Youth Scholar/Junior Leader:

AmericanPrivateEnterpriseSystem

Program Manual

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Program Manual 

Welcome   to   the   American  Private Enterprise System—a study of how our economy works at  the 

national and local levels. This program  includes  the  following content  information and discussion topics: 

Part I: How America Is Organized to Do Business ..............................................3 Part II: Our Economy – How It Works, What It Provides .....................................7 Part III: The Role of Government in Our Economy .............................................12 Part IV: How to Do Business ................................................................................ 18 Part V: Sole Proprietorships and Partnerships ..................................................... 23 Part VI: Investor-Owned Corporations and Limited Liability Companies ........... 26

Part VII: Cooperatives ............................................................................................ 31 Part VIII: E-Commerce: A New Avenue for Doing Business .................................36

“I believe in an America where the free enterprise system flourishes for all other systems to see and admire - where no businessman lacks either competition or credit - and where no monopoly, no racketeer, no government bureaucracy can put him out of business that he built up with his own initiative.”

—President John F. Kennedy

YoushouldenjoyyourstudyoftheAmericanPrivateEnterpriseSystem.Afterall,youareavitalpartofthesystem.Youwillhaveanopportunitytomeetandtalkwithleadersin yourcommunityduringthisproject, andthereshouldbeproductivegive‐and‐take time between you and the speakers.Thesuccessofthediscussionmethodusedinthisprogramdependsonhowwellyouprepareinadvance andhowwellyouactivelyparticipate ineachsession.

Yourdiscussionleadersarebusinessandprofessionalleadersofthecommunitywhohave

volunteeredtosharetheirknowledgeandviewpointswithyouastheyleadyouindiscussingthetopics ofthe program. Remember to personally thank eachadultleaderwhoworkswithyouandothers inthisproject.Theywillappreciateyourcourtesy. Youareoneofanumberofhighschooljuniors and seniorsthroughout the state selected to participate in thisproject at the local level. Top YouthScholarsfromeachprogrammayparticipateintheKentuckyYouthSeminarinJuneattheUniversityofKentucky.Wehopetoseeyouthen!

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Part I:  

HowAmericaIsOrganizedtoDoBusiness“Having seen a non-market economy, I suddenly understood much better what I liked about a market economy.” —Ester Dyson

How It All Started 

TheUnitedStatesinits200‐plusyearsofexistencehasgrowntobetheeconomicwonderoftheworld,bringingforthrichnessfromitsfarmsandfactoriesunprecedentedinallhistory.During thisperiod,wehavealsoenjoyedauniqueformof democraticgovernmentthathasbeenaninspirationtofreedom‐seekingpeoplesaroundtheglobe. Becausewe have ademocratic government, our countrygoeswherewe(allofustogether)decide wewanttotakeit.Thesedecisionscanbemade wiselyonlyifthechoiceswemakearebasedonan adequateunderstandingofoureconomicsystem.

Economic Systems 

Economicsiseverybody’sbusiness.Aneconomicsystemreferstoaprocessthroughwhichlabor,resources,andskillsarebroughttogethertoproduceanddistributetheenormousvarietyofthingspeopleneedandwant.Thesethingsincludegoods(food,clothing,cars,factories,etc.)andservices(transportation,education,healthcare,publicsafety,etc.).

Three Basic Questions 

Sincetherearelimitstowhatcanbeproduced,basicchoicesmustbemade.Economiesmustanswerthreecentralquestions:

1. Whattoproduce?2. Howtoproduceit?3. Forwhomtoproduceit?

Comparing Economic and Political Systems  

Differentcountrieshavedevelopeddifferentwaysofansweringthesethreequestions.KnowledgeofeconomicsystemsinotherpartsoftheworldcanhelpusunderstandourAmericaneconomicsystembetter.Althougheconomicandpoliticalsystemsineachcountryarerelatedinimportantways,weshouldbecarefulnottoconfusetheeconomicandpoliticalaspectsofeachpolitical/economicsystem. 

Capitalismreferstoamarketeconomywithresourcesownedprimarilybyprivateindividuals andgroups.

Socialismreferstoaneconomythatdependsheavily on the government to plan andmakeeconomicdecisionsandtoownandcontrolimportanteconomicresources.

Communismdescribesasocialisteconomyruledbyasinglepoliticalpartythatcontrolstheuseofalleconomicresources.

Insomenations,includingourown,individualsarefreetochoosetheirpersonalgoalsandto decidehowtheirworkandresourceswillbeused. Inothernations,onlyasmallgroupofleadershavethispower.

Wehavewhatiscalledamarketeconomy.Itinvolves economic decision making by threegroups:consumers,producers,andgovernments.Theirdecisionsareguidedprimarilybytheinterplayofbuyersandsellersinthemarketplace.Marketeconomies can exist in democratic political systems,asintheUnitedStates,orsomewhatmoreauthoritariansystems,asinSpain.

Thesameistrueof socialist economies. In thecase of Sweden, democraticpoliticalprocessesguideasocialist‐orientedeconomy:intheformerSovietUnion,asocialisteconomywasruledbyasinglegroup,the CommunistParty.Intoday’sworld,mostmajorindustrialnationsaremarketeconomies,whilesocialismiscommonamongdevelopingnations.

Circular Flow of Economic Activity 

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Three Forms of Political Economies and How They Work Today  

Capitalism Production:Privateindividualsownlandandbusinesses,operatingthemforprofit.Themarketmainlydetermineswhat goodsaresoldatwhatprices.Pay:Wagesaresetbetween employeesandmanagementat individualfirms,withworkersoftenrepresentedbyunions.Government:Itregulatesbusiness largelybytellingfirmswhatnot todo.Itstimulatesoutputthrough incentives and usuallyprovides tax‐supported social benefits.

CommunismProduction:Thestateownsthesourcesofproduction,andthesearemanagedbyofficials.Centralplannerssetproductionquotas.Pay:Governmentsetswages.Freetradeunionsareprohibited.Government:TheCommunistPoliticalPartyistheonlypoliticalparty,andthatpartyrulesall.

Socialism Production: Electedgovernment graduallytakescontrolofkey industries.Authoritiesoftenplanoutputforuseratherthanprofit. Pay:Strong tradeunionsbargain withmanagementandoften serveasthefountainheadsof socialism.Government:Itallocatesresourcesandusestaxingpowertoredistributewealth.

What Our Economy Provides 

Wenowhavesomefamiliaritywiththeelementsofoureconomy,howdecisionsaremade,andhowthesystemworks.NowwecanlookattheextraordinarydimensionsofourAmericaneconomy—thethingsitprovides.

How Big Is Our Economy? 

Onewaytomeasurethesizeofournationalproductionistoaddtogetherthevalueofallthegoodsandservicesweproduceinoneyear.ThetotaliscalledtheGrossDomesticProduct,orGDP.GDPdoesn’tmeasuretotaltransactions,onlyfinaloutput.Weconstantlyseeandhearreferencesinthenewstothistotalasayardstickofourproduction.TheGDPdoesnotincludedo‐it‐yourselfactivities,suchashouseworkorhomegardening.Italsodoesnotmeasureexpenses,suchascleaningupourenvironment,onlymarketactivities.

In1999,ourGDPtotaledmorethan$9.2trillion,adjustedforinflation.ItssizewasgreaterthanthoseofRussia,Germany,andtheUnitedKingdomcombined.

Tobetterunderstandthisover‐whelmingfigure,thinkofitasabout$32,448worthofgoodsandservicesperAmerican.

Income 

Weearnincomebybeingpaidforapplyingourskills,efforts,andresourcestosomeproductivepurpose.Inthisactivity,weproducegoodsandservicesforothers—andincomeforourselves.Thisincome,inturn,allowsustobuythegoodsandserviceswewant.

Ifweaddalloftheincomesofindividualsandbusinessesearnedthroughproducinggoodsandservicesduringonerecentyear,thetotalismorethan$5.46trillion.Asyoumightexpect,mostofthisincomewenttoemployeesinwagesandbenefits.

Nationalincome=GDPplusreceiptsorincomefrom abroad, payments abroad, consumption offixedcapital,taxes,andsubsidies.

WORLD TRADE:  A POCKETBOOK ISSUE FOR EVERYONE 

More than ever before, the United States isbecomingdependentonothernationsformanyof thegoodsandservicesAmericanconsumerswant. Shoes,oil,computers,cars,clothes,andDVDsare justafewoftheitemsforeignersaresendinghere inhugequantities.Asaresult,U.S.shoppers,retailers,andtravelersarelearningthattheyneedto knowmoreaboutforeigneconomicconditionsandexchangeratesthataffecttheirdecisionsonwhat tobuyorsellabroad.IfJapan’syenincreasessharplyin value,consumersmight see higher prices for Japanesecars.IftheGermanmarkdeclines,itcan meancheaperhotelroomsfortouristsinMunich.

Purchasedecisionsaremadeevenharderasitbecomesmore difficult to determine whether aproduct is Japanese, European, or American. Atelevisionset,forexample,mighthavepartsfromJapan,aspeakerfromSingapore,andapicturetubefrom theUnited States,with the assemblyworkdonebyworkers inbothMexicoandtheUnitedStates.Onething iscertain:neveragainwill theUnitedStatesbeasself‐sufficientasitwasintheyearsimmediatelyafterWorldWarII,whenithadmostoftheworld’smanufacturingplants,muchof theadvancedtechnology,andthegreatestamountofcapital.

