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Lawrance G Lux

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Understanding the Productive Process
By Lawrance G Lux
Last edited: Thursday, May 29, 2003
Posted: Thursday, May 29, 2003

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Authors often hear complaints of writing over the heads of Readers; they in search of a basic understanding, not advanced treatises. Herein I attempt to answer fundamental questions about the Production Process.

Any Author on Economics will face an immense problem, practically from the start of his discussion. He has to make a Judgement on the degree of training enjoyed by his Reader. Any Reader of Economic text must start into the Text wondering if he has sufficient knowledge of the discussed Subject to render an evaluation. Economic Issues have become so complex, Professors of Economics cannot always be sure of comprehension; due to the vast expansion of Economic models and statistical material. This Author wishes to present coherent material for the basic Student, who may possess absolutely no prior organized knowledge of Economics; Everyone holding some intrinsic grasp of how Economics works by participation in the market of Goods and Services. The Author has to build a foundation, before he can put on the Roof.

Everyone purchases Goods in the Economy. The Individual needs these Goods to establish and maintain his lifestyle. He purchases these Goods from a Producer, or from a Retailer who has purchased these Goods from a Producer; or from a Wholesaler who has purchased these Goods from a Producer for resale to Retailers. The Consumer, the Individual who purchases these Goods for his own consumption to maintain his lifestyle, uses Money to purchase Goods derived from his own position as Producer, Wholesaler, Retailer, or Financier of Production. He can be classified as an Employee or a Manager in any of the above Occupations, or he can be defined as an Owner of the Means of Production. It is quite clear the Economy is intrinsically focused on Production; every economic occupation purchases Goods gained from Production, and Everyone pays for the Good by being involved with some process of Production. The only deviation from this basic format lies in purchase of Goods with Government welfare transfers; these determined by lack of participation in the Productive process; the element of Charity must all be considered, but Charity is only welfare transfers from private economic Participants given to non-Participants in the Productive process. The Reader can understand the importance of Production to both Economics and Consumers.

The Productive Process must also be examined, for it contains some very important elements which cannot be violated. It must be organized and financed. The Organization entails identification of the Product to be produced, the methodology with which the Product will be produced, and the resources which will be utilized in the Product’s production. This process necessitates identification of Management, identification of Productive labor, the parameters of the Product and it’s composition, and the technology used in Production. All of the Above remain the province of Management, coming from Entrepreneurs who make the decision to produce; this flowing from Individual choice or Government appointment. The need for finance appears immediately after the decision to produce; all following elements requiring payment for initiation of endeavor. Research and Design must be pay for, as they are Productive services provided by skilled Productive labor. The technology must be chosen and assembled; this selected by the designated Design parameters of the Product. Productive labor must be hired and trained in the use of technology for production of the Product. Resources for both Training in Productive methods and actual Production need to be purchased and stored. This all must be accomplished before the actual production of the Product, though most comes only after a Test Product has been assembled in the Research stage.

Many Readers will think this a simplistic outline without value, though beginning Students need such an outline; understanding the complexity of Economics starts with simple statements, where the Student gains comprehension of the totality. A Study outline of Productive finance may introduce greater interest for those educated in the Economic process. It is sufficient to state Productive finance must also be financially capitalized, this through derivation of Profits from Production. Productive finance also requires several elements which must be served.

The Productive financier has to first have a source of funds. These funds must come from some previous involvement within the Productive process of the Economy; be they previous Wages, Profits, or borrowed funds from financial instruments; most Productive funds coming from the latter source. Profits from Production provide return to Productive finance, no matter which original source is utilized; and Production cannot be maintained, if these Profits fail to materialize. The only alteration from this structure comes as Government underwriting of unprofitable Production to serve Government interest; another form of welfare transfer, and One which is the most expensive form of welfare transfer-both to the Taxpayer and the Economy.

There are a number of constituent elements necessary to provide profitability to a Product. The Product must hold economic value to some Consumer; i.e., it must provide some establishment or maintenance of lifestyle for the Individual purchasing, else he will not purchase the Product. The Product has to serve some economic value first of all. It must withstand competition in the Market for such Goods, so that it must be the superior or equal in value to any other Product; the only alternative to this necessity being much lower Product cost, without losing a substantial amount of value in use for the Consumer. Productive cost of the Product must be sufficiently low a Profit can be attained, with sale of Product at competitive price in the Market. The largesse of this Productive Profit is in itself important; it must be of size sufficient to provide adequate Return to the amount of Capitalization used, in both the Organizational and Productive process. Insufficient Productive profit will lead to under-funding of the Productive effort, and Production will eventually cease.

