Capitalism is financial by definition

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By FERNANDO NOGUEIRA DA COSTA*

The analysis of the complex capitalist system with the abstraction or exclusion of the financial system is artificial.

Cash flows and inventories are related financial concepts, but they refer to different aspects of a company's financial management. Should this type of microeconomic management be extrapolated to the macroeconomic level?

Another question: follow the money Is [“following the money”] not an essential investigative tool? Is it for reasons of facilitation that conventional economic theory does only “real” analysis, that is, without money, except when it is inflationary? Worse, for religious reasons do critics of “financialization” abhor rewarding the opportunity cost of giving your money away for others to profit from?

Initially, I will try to answer the first. Cash flows refer to the inflows and outflows of money in a company during a given period. They represent actual cash movements, including sales receipts, vendor payments, operating expenses, asset investments, loan payments, and so on.

Its accounting offers an important tool for monitoring a company's liquidity and capacity to generate and manage its financial resources. It can be categorized into three activities: (i) operating cash flow, related to the company's specific activities; (ii) investment cash flow, related to the acquisition of long-term assets; (iii) financing cash flow, related to raising funds.

In turn, it is biased to consider as inventories only the physical goods stored by a non-financial company for use or sale in its business operations. The management of raw materials, products in the process of being manufactured and finished products is essential, but inventories also involve financial wealth accumulated over time, especially retained and capitalized profits.

Properly managing merchandise inventories is important to ensure a continuous supply of products, avoid shortages or excess stocks, optimize storage costs and minimize the risk of obsolescence. But the management of financial balances is not something separate, but rather inherent in the management of legal entities, as well as the management of money by individuals, government entities, as well as (of course) financial institutions.

This control involves monitoring and recording items in stock, forecasting demand, conducting periodic inventories, managing purchase and sales orders, calculating the weighted average cost of items, and assessing their readiness. The objective is to balance the availability of products to meet customer demand, minimizing the opportunity costs associated with inventories, such as “tied up capital” without interest payments. In a situation of excess, faced with high interest rates, it is worth “making a liquidation”, that is, giving liquidity to that capital.

In summary, cash flows refer to the movements of money inside and outside a company, while inventories are the physical goods or merchandise, held by the company, for use or sale in its operations, but not only, as they also involve balances financial. Both are important aspects of any company's financial and operational management. Again, I repeat the question: wouldn't its accounting at the macrosystemic level also be relevant?

The Theory of Consistency between Flows and Stocks at the macrosystemic level seeks to explain the relationship between flows and stocks in the economy as a whole. This theory, on the one hand, argues that economic flows, such as production, consumption, investment and trade, must be consistent with existing stocks in the economy. On the other hand, it refers to the accounting balance between the entry and exit rates of flows and the values ​​(not just quantities) accumulated in stocks or balances in the systemic process.

In this configuration, flows refer to the inputs and outputs of a system, while stocks are the quantities or accumulated balances resulting from these net flows. A metaphor would be, in a water (liquidity) storage system, the inflow would be the water (money) capable of serving the system, while the stock would be the total amount of water stored or the availability of liquidity or cash.

Consistency between flows and stocks occurs when the inflow rate is balanced with the outflow rate so that stock remains at the planned level over time. If the inflow exceeds the outflow, the stock will increase and this, in the case of goods, is an overload problem, in the case of money, “not even a madman can tear it up”…

On the contrary, if the outflow is greater than the inflow, the stock will decrease, signaling the need to order more products and/or expand production capacity. In financial terms, it determines the need for external financing, either to the company or to the economy, if it does not have the capacity for self-financing, given the scarcity of financial resources available in cash.

Therefore, ensuring consistency between flows and stocks over time is critical not only for supply chain management, but also for modeling the economy as a component of a complex financial system.

The central idea of ​​this theory is that economic flows are related to available stocks. For example, the production of goods and services in an economy depends on physical capital stocks, such as machinery, equipment and infrastructure. In turn, investment in the economy is driven by the need to increase these capital stocks.

Likewise, consumption is influenced by the stocks of consumer goods held. If inventories are low, consumers can increase their purchases to replenish inventories, boosting consumption. If inventories are high, consumers may reduce their purchases, resulting in lower consumption.

In addition, the theory of consistency between flows and stocks also highlights the importance of coordination between different institutional sectors. For example, the productive sector needs to be aligned with consumer demand, ensuring that stocks are adequate to meet the needs demanded.

The lack of consistency between flows and stocks can lead to imbalances such as oversupply or product shortages. It results in negative impacts on the economy as a whole.

In summary, the theory of consistency between flows and stocks at the macrosystemic level emphasizes the importance of supervising the relationship between economic-financial flows and existing stocks in the economy. It helps to understand how inflows and outflows affect stocks or balances and how coordination between different institutional sectors is essential for the proper functioning of the macroeconomy.

A cycle begins with the granting of credit by anticipating payment to buy something. The debtor borrows from the future and all is well if the expected returns are confirmed. If they are frustrated, it will cause corporate or personal deleveraging, in the case of legal entities or individuals, and fiscal adjustment and refinancing in the governmental case.

At the beginning of speculation about the future price trend of some asset (wealth maintenance), “property reigns”; but in the end “cash reigns”. Throughout the cycle, there is a need to balance the portfolio between fixed, financial and liquid assets.

Generally, speculators request credit to buy assets with third-party resources, added to their own, to achieve greater equity return on their capital. Protected agents invest to earn interest on loans, either to the government, via the purchase of public debt securities, or to third parties through banks.

Investors, when they become excessively immobilized with investment in fixed capital, are in need of bank working capital loans. Otherwise, they have to sell properties quickly at a discounted price to raise the cash.

If more and more debtors delay their payments, systemic risk is generated. When debtors and creditors can go bankrupt and the economy collapses, even neoliberal perts ask the government to step in… and socialize the loss!

If these cycles of expansion and contraction occur in rapid and continuous sequence, the conditions are created for the detonation of the so-called Great Debt Crisis. Its resolution only occurs with a slow and gradual process, but with bumps in losses and damages, of financial deleveraging.

It is evident that the analysis of the complex capitalist system with the abstraction or exclusion of the financial system is artificial. Capitalism is financial by definition!

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP).


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