Stronger Economies  

Theimprovedhealthofmany countries’economies thatlanguishedafterWorldWarIIisbehindthegrowthintrade.Japan’ssalestothe

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UnitedStates generallyexceeditspurchases.WesternEuropesellsautos,steel, andotherproductshereinlarge amounts.SmallcountriessuchasSingapore,the Philippines, Taiwan,andSouthKoreahave becomemajormanufacturersof ourtextilesandhome‐entertainmentdevices.PurchasesfromoverseasoftenmeanlowerpricesandgreatervarietyamongitemsAmericansbuyaswellastheloss ofthousandsofrealorpotential Americanjobs,asimportstake awaysalesthatotherwisemight havegonetoU.S.firms.

Buying from foreigners representsonlyonesideofthetrade picture‐the import side.Topay forimports,acountrytriesto exportitsproductstoothercountries.TheUnitedStateshas foundthat theemerginghealth ofitstradingpartnersmeans theirconsumerscanaffordmoreAmericangoods.In1999,we imported$1,029trilliondollars’worthofgoodsandexported$684billionworth.Despitethesehugesales,theU.S.deficitonmerchandisetradewithother nations—importscomparedtoexports—reached$345billion.

Thetradedeficitisn’tthewholestory,however.Alsotobe consideredisthemoneythe UnitedStatestakesinfromthree othermajorareas:salesofservices, foreign‐investment transactions,andprofitsbymultinationalcorporations.Increasingly,U.S.firmsare performingmoneymaking servicesinothercountriesintheareas ofbanking,transportation,communications,data processing, andinvestments.Thenationalso getsfundsfromforeignersintheformofvastinvestments.For example,highinterestratesmake itattractiveforforeignersto deposittheirmoneyinU.S. lendinginstitutions,tobuybonds, andtomakeotherinvestments. Declining interestrates,however, havetheoppositeeffect.Profits byU.S.‐basedmultinational corporations,withbranchesandfactoriesinmanycountries,also helpoffsetthetradedeficit.

Exchange Rates 

Everyyear,dealsbetweencountriesareaffectedmarkedlybywidefluctuationsinthevalueofeachcountry’s currency—the exchange rate. TheexchangerateoftheAmericandollar,forexample, isthenumberofdollarsorcentsittakestobuyaJapaneseyenorothercurrency.Whenthedollarisrisingagainsttheyen,ittakesfewerdollarstopurchasethesamenumberofyen.Whenthedollaris falling, ittakesmoredollars to buyyen.An increaseinthevalueofthedollarmakesimportsless expensive intheUnitedStates,butU.S. exports costmoreabroad.Ifthedollarlosesvalue,theoppositehappens:importsbecomemoreexpensive here,andU.S.businessesenjoylargersalesabroad.

Example:MostcamerasarenowmadeinJapanandotherAsiancountries. If theU.S.dollar

depreciatesagainsttheJapaneseyenfrom120to100yenperdollar,acamerathatusedtocost$50will costmorethan$60.Themainreasonisthatthose camerasaresoldinyenbytheJapanesemanufacturer,soittakesmoredollarsforaU.S.importer toobtainthenecessaryyentopurchaseeachcamera than beforethe depreciation. Specifically, atU.S.$1=100yen,oneyencostsexactly1cent, butatU.S.$1=120yen,oneyencostslessthana centorexactly0.83centsperyen.

Enter the Tariff 

Therearetimeswhentherulesbreakdown.Whenonecountrylosestheadvantage,itmaydecidetoprotectitsownindustriesbyimposingtariffstoraisethepricesofimports.Tariffsaretaxesagovernmentplacesoninternationallytradedgoods toprotectitsprices.Oritmaysubsidizeproducts forexport.Especiallyduringhardeconomictimes,pressuresmountongovernmentstoprotectworkersandbusinessesthatarehurt.

While trade barriersmaywork in the short run,mosttradeexpertsfearthateveryonesuffers inthelongrun.Forexample,tariffsplacedonimportedautomobilesactually increase thecost toAmericanconsumers.

THE NEED FOR CHOICES 

Allofourneedsanddesirescannotbefullysatisfied,norwilltheyeverbeinaworldoflimitedresources.Throughouthistory,manysocietieshaveattemptedtosolvethisproblembydictatingwhatindividualneedsandwantsshouldbe—andbycontrollinghowtheseneedsandwantsaremet.Yeteconomicfreedomsandpersonalfreedomshaveawayofinterlocking.Whenindividualsaretoldhow theymustconducttheireconomiclivesandwhen thereareobstaclestosucheconomicfreedomsas spendingchoicesandcareerchoices,personalfreedomsareinherentlyinvolved.

In theAmerican economic system,decision‐makingissharedbyconsumers,producers,andgovernments. Our challenge—and privilege—is tomakewisechoicesinouruseofeconomicresourcestosatisfyourprivateandpublicneedsandwants, nowandinthefuture.

Considering Alternative Benefits 

Whatbenefits dowe gainwhenwemake aparticular economicdecision comparedwith thebenefitswemighthavegainedbymakinganother?Wemust always consider the alternatives.What wearediscussingisaneconomicconceptknown asopportunitycost.Whenlimitedresourcesareused,

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somebenefitsaregained,butsomearealsosacrificed.Sothereisacostinvolvedinourchoice.

Thisconceptappliestoalleconomicchoices. Forinstance,inourownliveswemakechoicessuchasthese:

Spendingforthingstodayorsavingforthefuture

Balancingspendingforfood,clothing,andshelteragainstspendingforentertainmentandrecreation

Undertakingextraworkorspendingthattimeonleisure

Comparingthepotentialbenefitsofhighereducationwiththecostandsacrificesitnormally requires

Keypublic issuesalsorequirechoices:

How much government involvement in oureconomyisnecessaryforitscontinuedwell‐

being?Inwhatareasshouldtherebelessinvolvement?Inwhatareas,more?

Howcanwebalancenationalgrowthwithconservationofnaturalresourcesandprotectionof our environment?

Howcanweevaluatethelong‐termeconomicandsocialcostsandbenefitsofvariousgovernmentprograms?

Howcanweholddowninflationandyetstimulatetheeconomyandexpandemployment?

HowcanwepreservethebenefitsofcompetitioninourAmericaneconomicsystemandstill meettheneedsofthelessfortunate?

Answers to suchquestions are anythingbutsimple.Yettheseissuesdirectlyaffectourownfuture,ourchildren’sfuture,andournation’sfuture. UnderourAmericaneconomicandpoliticalsystems,suchanswersdependonthechoicesweall make.

  

PART I 

QUESTIONS FOR DISCUSSION 

1. Istheroleofchoiceequallyimportantinall economic systems? 2. Whenyoubecomeamemberofagroupsuchasthisone,shouldyoubewillingtogiveupsomeofyourpersonal

freedomandassumesomeaddedresponsibility?Why?Whataresomeexamples?3. Whatisaneconomicsystem?Whatdoesitdo?4. WhatarethebasicCHOICESthatmustbemadewithregardtotheproductionofgoodsandservicesinany

economicsystem,e.g.,intheUnitedStatesorinCubaorinmainlandChina?5. WhatkindofeconomicsystemdowehaveintheUnitedStates?6. Mostmajorindustrialnationsoftheworld,suchastheUnitedStates,arelargelyMARKETECONOMIES,while

socialismismorecommonamongdevelopingnations.Whyisthis?Isonesystembetterforus,whileanothersystemmightbebetterforalessdevelopedcountry?

7. Whatthreegroupshaveimportantdecision‐makingrolesinoureconomyintheUnitedStatestoday?Inwhatway?

8. AreyouindividuallyaCONSUMERoraPRODUCER,orareyouapartofGOVERNMENT,asthetermsareusedhere?Areyouallthree?

9. Howdoesyouranswerinfluenceyourperspectiveastoyourindividualresponsibilitiesinconsumingorproducingorininfluencingtheroleofgovernmentinoureconomy?

IDEAS FOR FURTHER STUDY AND TOPICS FOR TALKS OR DEMONSTRATIONS 

1. Pickacountryandexaminehowitanswersthe threebasicquestionsofwhattoproduce,how toproduceit,andforwhomtoproduceit.

2. Pickacountryandseetheimportanceofthe rolesofproducer,consumer,andgovernmentin economicdecision‐making.

3. Invitealaborleaderorgovernmentrepresentativetotalktothisgroupabouttheirrolein theU.S.economy.   

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 Part II:   

OurEconomy–Howitworks,whatitprovides “You can make positive deposits in your own economy every day by reading and listening to powerful, positive, life-changing content and by associating with encouraging and hope-building people.” —Zig Ziglar  

INTRODUCTION 

Whilemembersofallthreegroups,consumer,producers,andgovernment,makedecisionsinoureconomicsystem,thekeyrolethatreallymakeseverythingworkisplayedbyyouinyourroleasaconsumer.

CONSUMERS 

Today,almosttwo‐thirdsofournation’stotaleconomic output consists of goods and servicesboughtbyindividualsandhouseholdsfor personaluse.Theremainingone‐thirdisbought bybusinesses and governments. So you can clearlyseetheimportanceallofusplayasconsumersintoday’seconomy.

