model is the formula (A*B)/C where A is revenue, B is gross margins-earnings as a percentage of revenue and C is rate of return producing a stock price.

In a rare study by this investigator, several of the western European countries have stock market values substantially less than their gross domestic product.  This surprising anomaly reveals the numbers and consequent laws that actually hinder economic growth and create unemployment instead of ending unemployment which capitalism is supposed to do.

In the table below there is a copious amount of valuable information revealed between the population, the GDP and the stock market value of various countries.

GDP – Stock Exchange Comparisons

     Country    Country    GDP Billion    Stock Market    %
     Compared     Population    Exchange Rate    Value    Of GDP

1    Hong Kong    7,055,071    $223.8 billion    $1.32 trillion    490%
2    South Africa    49,052,489    $300.4 billion    $842 billion    180%
3    Switzerland    7,604,467    $492.6 billion    $1.275 trillion    159%
4    Singapore    4,657,542    $154.5 billion    $268.6 billion    74%
5    Taiwan    22,974,347    $401.6 billion    $654 billion    63%
6    Malaysia    25,715,819    $214.7 billion    $325.7 billion    52%
7    China    1,338,612,968    $4.222 trillion    $6.226 trillion    47%
8    Canada    33,487,208    $1.564 trillion    $2.187 trillion    40%
9    USA    307,212,123    $14.33 trillion    $19.95 trillion    39%
10    United Kingdom    61,113,205    $2.787 trillion    $3.859 trillion    38%
11    Israel    7,233,701    $188.7 billion    $236.4 billion    25%
12    PEV©    13,983,816    $1.376 Trillion    $1.376 Trillion    0%
13    France    64,057,792    $2.978 trillion    $2.771 trillion    -7%
14    Japan    127,078,679    $4.844 trillion    $4.453 trillion    -8%
15    Jamaica    2,825,928    $13.47 billion    $12.33 billion    -8%
16    Korea, South    48,508,972    $857.5 billion    $623 billion    -27%
17    Brazil    198,739,269    $1.99 trillion    $1.37 trillion    -31%
18    Spain    40,525,002    $1.683 trillion    $1.132 trillion    -33%
19    Thailand    65,905,410    $272.1 billion    $196 billion    -34%
20    Saudi Arabia    28,686,633    $467.7 billion    $246.4 billion    -43%
21    Ukraine    45,700,395    $198 billion    $111.8 billion    -44%
22    Germany    82,329,758    $3.818 trillion    $2.106 trillion    -45%
23    India    1,166,079,217    $1.237 trillion    $650 billion    -47%
24    Philippines    97,976,603    $168.6 billion    $85.6 billion    -49%
25    Italy    58,126,212    $2.399 trillion    $1.073 trillion    -55%
26    Pakistan    176,242,949    $160.9 billion    $70.26 billion    -56%
27    Kenya    39,002,772    $31.42 billion    $13.39 billion    -57%
28    Nigeria    149,229,090    $220.3 billion    $86.35 billion    -61%
29    Mexico    111,211,789    $1.143 trillion    $397.7 billion    -65%
30    Russia    140,041,247    $1.757 trillion    $450 billion    -74%
31    Indonesia    240,271,522    $510.8 billion    $111.5 billion    -78%
32    Iran    66,429,284    $382.3 billion    $45.57 billion    -88%
33    Bangladesh    156,050,883    $83.04 billion    $6.793 billion    -92%
Source CIA Fact Book May 24, 2009

According to the pure goal of capitalism, the “gross domestic product” of countries with stock markets is NEVER suppose to be MORE than “the value of its publicly traded companies.”  Any country with a stock market is by definition practicing capitalism.  But it is not only countries without stock markets that have a flawed understanding of capitalism and its relationship to physics.

Out of the 32 sample countries above using data from the CIA May 24, 2009 Fact Book, 66% of these countries have gross domestic products greater than the value of their stock exchanges.

China added $971 billion to its GDP and $1.746 trillion to its stock market since July 2008 while at the same time Russia went from its stock market value being 4% over its GDP to negative 74% - a whopping $872 billion drop in its stock market value that plunged millions of Russians into unemployment.

Indeed India’s Bombay stock exchanges celebrating the conclusions to the globe’s largest democracy’s free elections saw a 17% surge in the value of listed shares when less than 0.7% of the households actually own shares!

Clearly something is fundamentally wrong with the comprehension of capital, capitalism, gross domestic product and the value of national stock markets in eliminating unemployment.

It is the degree of the integration of labor units into the ownership of shares in publicly traded companies that determines how well the policy maker understands exactly the role capital plays in eliminating poverty – which should be the central goal of any country’s economic and political policy.

Although Adam Smith is often described as the "father of capitalist thinking," he never used the term "capitalism."  He described his own preferred economic system as "the system of natural liberty."  However, Smith defined "capital" as stock, and "profit" as the just expectation to keep the revenue from improvements to that stock.  Smith also made capital improvement the central goal of the economic and political system.[44]”

Look at this description carefully noting… the “just expectation to keep the revenue from improvement to that stock…”  and the “central goal of the economic and political system.”  What a prophetic vision!

Few economists and political leaders truly understand how important public corporations and stock exchanges are for the “central” benefit of its citizens.  The political leaders leave this supposed capital understanding to venture capitalists, investment bankers and bankers who themselves do not realize the importance of stock markets and the necessity of the even distribution of shares to a country’s labor units in ending unemployment while creating wealth for the country.