Technology becomes paramount in the Productive Process for a number of reasons. Technology remains the source for efficient Production in the first place. It is the avenue for cutting the cost of Production, by utilization of cheaper amounts of Resource, and reduced amounts of Labor and Capital. It is also the greatest threat to Productive Profits, due to the fact it remains the true venue for competition between Products in the Marketplace. This Threat is not minor, as can be seen by the development of Patent Law; the process where technological advantage is protected in the Marketplace. Technology, though, also has serious Costs; mainly in the form of Labor retraining costs, and more expensive Capitalization of Production.

The matrix is completed with the process of Marketing. This consists of the formula for getting Consumer awareness of the availability of the Product. Production generates no sale of Product, if the Consumer does not know of the existence of the Product. It requires Distribution of Product, so the Product arrives at an arena where Consumers can purchase; in itself, a costly effort to maintain, often needing a network of Retail outlets and Service venues. It continues to the area of Advertising, where Product identification and availability is brought to media attention and the Consumer. The area of Marketing in total has been growing as an element of Production Costs, though has been showing some signs of abatement in later years. Reasons for this consist in the multiplicity of Products available with high degree of Trade, with little ability to promote long-term Brand loyalty; the rising cost of Advertising within a spectrum of overuse of advertisements; and the need to maintain Product unit Profitability. Advertising saturation concepts have changed; with almost no ability to dominant a Product market; altering the emphasis to Product durability and function, from a earlier attempted establishment of Brand loyalty among Consumers.

The Production cycle can be seen as a complex function, traveling from Entrepreneurial idea, then Research and Design, to Investor and Hard Capitalization, training of Labor, Production itself, establishment of distribution networks, and training of Retail labor plus Advertising. Many Steps of the process can be averted, but most only at the cost of long-term Profitability. The importance of this network lies in the fact all must be adequately complete, before the Return on Investment can be attained. Production Profits must be realized if the real goal of Production is attained: the enrichment of the Producers. The Author here states the Reader should not express any contempt for the Producers; they cannot function in the Economy, either as Producer or Consumer, without this enrichment of themselves; it is the means they utilize to be Economic participants.

Difficulty enters the equation at this point because of the natural construct of the Economic Consumer. He is a mythical creature which does not actually exist, there being such a vast diversity in economic tastes. The Economist, though, will explain the Consumer can be quantified, so that a statistical model of the average Consumer can be constructed. A incredible numbers of characteristics can be assigned to this mythical Consumer: average Income, standard of living, preferred colors, preferred types of packaging, most desired products as determined by Disposable dollars designated for product purchase, amount of knowledge held on product availability, order of preference in purchasing decisions, and amount of purchases to be made in any Time period. The difficulty described above comes in the fact the above information is highly volatile, with wide flux on purchasing decisions due to economic pressures placed on the Consumer.

The Consumer reacts almost instantly to alterations in Income, thinking to expand or contract his purchases based not only on his immediate income; but also on estimates of possible effects on his future income. Later discussions will delineate the concepts of Disposable Income, Projected Earnings, Incremental Income Allotments, and Averaged Irreducible Expenses. It is sufficient here to explain that even temporary shortages of consistent Income will lead to immediate change in Consumption patterns, and even the threat of such shortages will lead to such alteration. Expectation of higher Income will lead to expenditure patterns pushing to increase of purchases, which cannot be sustained under circumstances where Income remains unchanged; leading to an overall reduction of Consumption, in order to fund the excessive prior purchase decisions. There is the case of the Individual who bought a Cadillac under expectation of a Promotion, only to fail in the Promotion; continuing to live on a Chevy budget. A more relevant case is an Individual who purchased a new car because of added Income from working Overtime hours; only to revert to a normal Workweek.

The Consumer possesses many other bad characteristics for both Economist and Businessman. Most mechanics cannot name more than twenty percent of the new model cars available for sale in his area; less knowledgeable Consumers can hardly find the car model suitable to his needs, with Dealer and Salesmen little aid in advising on models which they do not sell. Most Consumers know three times as much about automobiles, than they do about Housing; and know far less about Electronics than either. Discount Retail houses compete on the basis of product prices, with almost no attempt to explain function. The only educational process available for most Consumers comes in the form of Advertising, not noted for clarity of Product function. Business finds this ignorance profitable; the Economist find it deplorable, knowing at least half of all Consumers could be served better with alternate Products, often of cheaper price. Product comparison magazines fill some of the gap, but suffer from dishonesty of service in examination of Advertising Products; and fail in Readership due to Consumer inattention after immediate purchase decisions are made.