Everydaywemakedecisionstobuyornotto buy,and these decisions directly affect our economy.Ourwillingnessandabilitytospendour moneyforcertaingoodsandservicesarecalledthe demandforthesethings.Demandisinfluencedbytheprices,quality,andavailabilityofgoodsand services.Ifthepriceofsomethingrises,weoften decidetobuylessofitortobuysomethingelse.If thepricegoesdown,wemightbuymoreofit.

Whenourincomeschange,ourdemandsareaffected.Webuylessorshifttocheaperitemswhen ourincomes go down.We tend to choosemoreexpensiveitemsorsimplybuymorewhenourincomesgoup.

Ourdemandforgoodsandservicesaffectstheefficiencyofproducers.Mostofuslookforgoodvalueswhenwebuy,andweareincreasinglyconcernedwithproductsafetyandreliability.Wetrytoselect goodsandservicesthatwillserveusbestandhave thehighestqualityfortheprice.

Thisrewardsefficientproducersthatkeepqualityupandpricesdown andpenalizesinefficientones.Tosucceed,producersmustcontinuetooffergoodsandservicesconsumerswant.Thecostsqueezehassetoffaflurryof changes in themarketplace. For example,some peoplenowaresettlingforsmallerhomes,suchas townhouses,condominiums,andthelike.

Eventhoughthegeneralconsumertrendisto cutcosts,theexpandingnumberofworkingwomenhascreatedabriskmarketforconveniencegoods.Andamong working couples with no children,whosecombinedannualincomesareoften$50,000ormore,thedemandforluxurygoodsandserviceshasremainedsteadyeveninatimeofrecession.

Althougheveryhouseholdhasslightlydifferentspendingpriorities,about$8ofevery$10on averagegoesfornecessities,suchasfood,clothes, shelter,andmedicalcare.Healthspendingalone accountsfor$1.50ofevery$10intotalconsumer outlays.What’sleftovergoesmostlyfornonessential goods andservices—a new stereo, vacation trips, cosmetics,sportinggoods,andmovies, to namejustafew.

SUPPLY AND DEMAND 

America’sbusinessesarethesuppliersinthebasic supply‐and‐demand equation that is at theheartofthefree‐enterprisesystem.Inanutshell,that’showtheU.S.economyworks:Thematchingupofconsumerneedsanddesireswiththegoods andservicesofferedbybusinessesatapriceconsideredfairbybothparties.Whenbuyers’desires change,businessesmustrespondorbeswallowed up by thecompetition. F o r e x amp l e , the a u t o i ndu s t r y f o und troubles,whenitwasslowtoadjusttothedesire forsmallercars.

Forbusinesses,thebestofallworldswouldbe tomaximizeprofitsbymakingorsellinggoodsthataremostindemand,becausethemoreconsumers wantanitemorservice,themoretheyarewilling topayforit.Thus,firmshaveanincentivetosell videogames,forexample,whenconsumerdemandishighforthatproduct.

Problems crop up for businesseswhen toomany firmsentera fieldtomeet theconsumers’demandforaproductorwhenthepricerisesbeyondthepointindividualsconsiderreasonable.In bothinstances,theresultisthattoomuchofaproductisproducedandpricesdrop,puttingasqueeze onbusinessprofit.

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Wooing the Consumer 

Howdoconsumerskeepabreastofwhatgoodsandservicesareavailable—andatwhatcost?Mostlythroughadvertisingmessageson televisionandradio,innewspapersandmagazines,onbill‐boards,andthroughthemail.In onerecentyear,businesspoured nearly$118billionintoadvertising,accordingtoestimatesbyAdvertisingAge.Inadditiontothetraditionalmethodsofadvertising,technologyhasbegun toplay avitalroleinadvertising.Most,if notall,companieshaveanInternetsitewhereconsumers canresearchtheirproductsandpurchase themonline.Consumersenjoytheconvenienceofnothavingtoleavetheirhometopurchaseproducts.Companies arespendingbillionsofadvertisingdollarstogettheirproductsontheInternettomeetthedemandsofconsumers.

CREDIT AND SAVINGS  

Inthescrambletoluretheconsumer,U.S.industrywouldbeata loss without another important tool:credit. Particularly in the purchaseofbig‐ticketitems,suchashomes,autos,andmajorappliances, creditenables consumerstobuywithouthaving toputupallthecashatonce. If buyers canmeet theirtimepayments,creditservesavitalpurposebyallowingthem to enjoy goods and services now, rather thanhaving towait.But there’s adanger, too.Recently,personalbankruptcieswereatanextremehigh—theresult,expertssay,oftheinabilityofmanyfamiliestomanagecreditobligations. Altogether,theamountofmoneyowedbyAmericanconsumershasbeen$729billion.

Theeconomycansufferfromsuchexcesses, too.Retailsalesstagnateorfallwhenconsumers becomeconcernedovertheirdebtsorthehighinterestratestheymustpayoneverythingfromcredit cardstohomemortgages.Forexample,outstandingconsumerandmortgagedebtasapercentage ofafter‐taxdisposableincomereachedrecordlevelsinlate1979,andthendeclinedfortwoyearsina row.From1980to1999,mortgagedebtincreased from$1.460billionto$5.7billion.

Mostanalystsviewadrop‐offinconsumerdebt as agoodomen.Rather than spendandborrow, saytheeconomists,consumersshouldputmoreof theirmoney into savings and investments. That wouldmakemorefundsavailabletocompaniestobuildandmodernize,thuscreatingmorejobsfor Americansand allowing U.S. firms to compete moreeffectivelywithforeignfirms.

Duringthelastseveralyears,theUnitedStates,France, and Italywere theonly three industrializedcountries toregisteradecline in therateof personalsavings.Duringthe14‐yearperiod1980 through

1994,personalsavingsintheUnitedStatesdeclinedfrom7.9to4.1percentofdisposablepersonalincome.

PRODUCERS 

Producersarethosewhoworkbythemselvesoringroupstoprovidegoodsandservices.They makeeconomicdecisionsbasedonwhattheybelievethedemandwillbefortheirproductsorservices—andthey expect to earn an income from whattheydo.

WhoaretheseproducersintheAmericaneconomicsystem?Youmightthinkonlyintermsof largebusinesses,but,inallprobability,youarea produceryourself.Workersareproducers.They applytheirbasicskillsandenergiestochangeresourcesintogoodsandservices.

Managersareproducers.Theyproducewhentheycoordinate,plan,andorganizetheactualproductionofgoodsandservices.Aboutone‐thirdofallwageandsalariedemployeesaremanagers,supervisors,oradministrators.

Investors are producers. They supply themoney,orfinancialcapital,neededtobuyandusefacilities,equipment,andrawmaterials.

Youmaywellbehelpingtosupplyfinancialcapitalwithoutrealizingit.Ifyouhaveasavingsaccount,ownsharesofstocks,ownlifeinsurance, orareinapensionfund,youarehelpingtogeneratefundsforinvestmentpurposes.Banks,savings andloanassociations,andthestockmarketshelp put thesavingsofpeople towork.By financing homeandbusinessinvestmentsandcreatingnewloans,theyplayavitalroleinoureconomicsystem.

Peoplewho start businesses are producers.Thesepeoplewho start newenterprises orbusinessesarecalledentrepreneurs.Theirvisionandoriginalityhave alwaysplayedakeypart in thegrowthofoureconomybyprovidingnewgoods,services,andjobs.SomeofAmerica’sfamousinventorshavebeenentrepreneurs.

Althoughyoumaynothavethoughtofyourselfasaproducer,youcanprobablyseeatleastone wayinwhichyouare.

HOW THE WORKFORCE IS BEING TRANSFORMED 

WorkersformthebackboneofAmericanenterprise.White‐collarandblue‐collar;skilledandunskilled;merchants,farmers,andprofessionals—menandwomenintheworkforcedofarmorethanearnalivelihood.Morethan143millionstrong, theyarebothproducersandconsumersofgoods andservicesandaresourcesofboththesupplyand thedemand

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thatdrivethenation’scommerce.Yetthenation’slaborforceisundergoingimportantchanges:

Automationiserodingjobopportunitiesinold‐linemanufacturingindustrieswhilecreatingvastnewonesinhigh‐technologyandservicefields.

Laborunions,afterdecadesofgrowth,arelosingpower.

Womenandmorematureworkersareplayingbiggerroles.

Youngpeople,particularlyAfricanAmericansandHispanics, are continuing to find itdifficulttolandcompetitivejobs.

FormostAmericans,havingajobisabasicrequirementforparticipatingintheeconomicsystem.Thosewithoutjobsfindthemselveswithlittlecontroloftheirowndestiny,dependentonothers orthegovernmentfortheirwelfare.

Wagesandsalariesearnedbyworkingpeople arethechiefsourceofpersonalincomeintheUnited States,recentlyamounting tonearly$6.1 trillion, ofallpersonalincome.Virtuallyallof thisincomeisplowedbackintotheeconomythroughspending,savings,investments,andtaxation.

Butworkersderivemorefromtheirjobsthan justapaycheck.Such important itemsashealthinsurance, old‐age pensions, and paid vacation timearetypicalofthebenefitsthatgoalongwithmanyjobs.