If this statement were not true then experts and leaders would have implemented the “new consumption function” more than ten years ago during the dot-com era rather than unknowingly condemning public company expansion with government interference out of ignorance.

A careful evaluation of the above table of population, gross domestic product, and value of a country’s stock exchanges reveals exactly how many publicly traded companies a countries should have.  Governments cannot make market decisions as command economics have demonstrated.

Using the BRIC’s (Brazil, Russia, India, China), it is clear that China, India, Brazil and Russia are short 174,000, 152,000, 26,000 and 18,000 publicly traded companies!

It is not being said here that government scrutiny was not necessary before and during the dot-com era.  The point here is that the bad results of government interferences are another indication of academic, business and government policy makers who do not understand capitalism.  Thus capitalism is flawed and we have a universal economic mess.  And this mess will continue if we do not face capitalist reality with the real facts of why and how the publicly traded company is central to good governance.

The facts are that production and consumption are the only two functions for economic humans.  In the 21st century economics there are only two components of economics: a) the labor units producing the value and b) the stock markets capturing the excess from this labor unit value creation where the collective is called Gross World Product - GWP.

The “new consumption function” states that “consumption is a function of Product Equity Value©” where everyday consumer purchases on things like clothes, appliances, medical, education, homes, autos, recreation, etc is automatically worth 10, 20, 30 and even 235 times (or more) than the consumption price.  This statement is made by courtesy of energy laws and the use of a novel value creation formula in valuing shares of public companies before they are distributed.

This multiple value creation effect already exists in the reason for why a public company can produce more bang from 1 unit of value than can a company that is not publicly traded.  The classical example from physics is that 1 unit of uranium is worth more than 235 times 1 unit of coal.  [New physics will show that uranium is in fact 3.7 million times more than coal.]

So exactly how can this multiple value be transferred to the consumers instantly after each purchase?

Two conditions are required.  It is in the design of a new customer-centered publicly traded company model where this multiple value equity can be given to the customers.  This means a universal balanced distribution of the ownership of public companies to include all customers.  The products and services are paid for but the equity is given free after the purchase.

Caution!  It only appears as if the “equity” given is free because of the speed of closing the “time gap” between the purchase of the product or service and the giving of the shares.  Both actions are instant and simultaneous based on the assumption that a customer will buy the product or service if the immediate value results are greater than the purchase.

This new model design requires an exact knowledge of the laws of physics as applied to an economic system.  Desired economic results must be specified since this data will affect the distribution of the shares of a new model publicly traded company.  In all cases, the customers must be included in the ownership process to achieve higher stock price for the public company and guaranteed future revenue.  This is the first of two conditions for the instant transfer of multiple values to customers right after purchasing activity.

Let’s say the distribution of the shares in the new customer-centered corporate model is 31% for the startup owners of new publicly traded companies and 69% for the customers.  The mere fact of giving the 69% free to the customers after their purchases will achieve universal distribution of shares, revenue and stock price results without imprecise inventory concerns, marketing, advertising and sales.

Condition two requires a pre-assembled 14 million customer base where the 14 million number is chosen or engineered for maximum value creation.  Now the factory, the new corporate reactor housing these 14 million pre-assembled customers can turn out a new public company a day with 61 million shares outstanding, selling a $1+ product where the gross margins are 63% +- and the acceptable rate of return is 3%+-;

Clearly $14 million in revenue times 63% gross margins-earnings divided by 61 million shares divided by .03% rate of return is producing a share price of $4.819.

Therefore 61 million times 69% of the free shares allocated-given to the 14 million preassembled customers instantaneous for the purchase of products or services are 3 free shares each. With a share price of $4.819 times 3 shares, clearly the product or service equity value is $14.487 for the preassembled consumers daily.

Since the customers paid $1 for the product and instantly receive $14.487 in equity value, it is better for the new public company to design its share distribution or capitalization structure in the design stage of the product to include 14 million customers who buy the new model company’s products and services, thus producing the earnings that drives the share prices.

It is the customers that produced the revenue and subsequent earnings for the company and not the owners or employees – the traditional receivers of free stock options.  Receiving free stock options for what reason?  Receiving free stock options for not having the foresight to lock customers into their old and outdated 20th century corporate model?

In the dawn of the 21st century, why not include the customers in this free share option process?  Won’t the guaranteed loyalty and future predictable earnings end poverty?

When the customer is included in the free distribution of equity after the purchase price we find that inflation, depressions, credits, debt, boom-bust cycles and unemployment are at an immediate end.

This “new consumption function” correcting the flaw in capitalism is the economic term.  The commercial term for this “new consumption function” is Product Equity Value© where the customers now buy the product or services and receive the Product Equity Value© shares free.

When the corporate model is redesigned to accommodate this new physics-economic reality using just one financial instrument “equity” for the customer at the center of corporate ownership, then we see clearly that there are only two macro components to the global economy:

a)    the “labor units” producing the value and
b)    the “stock markets” capturing the excess value by capitalization. 

The existing flaw in capitalism is corrected by Product Equity Value© ratios of 11, 14, 20, 40 and even 235 times more than the purchase price.  Product Equity Value© is available at b2bvp.com

Paul Katchings
Business Engineer

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Last Updated ( Sunday, 22 August 2010 )
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