Current political leadership is basically Business-oriented to the point most Consumer Safeguard agencies are left unfunded. The actual threat to the Consumer remains minor, but the long-term cost is lack of Product comparison venues. Some Economic studies have been conducted, to attempt to quantify the economic losses occasioned from the lack of Product comparison. The Author evaluates that purchase of unsuitable Product costs almost Two percent of Total Consumption dollars in this Country; he does know he is the new Owner of a Pick-up truck build for heavy transportation while he mainly uses it for intercity commutes, the wrong choice probably costing a loss of Ten miles per gallon of gas. He bought it new from a Dealer salesman, who informed him it was just what he needed. He is sure he is not the only Consuming Fool in America.

Another factor enjoyed by Business, but detested by the Economist, comes in the fact almost all Consumers are Plunge buyers. Interesting products will be purchased upon discovery, creating imbalance in Consumer budgets; this imbalance often leading to a Consumer debt ratio some thirty percent higher than need be, causing Interest charges which distract from a larger Consumption pattern. This may seem like a picayune observation, until it is stated as probable loss of Four percent of total potential Consumption. Many Product/Labor Studies have been conducted, but One can be sure this Shortfall causes the equivalent of fifty thousand jobs in the Economy. Public school classes teaching adequate Consumption procedures could possibly cut this loss in half, though loss of Buying skill would be rapid as the classes receded into Student memory.

The Consumer lacks an overall evaluation of his financial position. No organization stipulates a detailed Household scenario based upon Income levels. Every Consumer lacks clear identification of economic status, almost totally defined by Bank extension of mortgages. The relaxation of Bank procedures for such extension, leaves this definition almost without validity. The Consumer, today, finds declining Mutual Fund values, very low Interest rates on financial instruments, inability of fund aggregation for individual investment, and constant consistent values only in residential properties. The Consumer is over-invested in Housing as consequence, all based upon large mortgages which deny expansion of other forms of Consumer credit. Several Economic studies express widely divergent estimates of the damage, but the Author believes overcapitalization of residential properties incite at least a Nine percent loss of Consumer Demand. This being due not to mortgage rates, which are low; but due to the loss of Consumer credit extension and absorbed Discretionary Income paying excessive mortgage service.

An important element of the above discussion affects Construction Cost scheduling extensively. The high consistent real estate values pressures for construction of high resale value properties. Normal Working Class housing has been abandoned, replaced with moderate wealth estates construction. Economic studies indicate such focus of construction has increased rental rates by thirty percent above projected Normal, pressured Working Class families to devote another Twenty percent of their Discretionary Income to housing, and has expanded the number of families without Housing by a factor of Three. It has also expanded the period of resale from Three months to Two years; this process incurring listing charges and lengthy payment of property necessities-like heating, property tax, and mortgage payments. The higher Property values of construction has also forced up the cost of purchase of empty lots for construction; when combined by a refusal of construction in older urban area, has made these increases probably the greatest in the Economy. Consolidation of all these Economic factors into a statistical model remains almost impossible, though the Author estimates such expanded expenses produce a Seventeen to Twenty percent decrease in Consumer Demand.

The Consumer also faces Corporate Product Price schedules. These schedules set Product prices at levels which produce economic profits for the Corporation, through which they can aggregate financial assets rapidly. These economic profits produce wicked Product price increases. Most Automobile companies finance their extension of Consumer credit solely through these excess Product prices; meaning Consumers pay both for the Product, and for the extension of credit through higher Product prices. Continual price increases come not from increased cost of Product manufacture, which have actually decreased; but need of greater funds for credit extension. Extension of Corporate Consumer Credit rather than normal financial institution credit probably doubles the cost to the Consumer, in terms of total overall payments necessary. The individual Consumer can do little about this, as most of the increase is reflected in Product price initial cost; this product price setting the largesse of the initial loan. This process can be estimated to cost a loss of Fifteen percent of Consumer Demand-through higher Product prices and Interest charges.

The Reader can quickly determine the Author fears current economic structure, due to it’s impact upon Consumer Demand. This term remains vital to the Economist, who know it means Consumers with money in their pockets-either as Cash or Credit cards-who are willing to purchase. The current economic structure is draining Consumer Demand from the system. Improvement does not call for alteration of procedure, just amendment of the procedures of Government and Business. A Free Market system remains the most positive force to increase economic performance, and increase the Standard of Living of all. The necessity, in fact, lies in reintroduction of free market forces into the current system; forces which Government and Business procedures have diminished in impact and effect. Much of the following material will be devoted to removing what the Author calls: the bureaucratization of the free enterprise system.



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Reviewed by Karen Dunn 11/20/2003
Excellent Explanation!


Reviewed by Claywoman 6/9/2003
Hmmm...two David Arthur Walters? Now I have to ponder this wonderful article as well as his! You guys are making me feel inadequate...
Reviewed by m j hollingshead 6/1/2003
interesting article

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