Justasworkersneedjobstosustaintheirlivelihood,industriescannotfunctionproperlywithoutanadequatesupplyoftrainedworkers.Matchingupjobswithqualifiedworkersisacomplexprocessthatinafree‐marketeconomydependsontheforcesofsupplyanddemand.Theprocessisnotalwaysasmoothone.Demandforlaborfrequentlychangesmorerapidlythanthesupply.Forexample,itmighttakeacompanyinPhoenixseveralmonthstolocateandhire100electricalengineersitneedsforabusinessexpansion.Findingashortageofqualifiedpeople,thecompanymighthavetolureemployeesawayfromothercompaniesbyofferingbigsalariesandotherbenefits.Overtime,suchstrongdemandinthefieldmightencouragestudentsenteringcollegetomajorinelectricalengineering,assuringthatfutureneedswillbemet.Tooheavyaresponsecouldproduceasurplus.

Laborsurplusesoccuronawidescaleduringperiodsofrecession,whenbusinessactivityslowsandtheneedforworkersdeclines.Theresultismassivelayoffs.Theresultingeconomichardshipdoesnotstopwiththosewhoarejobless.Entireregionsoftenfeel

theimpactasretailspendingandtaxrevenuesfalter.This,inturn,canleadtostillmoreunemployment.

CHANGING WORKPLACE 

About 21 percent of the labor force holdsmanufacturingjobs.Expertslookforlittleemploymentgrowthoverall inthisfieldandanoutright declineinsomeindustriesasunskilledworkersare replacedbyrobots.

ServiceoccupationsnowaccountforthelargestshareofAmericanworkers—nearly116millionpeople,or80percentofthenonagriculturalworkforce.Thisbroadfieldincludesoccupationssuch asnursesandhospital attendants, hotel and restaurantworkers,policeofficers, firefighters,and janitors.

AnotherimportanttrendintheU.S.labor forceisthegrowingranksoffemaleworkers.The number ofwomen holding jobs has grown—fromfewer than22millionin1960to67.5millionatthemostrecentcounts.Whilethisincreasereflectsbothrisingdivorceratesanddecisionsofmanywomento stay singlelonger,womennowmakeup47%ofthelaborforceand73%workfulltime.

Government 

Wehaveseenthatconsumers andproducersmakedecisions in theAmerican economic system.Government alsogets intothedecision‐makingprocess.Because consumersobtainbenefits fromcompetition,our government has traditionallysoughttomaintainacompetitive environment for business.Thisintercessionoftentakesthe formoflawsorregulations intendedtopreventabuseinspecificareas.Ofcourse,manygovernment regulations alsodeal withproductstandards,environmentalimpacts,andothermattersnotdirectlyrelatedtocompetition.Wewilltalkmore abouttheroleofgovernmentinPartIII.

HOW OUR ECONOMY FITS TOGETHER 

Oureconomycanbethoughtofasagiganticmachine. So far,wehave lookedat thedifferentpartsandwhat theydo.Now, inorder tounderstandtheeconomymorefully,itwillbehelpfulto lookathowthewholemachinefitstogetherand works.Theconceptofsupplyanddemandiscentraltothisunderstanding.

Supply, Demand, and Prices 

WetouchedonthesubjectofsupplyanddemandbrieflyinPartI.Itissomethingwecomein contactwitheveryday.

For example, supply anddemand affect thewageswearepaid;ourwagesareactuallythepriceswe

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chargeforperformingwork.Supplyanddemandalsoaffect thepricesofgoodsandservices, the pricesofrawmaterials,andtheprice,orinterest, paidwhenweborrowmoney.

Two factorswork together to determine thesupplyofaproduct,service,orresource:thecost ofproducingitandthesellingprice.

Supposebuyersarewillingtopaymoreforaproductthanitcoststoproduceit.Businessesusuallyincreasetheirproductiontoincreasetheirprofits (ortheir return over and above production costs).Thisprofitmargin,ifitislargeenough,encouragesnewbusinessestoenterthisfield.Now there’smorecompetitionamongsellers,whichtendstoreducepricesorimproveproductsorboth. Anditmeansalargersupply.

Thereisanoppositesidetothispoint.Consumersmightdecideaproductisnotworthitspriceandstopbuyingit.Theproductisnolongerworth thecostofproducingit.Whenthishappens,and ifthesituationcontinuesverylong,theproductis forcedoffthemarket.

What isgoingon isabalancingactbetween thesupplyofgoodsandservicesandthedemandfor theminthemarketplace.Pricesplayaroleinthisprocess.Lookaroundandyoucanseetheeffects.Whentheautomodelyearisover,lastyear’smodelsareusuallyreduced inprice tostimulate sales.Departmentstoresholdclearancesalestoreduce their inventories.

Foodpricesgoupanddown,dependinginpartontherelativesupplyofagriculturalcommodities.However,thecostsofsuchcommoditiesareoftenasmallshareofthefinalretailpriceformanyprocessedfoods.Forexample,itwasrecentlyestimatedthatprices of farm products accounted for only about 8percent of the priceof a typical loaf of bread.Theother92percentwasforprocessinganddistribution.

Allthesetransactionsbetweenbuyersandsellersaremadepossiblebytheexistenceofmoney. Usingmoney is a convenient way to exchange goodsandservices.Also,bysavingmoney,wecan setasidesomeofourpurchasingpowerfor later use.Moneymakesbuyingandsellingeasyandthusmakesoureconomiclifefarmoreproductive.That iswhymoneyhasreplacedthebartersysteminall modernsocieties.

Themarketplace is wherever these transactionsoccur,wherebuyersandsellerscometogether toagreeontheexchangeofgoodsandservicesfor money.Transactionspermitbuyersandsellersto influenceeachotherandtherebylargelydeterminewhatoureconomyproducesandwhoproducesit.

Competition 

Competitionhas alwaysbeenofkey importanceintheAmericaneconomicsystem.Thevitalityofthe

Americaneconomyisbasedoncompetitionbetweenproducers.Thosewhosupplythe bestgoodsandservicesatthebestpricesgenerally arethemostsuccessful.Competitionisoneofthe factors thatcause our economy to change constantly.Producerstendtomovetoactivitieswhere earnings apparentlyare higher and leave those whereearningsarelower.Thismeansworkers,facilities,andrawmaterialsshifttothesenewareas fromformerones.

Inanydiscussionofcompetition,thesubject ofproductivityislikelytocomeup.Productivitydescribeshowwellproducers(andgovernments)useresources—people,facilities,andrawmaterials.Themost important factors influencingproductivityare:

People—theirskills,efforts,andmotivations. Capitalresources—theavailabilityand

efficiencyoffactoriesandequipment. Technology—theapplicationofscienceto

industrialneeds,involvingnewmaterials,newmethods,andadvancedprocesses.

Organization—theeffectivenessofmanagementincombiningresources.

Governmentregulation—theimpositionofstandardsorrestrictions.

Workingenvironment—asitrelatestobothhealthandworkattitudes

Improvementofproductivityinbusinessandindustryisessentialifwearetomaintaincompetitivenessinsellinggoodsandservicesbothathome andabroad. Sinceour various governmentsnormallyhavenocompetitioninprovidingmanyoftheirservices, improvingproductivityingovernmentshouldbeamatterofspecialinterestandconcerntousall.Howdoweasproducersremaincompetitive?Andhowdobusinessesandindustriesincreaseproductivity?Investmentsinnewfactories andequipmentand improvedtechnologyare theanswersinmanycases.

Balancing the Economy 

Asyouprobablyrealizebynow,animportantfactormakingtheAmericaneconomicsystemwork isthelawofsupplyanddemand.Itisnotreallya law,ofcourse;it isanexplanationofthefactorsdetermininghowmuchofeachproductand serviceisproducedandhowthosegoodsandservices aredistributed.

Remember that whenwe buy less than oureconomyisproducing,eventuallyproductiongoesdownandunemploymentincreases.However,ontheothersidewhenourpurchases increase, thisdemandresults inbusiness expansionandhigheremployment.

Supply anddemand forces ultimately determinethelevelsofproductionandemploymentin our

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economy.Butasweshallsee,certainstepscan betakentoinfluencewhattheselevelswillbe.It isnowaresponsibilityofthefederalgovernment, asestablishedbytheEmploymentActof1946,topromotemaximumemployment,production,andpurchasingpower.

Maintainingbothstablepricesandhighemployment,however, is difficult in a free society.Wagestendtoincreasewhenavailableworkersare inshort supply, andpricesof goods tend to rise whendemandoutstripssupply.Overtheyears,our economyhasgrownataremarkablerate.But in thisprocess,therehavebeenperiodsofexpansion andperiodsofrecession.Thesealternatingupsanddownsmeanournationalgoalofhighemploymentisnotalwaysachieved.

Theeconomyexpandsandcontractsasaresultofchangesinourtotalspending.Manyfactors cancause

this,includingtheintroductionofnew technologies,theavailabilityofinvestmentfunds, changingnationaleconomicpolicies,cropfailures,wars,andpublicconfidenceinoureconomicfuture.Therearemanymore.All these factorsdirectlyaffecttheeconomy.

Let’sconsiderthismatterofpublicconfidencealittle further.When economic times are good,individuals,businesses,andmanygovernmentsfeelmoreconfidentabout the future,andtheyspendmore.An individualmightbuyanewcarordecidetobuyahome.Acompanymightdecidethe timeisrighttobuildanewfactoryorinstallnew equipment.Alocalgovernmentmightbuildanewschool.Expendituressuchasthesearenotmadeeveryday.When spending occurs in surgesof increasedpublic confidence, this stimulates the economyforaperiodoftime.Whensuchspendingdecreases,itnormallyslowsdowntheeconomy.

 

 PART II 

QUESTIONS FOR DISCUSSION:  

1. WhyistheroleoftheCONSUMERsaidtobethe keyrolethatmakeseverythingworkinour economicsystem?Doyouagree?

2. HowaretheconceptsofSUPPLYandDEMAND importanttoourunderstandingofour economyintheUnitedStates?

3. WhatistheroleofthePRODUCERinmakingour economywork?4. WhoarethePRODUCERSinoursociety?Whatis PRODUCTIONintheeconomicsense?AreGOVERNMENTS

producers?5. HowisGOVERNMENTinvolvedinoureconomy today?Howdoesitgetintothedecision‐makingprocess?Is

theroleofgovernment moreimportanttodaythanearlierinthehistory ofourcountry?Why?6. WhatfactorsdeterminetheSUPPLYofaproduct orservice?7. Ifbuyersarewillingtopaymoreforaproduct thanitcoststoproduceit,willproducerslikely increasetheir

production?Mightthisresultin morecompetition?Whatmightthisthendoto prices?Totheproductquality?Totheproductdifferentiation?

8. HowisCOMPETITIONimportantintheMARKETPLACEofourAmericaneconomicsystem?What isit?Howdoesitoperate?

9. IsPROFITgoodorbad?Whyorwhynot?10. Inwhatindustriesisournationstrongly competitiveintheworldmarkets?Why?

IDEAS FOR FURTHER STUDY AND TOPICS FOR TALKS OR DEMONSTRATIONS 

1. Selectonenaturalresourceorrawproductand findallthefinalconsumergoodswhichusethat rawproduct.

2. Helpyourgroupplanavisittoalocalbusiness.3. Examinethechangesinoneproductovertime. Forexample,howhasonecar

changedover time?Whatchangeshaveoccurredinorange juiceduringthelast30years?

4. Discusstheintermediate(value‐added)processestherawproductgoesthrough.

    

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 Part III:   

TheRoleofGovernmentinOurEconomy“Government’s view of the economy could be summed up in a few short phrases: If moves, tax it. If it keeps moving regulate it. And if it stops moving, subsidize it.” —Ronald Reagan  

Government units(onthefederal,state,andlocallevels)areinvolvedinfivemajorareasoftheeconomy.

1. Protection of the rights and freedoms—economic,political,andreligious—ofindividualsthroughourcourtsandtheadministrationofourlaws.

2. Providinggoodsandservicesintheinterestofallofus—suchashighways,national defense,andeducation.

3. Regulation—thepromotionoffaireconomiccompetitionandtheprotectionofpublichealthandsafety.

4. Promotionofeconomicgrowthandstabilization—throughvariouseconomicpoliciesand programs.

5. Directsupporttoindividuals—programstoreduce hardships for individuals whocannotmeettheirminimumneedsbecauseofspecial circumstancesorlackofemployment.

Beforewediscusstheroleofgovernmentin oureconomy, some definitions are in order.We shouldknowthemeaningoftheseimportantterms.

SUPPLY OF MONEY 

Thesupplyofmoneyhasanimportantinfluenceonspendingandproduction,andbanksplayacentralroleinthisprocess.Bychangingthemoney supply,theFederalReserveaffectstheamountofmoneybankscanlendtoindividualsandbusinesses tospend.Insimplestterms,theFederalReservegenerallymakesmoneymore available when total spending isconsideredtoo lowand lessavailablewhentotalspendingistoohigh.Theseactionsdirectlyinfluenceinterestratesthroughoutour economy.Thefederalgovernmentdoesnotdirectly controlthesupplyofmoneyintheUnitedStates. TheFederalReserveBoard,appointedbythepresidentandconfirmedbyCongress,controlstheFederalReserveSystem,whichcontrolsourmoneysupply.Termsformembersoftheboarddonotcoincidewithpresidentialelectionsandarenotsupposed tobepoliticalappointments.

INFLATION 

Inflationmeansacontinualriseinthegenerallevelofprices.Nobodywantsinflation,butithasbecomealltoofamiliarintheworldtoday.Pricesofmostgoodsandserviceshaveincreasedsignificantlyoverrecentyears.Pricesoftengoupasthequality ofthegoodsandserviceswebuyimproves.But,ingeneral, price increases not a ccompanied byimprovedqualityarecalledinflationary.Wheninflation occurs, eachdollarwe have buysfewergoodsandservices.Intheyearsbetween1950 and1975, the ability of our dollar to purchasethesethingswentdownbyabout50percent.However, from1950 to 1994, the overall rate of inflationdeclinedfrom4.2to0.68percent.

Inflationhasatleastthreebasiccauses.Whenconsumers,businesses,andgovernmentsspendtooheavilyonavailablegoodsandservices,thishighdemandcanforcepricesup.Ifcostsofproduction riseand producers try tomaintain profit levels, pricesmust increase. The lack of competition amongproducersalsocancontributetoinflation. Theburdens of inflation tend to fall more heavilyonthosewholiveonincomesthatremain thesameorrisemoreslowlythanprices.Thiscan includemanyworkersandretiredpersons.Theonlywaythesepeoplecancopewithrisingpricesistobuyless,reducingtheirlivingstandards.

Theseeconomicupsanddownshavevariedwidely in thepast,andfederalgovernmentpoliciesoften have attempted tomoderate their adverseimpacts.However,somanycomplexforcesareatworkinoureconomy,andthetimingofgovernmentpoliciesissocriticalthatunexpectedresultscanoccur.

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FISCAL POLICIES 

Thetaxingandspendingpoliciesofthefederalgovernmentarecalled fiscalpolicies.Federalspendingcanbe increasedtokeepoveralldemandatahighlevelifprivatespending islow.Andfederalspendingcan berestrainedtoreduceoveralldemandwhendemandishigher thanourtotalproduction.

Governmenttaxpoliciesalsocanbechangedtohelpbalance theeconomy.Federaltaxcutsandrebatescanbeusedtostimulate theeconomyinarecession—or taxincreasesmaybeusedtohelpdampenexcessivedemand.Whetherthefederalgovernmenthasasurplus(spendingless thantaxes)oradeficit(spending greaterthantaxes)dependsonhowfiscalpolicyisusedtomeet theneedsoftheeconomyand howtheeconomyperforms.

MONETARY SUPPLY 

TheFederalReserveSystemhasresponsibilityforcontrollingournation’smoneysupply—the totalofallcoinsandcurrencyincirculation,plus checkingaccountsheldby individuals andbusinesses. Thiscontrol is calledmonetary policy,whichisanotherwaytolessentheadverseeffects ofeconomicswings.

EMPLOYMENT 

TheAmericaneconomyhasshownanimpressiveabilitytocreatenewjobs.However,thenaturalgrowthanddevelopmentof theeconomyhas broughtmajorshiftsinemployment.Someregionsof the countrygrow faster thanothers. Thepatternofavailablejobskeepschanging,andtheworkforcemustcontinuallyadjusttothesechanges.

Ofcourse,thetotaldemandforgoodsandserviceschangesduringswingsintheeconomy.This changeindemand,combinedwiththeregionalandoccupationalshiftsinemploymentjustdescribed, causespartoftheworkforcetobeunemployedfor variousperiodsoftime.

Reducing unemployment and the personalhardshipsassociatedwithitinvolveseffortsbybusiness,labor organizations, government, and individualsthemselves.Retrainingprograms,income assistance,andemploymentservicescanallhelp peopleadjusttochangingjobconditions.

THE EVER PRESENT HAND OF GOVERNMENT  

TheU.S.governmenthasfar‐reachingpower overtheAmericaneconomy. It influences virtuallyeveryeconomicdecisionmadebybusinessmanagersandtheiremployees,bysaversandconsumers,byinvestorsandretirees.

Tobeginwith,thegovernmentmakespossible theworkingofthecapitalisticeconomy.Itprovides thebasics:moneyandcreditforeconomictransactions,the judicial system that protects private propertyandenforcescontracts,andregulatorswhokeepcompetitionontheupandup.

Beyondthat,theWashingtonbureaucracyoperatesAmerica’sbiggestbusiness.Itemploysmore people,buysmoreproducts,ownsmorerealestate, constructsmore buildings, insuresmore investments, andborrowsmoremoney thanany other organizationin the non‐Communist world. Add inthestateandlocalgovernmentsandyouhave an enormousmachine that directly affects thewholeeconomy.

Of equal importance, the government intervenesin the market by setting the rules underwhichallbusinessescompete.Throughthetaxsystem,thebudgetprocess,andcontrolofthemoney supply,thegovernmenthasgreatleverageinpushingthelevelofeconomicactivityupordown.

Overall,thesupply‐sidepoliciesoftheearly1980shadtheeffectofemphasizingtheshortrunover the long runanderoding the foundationof theeconomy.Atthecoreofthesesupply‐sideeconomictheories lies the key assumption that the stimulusgiven to the economy from tax cuts is strongenough for the tax cuts to pay for themselves.Butmostexpertsthinkotherwise,andexperiencehasproved themtobe right.While the short‐termimprovement in livingstandardscannotbedenied,the long‐lastingeffecthasbeena ballooningofthefederalbudgetdeficitwhichleads ultimatelytoadeteriorationofthelong‐term strengthoftheeconomy.

Theeconomicpowerofthegovernment,however,willnevershrinktoitsoriginallevel,which wassimplytocoinmoney,regulateinternational andsomeinterstatetrade,andprovideafewbasicservices, suchasprotection, roads, anddefense.Generally,theeconomicactivitiesassumedby

15

governmentwerethosethatcouldnotbecarriedoutbyprivatebusiness.

Thefirstmajor interventionsbygovernment intotheeconomywerepushedbybusinessmento makemorecommercepossible.Inthe1800s,for example,federal investmentsweremade in railroads,canals,androadstomakeiteasiertotransport products tomarkets and to help build andpopulatenewcommunitieson the frontiers. The economiesofthewesternterritoriesweregivena basebythefederalgovernmentwhenitofferedlandtohomesteaders,encouragingfamiliestosettleandfarmthere.Atthesametime,bigbusiness,interestedinmakingthemarketplaceoperate inarationalmanner,pushedforgovernmentregulation ofbanks,credit,andthecirculationofpapermoney. Startinginthelate1880s,Americansbecame moreandmoreconvincedthatthefreeworkingof themarket systemwasaninsufficientguarantee thattherewouldbenoabuse.Complaintsoffarmersaboutunreasonableshippingrates,ofworkers about the employment of children,andof small businesses about ruthless,unfaircompetitionbylargefirmsallpromptedgovernmenttostepin.

Aslongagoas1890,Congresspassedamajorpiece of legislation regulating business—theShermanAnti‐TrustAct.Theobjectivewastopreventtwoormorepersonsfromgettingtogetherto restraintrade.Thiscould involve formingamonopoly,whereasingleproducerdominatesanindustryso that itcansetpricesorcontrol supply withoutregardtocompetition.Italsocouldinvolve pricefixing,theagreementamongseveralfirmsto setpricestoavoidcompetition.

Competitionmay notbeinthepublicinterestinsomecases.Anexampleisapublicutilitythatsupplieselectricity,naturalgas,or water.Duplicationoflocalpower,gas,orwaterlines couldresultinhigherrates.Butifthereisnocompetition,howshouldpricesbedetermined?Insuchcases,stateorlocalgovernmentsregulatetheprices oftheservices,keepinginmindtheinterestofthe publicandthecostsinvolved.

Still,untiltheGreatDepressionofthe1930s, thefeeling remained strong that the capitalistic systemgenerallywasself‐adjusting:giventime, companiesthatsoldshoddymerchandiseatexorbitantpriceswouldlosetheirmarkets;firmsthat mistreatedworkerswouldfindpoormoralecutting productivityandprofitsintheirfactories.TheharddaysoftheDepression,however,promptedincreasingpoliticaldemandsforregulations.Nowmorethan60federalagenciesincludesomekindofregulatoryactivityinvolvingagriculture,foodprocessing,consumersafety,workerwelfare,orotheractivitiescloselyrelatedtoagribusiness.Seventy‐fiveyearsago,therewerejustsix.

Today,governmentrulescoverdeceptivebusinesspractices;theingredientsoffoods,drugs,andcosmetics;theairAmericansbreathe;andthewaterwedrink.Statecommissionsusuallysetrates forelectricityandnaturalgas.Localboardsestablishfaresfortaxisandpublic‐transitsystems.

Federalregulationsdetaileligibilityrequirements for government‐sponsoredmedicalcareandoutlinehowdepressedareasaretoberebuilt.Theyspecifyminimumwagesandtellemployershowsafefactoriesandofficesmustbe. R ulescoverinsuringbanks,distributingenergy,overseeingradioandtelevision,andmediatinglabordisputes.

All of these ruleshave costs farbeyond theamounts needed simply to administer them. TheCompetitiveEnterpriseInstitutefoundthatitcosts$1.8trillionwhichismorethanhalfoftheannualbudgettoregulatetheserules.Most of thatexpenseispickedupbyconsumers.Forexample,whenanindustryspends$20billionayeartomeetfederalcleanair requirements,thatexpenselatershowsupinhigherutilitybillstoconsumersas electriccompaniesacttorecovertheircosts.

Theclimateofchangetowardderegulationhasmadelittlereductionintheoverallcostoffederalinterventionso far,accordingto theWashingtonUniversitycenter.Butitseemscertaintoalterthewaytheeconomyworksinaffectedindustries.Themajor example to date is the airline industry. In1980,therulesforentryofnewcompanies,scheduling,andticketcostswererelaxed.Morelow‐costcarriersjumpedintothefield,ticketpricesdropped, andanewcompetitiveeraopenedup.

Thebiggest,mostpowerfultoolforinfluencingtheeconomycamewiththepassageofthefederalincometaxlawin1913.Tosomeextent,this progressivetaxredistributeswealth,becausethose withhigherincomesaretaxedatasteeperratethan thosedowntheincomescale.Changesintaxrates have been usedto finetune economic activity. Loweringtaxratesputsmorespendingmoneyinconsumers’pockets,increasingdemandforgoods andservicesduringperiodsofsluggishgrowthor recession.Atthesametime,thegovernment pumpsmoneyintotheeconomythroughthefederalbudget,tryingtokeepbusinessexpandingfast enoughtoprovidejobsforallwhowantthembut notsofastastoigniteaninflationarybinge.WhenWashingtonbuyssomethingorhandsoutmoney, recipients have that manyadditional dollars to spend,thusincreasingthedemandforgoods.

Thefederalgovernmentgivestaxcreditstocompaniestoinducethemtoinvestinnewplants andequipment and to persuade them to train theunemployed. It uses tax deductions to encouragesuchindustriesashomebuildingandto promote

16

suchsocialandeconomicgoalsasenergyconservation.

UncleSamalsoisinthelendingbusinessina giganticway.Billionsaredispensedinloanstofarmers,smallbusinesses,andforeignbuyersofU.S.exports.Additionalbillionsofloansareguaranteed by thegovernment.

ThroughSocialSecurity,incomemaintenance,andother

aid totheaged, the ill,andthe poor,thegovernmentisamajorsourceoffundsfor millionsofAmericans.Forexample,in1991,approximately24percentofgrossdomesticproduct wasallocatedforSocialSecurity.In1994,Social Security payments totaled$814 billion.Do you knowwhatitwaslastyear?Ifchanged,whatdo youattributethisto?

ThefederalgovernmentalsoisthelargestsinglecustomerforAmerica’sindustrialproductsandservices.ThePentagonalone spentmore than$1.7trillion in 2012,withmany billions going to buyeverythingfromaircraftcarrierstokitchenpots.

Directlyorindirectly,thegovernmentsupportsmuchoftheresearchdoneinthecountry.Mostofthemoneytheseactivitiestakeissuppliedthroughtaxes.Federal,state,andlocalgovernments use revenuesamounting to more than 22.9 percent of thecountry’s total production of goodsandservices.

Effects of Debt 

Mostoften,thefederalgovernmenthasspendsbillionsmorethanittakesin.Tomakeupthedifference,theTreasurywillborrow—whichiswhythenationaldebtgoesup.Tocoverthisdeficit,thegovernmentsellssecuritiesto banksorindividuals,thustaking forpublicusefundsthelenderscouldhaveusedtobuyorinvestelsewhere.Inthepast,thisprocess hastendedtoincreasethe country’smoneysupply.Whenthemoneysupplyincreasesatapacefasterthantheoutputofgoodsandservices,theresultislikelyto beinflation,withpricesrisingandwagesracingtokeepup.Themajorburdenfallsonpersonswhoseincomesdonotgoupas fastasinflationandwhothereby losepurchasingpower.

ECONOMIC THEORIES THAT VIE FOR DOMINANCE 

For some 40 years, the theoriesof British economist JohnMaynardKeynesdominated the politicaleconomiesoftheUnitedStatesandmanynations of the non‐Communistworld. Over the past decade, those

theories, which hold that the activeuseofgovernmenttaxingandspendingpowerscanbringfullemploymentandpricestability, have comeunderincreasing challenge. The reasonisthattheydidn’tworkwellduringthedecade ofthe1970s,wheninflationpersistedduringrecession. That wasn’tsupposed to happen. In theKeynesianworld,inflation shouldhavedropped sharplyduringrecession.

Asa resultof thisunexpecteddevelopment,other economic theoristshave come intoprominence.Theyinclude:

Monetarists,thinkthatasteady,restrainedgrowthofthemoneysupplyisfarmoreinfluentialthanbudgetpolicyoneconomicperformance,inflation,andunemployment.

Supplysiders,whofavorincentivestotheeconomybycuttingtaxestostimulatework,savings,andinvestment.

Post‐Keynesians,whonowacknowledgethepotenteffectthatmoneyandfinanceaswellasfederalfiscalpolicyhaveontheeconomy.

Let’stakeacloserlookattheschoolsofeconomicthoughtnowvyingintheUnitedStatesandsomeoftheirleadinglights:

Keynesians 

TheearlyinterpretersofKeynesadoptedbudgetactivismasthewaytomanagetheeconomy. Topulloutofarecession,thegovernmentshould createdeficits,eitherbyincreasingspendingorloweringtaxes.Conversely,tocooldowninflation,the governmentshouldaccumulatesurpluses,eitherbycuttingspending or raising taxes. The original Keynesiansbelievedinapredictabletrade‐offbetweenunemploymentandinflation.Ahigherinflationratemustbeacceptedtokeepunemploymentdown,andviceversa.

FranklinDelanoRoosevelt’sNewDealembracedtheKeynesianphilosophytoliftAmerica fromtheGreatDepressionwhen25percentunemploymentwasthenation’sconcern.Duringthe 1960s,theKeynesiansthoughttheycouldmanage fiscalpolicy(governmenttaxationandspending)tomoderate,ifnotgetridof,theboomandbustswingsofthebusinesscycle.

ButtheKeynesformularanintotroubleinthe1970swhenunemploymentstayedhighandinflationrose—aconditionknownasstagflation.Critics nowbelieve that the Keynesian emphasisonspendingandtaxationthroughthefederalbudgetoverlookedthepowerfuleffectmoney andcredithasoneconomicperformance,particularlyincopingwithinflation.Outofthiscriticismhavecomevariouspost‐Keynesianschools,whichacknowledgethatmonetarypolicy(levelsofinterestratesandgrowthin the supplyofJohn Maynard

Keynes

17

money)matters asmuchas fiscal policyinmanagingtheeconomy’supsanddowns.

Inaddition,manypost‐Keynesiansfavorsomesortofan incomespolicy—usingthetaxsystem ratherthan direct federal controls—tomoderate wagesandpricesinthefightagainstinflation.

Monetarists 

MiltonFriedmanistherecognizedleader.He contendsthatstablemonetarypolicy,ratherthanactivistbudgetarypolicy,isthekeytoasmoothrunningeconomy.Inflation,Friedmanargues,can be

controlledonlybymaintainingafirmgripon thegrowthofthenation’smoneysupply.

ItislargelyonthebasisofthistheorythattheFederalReserveBoardinOctober1979switched fromapolicyofmanaginginterestratestooneofcontrollingmoney‐supplygrowth,lettingratesfindtheirownlevel.

Asinflationistamed,themonetaristscontend, theeconomywillsurgeforwardifitisunleashed fromwhattheyconsidertheshacklesofgovernment.Thatrequires lower taxes, less regulation, andareductioninthefederalbudgetasashareof the total economy.

UnliketheKeynesians,Friedmanandhisfollowersdonotthinkfiscalpolicy(federaltaxesandspending)shouldbeusedtocounteracttheturnsofthebusinesscycle.Thesemonetaristswanttocontainfederalspendingandbalancethebudgetoverthecourseofabusinesscycle.Thegovernmentcannotfinetunetheeconomytoeliminateeveryupanddown,Friedmansays.Itsattemptstodosohavemadetheupsanddownsworse,notbetter.

Supply‐Siders 

Thesearedividedintopoliticalandacademicadvocates.RepresentativeJackKemp(formerUnitedStatesSecretaryofHousingandUrbanDevelopment)wastheleadingproponentofsupply‐sideeconomicsinthepoliticalarena.Hearguedthatdeepcutsinpersonalandbusinesstaxeswouldproducesuchastrongrecoverythatthebudget could be balancedwith rising revenues and withoutsubstantialspendingcuts.

Rational Expectations 

Anothercurrentdevelopmentineconomicanalysis,onethatisinfluencingbothmonetarists andKeynesians,isknownasrationalexpectations.Economistsdoingresearchonthistheoryattributethefailuresofpastgovernmentpolicy,inpart,to theerroneous assumption thatpeoplewouldbehaveundernewpoliciesastheydidunderoldones.“Thegovernmentwasassumedtobesystematicallysmarterthanpeople,”explainsThomasSargent,aprofessorattheUniversityofMinnesota.Whenpeoplebehavedinunexpectedways,headds,theobjectivesofgovernmentpolicyoftenwerefrustrated. Now theseacademics are attempting to include in theirstatisticalmodels of the economy estimatesoftherationalexpectationsofpeoplein reactiontopolicy.

Thoughthiseffort is far from complete, thehunch among the theorists is that the resultswilltend to support stable economic policiesoveractivistones.SaysRobertLucas,a UniversityofChicagoprofessor,“Thebestclimate weknowhowtoprovideisstability.”

This sectionhas set forth someof themostimportant economic questions facing our nationtoday.Howcanwebestencouragecompetition?Howcanwebestdealwiththeproblemsofinflation?

Inwhatwayscanwebroadenemploymentopportunitiesforthoseinneed?Eachdeservesseriousthoughtbecauseourfutureprogressdepends ontheanswersweprovide.   

Milton Friedman

https://en.wikipedia.org/wiki/Inflation

18

 PART III  

QUESTIONS FOR DISCUSSION: 

1. Whileoursisbasicallyacapitalisticsystemwithresourcesownedprimarilybyindividualsandbusinessesratherthangovernment,insomeimportantrespectsoursismixedeconomyexistingwithinademocraticpoliticalsystem.Whataresomeexamples?

2. Areprivatepropertyrightsimportantinourbusinesssystem?Whatarethese?Howaretheyestablishedandmaintained?Whataresomeofthechallengestothemtoday?

3. Theallegationissometimesmadethatgovernmentdoesn’tproduceanything,onlyindividualsandbusinessesengageinproduction.Isthistrue?Isithelpfulinunderstandingtheroleofgovernmentinsociety?

4. Shouldgovernmentinsistoneverybusinesssurvivingorperishingonitsownmerits,solongasitdoesnotviolatethelawsoftheland?Arethereanyexceptionstothis?Whataretheconsiderations?

5. CanyourecallrecentexamplesofgovernmentBAILINGOUTsomelargebusinessorbusinesses?Whatcircumstancesaresaidtosometimesjustifythis?Doyouagree?

6. ShouldgovernmenteverSUBSIDIZEorPROTECTbusinessdevelopment?HasthisbeendonetoanyconsiderableextentintheUnitedStatesovertheyears?Whataboutthegreatlandgrantstotherailroads?Whataboutimportquotasortariffstoprotectinfantindustriesinthiscountry?Whataboutspecialtaxbreaks?Whataboutprovisionsforaccelerateddepreciationandothers?

7. Ingeneral,thereseemstobesomefeelingagainstBIGgovernmentandagainstBIGbusinessinthecountrytoday.Why?Isitlikelythatweshallseeareductionofgovernment’sinvolvementinthefuture?Why?Howbigistoobig—ingovernmentandinbusiness?

8. ThechargeissometimesmadethatinAmericawearemoreconcernedwithPROPERTYRIGHTSthanwithpersonalrightsorhumanrights.Howdoyourespondtothisstatement?Doyouagreeordisagree?Whatistheevidenceoneachsideofthequestion?

9. Doyoufeelthatthegovernmentanditsemployeeshaveanyethicalresponsibilitiestothegeneralpublic?10. Whatdoyoufeelthegovernment’sroleshouldbeinthehealthcaredebateandotherspecialissues?

IDEAS FOR FURTHER STUDY AND TOPICS FOR TALKS AND DEMONSTRATIONS 

1. TracethehistoryandactivitiesofaUnitedStatesgovernmentagencysuchasUnitedStatesDepartmentofAgricultureorothergovernmentagency.

2. Developyourowncriteriaforhowoneofour government agencies should function.Forexample,whatshouldtheEnvironmentalProtectionAgencydo?Orhowshouldwehandlefoodstamps?

3. Conductasurveyofyourcommunitytosee howmanygovernmentagenciesthereareand whatbusinesses,ifany,theyrelateto.Drawa charttoshowtheserelationships.

   

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 Part IV:    

HowtoDoBusiness“A business that makes nothing but money is a poor business.” —Henry Ford

 

WAYS OF DOING BUSINESS 

Introduction 

AfterstudyingPartsI,II,andIII,youshouldhavesomeideaofhowoureconomyworks–inabroadsense.YoushouldbeawareofhowtheU.S. privateenterprisesystemresemblesothereconomies andhowitisdifferent.Thedifferentrolesyouplay asconsumer,producer,andthevoiceofgovernmentalsoshouldbeapparenttoyounow.Theremainder ofourprojectontheAmericanPrivateEnterpriseSystemisdevotedtoexaminationoftheproducer,concentratingonthefourdifferentwaysofdoingbusiness:

a) theindividuallyownedbusiness,b) thepartnership,c) thecorporation,andd) thecooperative.

Anoverviewwillbepresentedfirst;thenthenextthreeunitswillbedevotedtoeachmethodoforganizingasabusiness.Table1onpage22isacomparisonofthemethodsusedbythesefourtypesofbusinesses.

Overview 

BusinessOrganizations.Businessesareorganizedto(a)produceormanufacture,(b)distribute,or(c)sellgoodsandservices.Sometimesabusinesscombinesmorethanonefunction.Forexample,storekeepersbuy,store,andsellgoods.Theymayalsosellaservice,suchasfixingtelevisionsets.Storekeepersseldomproduceormanufacture.

ProductionofBasicCommodities.Somebusinessesproducebasiccommodities.Basiccommoditiesarerawgoodsormaterials.Consumersusesome commodities,suchascoalandoranges,directly.Farming,fishing,lumbering,andminingarebusinesses thatproducerawproducts.

ProcessingorManufacturing.Typewriters,tractors,bread,cannedpeas,babybottles,radios,andtelevisionsaremadefrombasiccommodities.Processorsmakebasiccommoditiesmoreusefultoconsumers.Cookingpeasandcanningthemisprocessing.Manufacturersusebasiccommoditiestomakeotherthings.Radiosaremanufactured.

Marketing.Productsthatareprocessedormanufacturedmustgettousasconsumers.Marketinginvolvessellingandtransportingproducts.Sometimesproductsaresoldtowholesalefirmsfirst.Thenwholesalefirmssellproductstoretailfirms,andretailfirmssellthemtoconsumers.

BusinessServices.Manybusinessessellservicesinsteadofproductstopeopleorotherbusinesses.Banks,lawfirms,doctors,bowlingalleys,andrepairshopssellservices.

How Do Businesses Produce? 

Abusinessproducesusingtwoormoreofthefollowingelements:

NaturalResources Labor Capital Management Government

Asanexample,consideragasstationandautorepairshop.Nomatterwhoownsit,itneeds:

BasicNaturalResources.Thelandforagasstationandrepairshopmustbeinagoodspot.Itshouldbeeasyforcarstodrivetoit.Agoodsupplyofwaterisnecessary.Inadditiontothesetwonaturalresources,otherservicessuchaselectricityandtelephonemustbeavailable.

Capital.Theland,money,buildings,machines,andtoolsusedinabusinessrepresentthecapitalusedorownedbythebusiness.

Labor.Businessesneedlabortokeepthemfunctioning.Forexample,afull‐servicegasolinestationneedsaskilledmechanic,agas‐pumpattendant,andabookkeeper.Theworkingconditionsandtheabilities,skills,andattitudesofownersandemployeesdetermineinparthowwellthebusinesswilloperate.

Management.Evenwithgoodcapital,labor,andnaturalresources,someonemustrunthebusiness.Thatiscalledmanagement.Managers(orentrepreneurs)solveproblems,decidewhodoeswhat,andplan.Managementatagasstationmaysolveaproblemoflonglinesofcustomersbybuyingmoreland,addingmorepumps,orhiringmorepeople.Itispoormanagement,forexample,touseaskilled

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mechanictowashcars.Managementmustalsoseethatgasoline,tools,andothermaterialsareavailable.

Government.Businessesneedpoliceandfireprotection,maildelivery,andotherservices.Localgovernmentsfurnishsomeservices,suchaspoliceprotection.Stateorfederalgovernmentfurnishesservices,suchasinspectingbuildingsandequipmentforsafety.

CapitalGoods.Factoriesandmachineryneededtoconvertrawmaterialsintothegoodsandserviceswewantarecalledcapitalgoods.Factoriesandequipmentwearoutorbecomeoutofdateandnoncompetitive.Besidesreplacingtheseitems,morecapitalgoodsareneededifproductionistoexpand.Withoutacontinuingsupplyofnewcapital,theeconomycannotproducethegoods,services,andjobsrequirednowandinthefuture.Andthismeanslargecapitalinvestmentsmustcontinuallybemade.

Inadditiontoreplacing,modernizing,andexpandingexistingindustrialcapacity,ournationwillbechallengedinthenextdecadetoprovidemorejobs,expandhousing,developmajornewenergyresources,continueimprovementsinthequalityofourenvironment,andimproveourtransportationnetworks.Ithasbeenestimatedthatourtotalcapitalrequirementsforthenext10yearswillatleastdoublethoseofthepastdecade.

Capitalgoodsareimportanttojobs.Thein‐vestmentinequipmentandfacilitiesismanythou‐sandsofdollarsforeachproductionworkerinAmericanindustry.Millionsofnewjobswillbeneededinthenearfutureforworkersenteringthelabormarketforthefirsttime.Herewefacesomeveryimportantquestions.Howcanbusinessandgovernmentbestworktogethertoprovidethesejobs?Andhowwillthenecessarycapitalgoodsbeprovided?

Businesses Contribute to a Community 

Businessprovidesourbasicneeds:

Food.Thefoodinagrocerystorecomesfrommanybusinessorganizations.Milk,forexample,isproducedonfarms.Thenitmustbeprocessedandputintocontainersbeforeitcanbedeliveredtostores.Farmersalsobuycows,feed,andmanyotherthingsfromdifferentbusinessestohelpproducethemilk.

Shelter.Manymaterialsareusedinbuildinghouses.Forexample,nailsaremanufacturedfrommetal.First,oreistakenfromtheminetothesmelterforprocessing.Metalisthentakentoafactorywherethenailsaremade.Nailsaremarketedbyfactoryrepresentativestowholesalefirms.Wholesalefirmssellnailstoretailstores.

Clothing.Ready‐to‐wearclothesandclothformakingclothesareboughtinstores.Tailorsprovideaserviceinmakingorfixingclothes.

Transportation.Transportationservicesmovepeopleorproductsfromplacetoplace.

Communication.Communicationtakesmanyforms,anumberofwhichinvolvebusiness:television,radio,newspaper,telephone,computer,andonandon.

Services.Personalservicesmakeacommunitysaferandmorecomfortable.Banks,insurancecompanies,lawoffices,churches,schools,andhairsalonsareexamples.

Successfullocalbusinessesoffertwobenefitstothelocalcommunity:(1)theyservethecommunityand(2)theygenerateincome.Successfulbusinessesarenecessaryforaprosperouscommunity.

Localbusinessesusuallytradewithorganizationsoutsidethecommunity;justaslocalgovernmentworks with county, state, and federalgovernments.

 Starting a Business 

Nomatterwhatitspresentsize,chancesare thatanenterprise traces its roots toanentrepreneur—apersonwithanewideawhotookariskin thehopeofmakingaprofit.

Theexamplesareendless.In1976,twocollegedropouts—StevenJobsandStephen Wozniak—raised$1,500bysellinganold Volkswagenvanandsettingtoworkinagarageto designthefirstlineofpersonalcomputers.Now,theircompany(AppleComputers)is oneoftheleadersinthefield.

Othersbuildtheirbusiness around existingideas combined in a newway. Fordecades,manyAmericans paidconsultantstofiguretheirincometaxes, but it took Henry and RichardBlockofKansasCityinthemid‐1950sto developalucrativenationwidechainoftax‐preparation offices aimed atindividualsofallincomelevels.

Even in these risky times, entrepreneurialspiritsseemtothrive.Duringarecentrecession,in2008,anaverageof320outofevery100,000adultsstartedabusinesswhichrepresentsabout530,000newbusinessesamonth.

Making a Profit 

Inordertostayalive,abusinessmusthaveprofitstopayforfutureexpansion,unexpected events,andasincentivetotheownertokeepgoing.Inacorporation,profitsalsoarethe sourceofdividendspaid to the individual owners—the stockholders.

Whiletherearemanywaystomeasureprofits,investors frequentlylookattwo.One—the profitmargin—istheamountabusinessclearsoneachdollarof sales.Asupermarket,forexample, typicallyhasaprofitofalittle overonecentoneachdollarof

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sales.Thesecondmeasureisthereturnoninvestment,orprofit,inrelationtothenetamountinvestmentinthefirm.

Thus,whileannualreportsmightshowrisingprofits indollar termsoverseveralyears,alookattheseothertwomeasuresmay showaslowdownorevena declinedependingoninflationrates.

Since2011,inflationrateshavecontinuedtodrop.In2011inflationratesweresittingat3.0%butdroppedin2012to1.7%.In2013and2014,theinflationratehasremainedat1.5%.

The Problems of Productivity  

Inthestruggletoboostprofitsandtrimcosts,companiesarefocusingmoreandmoreonproductivity—usuallyoutputperworkerperhour.

Historically,theproductivityratehasrisenbyalmost3percentperyearintheUnitedStates.Butbeginninginthemid‐1960s,therateinthiscountrybegantoslowdramatically.Atthesametime, othernations, Japan in particular, have shown steadyjumpsinproductivity.ProductivityintheUnitedStatesoverthelastdecadehasbeenupanddown.Forexample,in2003theproductivityratewasat3.7%butwasdownto0.9%by2006,in2009theratewentbackupto3.2%butwasdownin2012to1.5%.

Someexpertsblamethisproblemontheflood ofinexperiencedworkers into the labormarket.OtherscitethefailureofmanyU.S.firmstoinvest inenoughmodernequipmentandplants,aproblemthatoftencanbe traced to inflationand the highcostofborrowedfunds.

Withmoremoneytoinvest,companiesareexpectedtomovemorerapidlyintosuchinnovationsasindustrialrobots,whichcanspeedproduction,improvequality,andrelievepeopleoftediousanddangerousjobs.

Inaddition,moreandmorecomputers,wordprocessors, and other automated equipment areappearinginfactories,offices,banks,departmentstores,andevensupermarkets.Manyfirmsalsoaresettingupquality‐control circles inwhich smallgroupsofemployeesgivetheirideasonhowtotrimcostsandboostproduction.

Together,theseeffortsaredesignedtoproduce anitemforless,thusallowingcompaniestomake moreprofitsandbemorecompetitivewithforeign firms.

A TOPSY TURVY INVESTMENT WORLD 

NowhereisAmericancapitalismingreaterturmoiltodaythanatitscore—thefinancialsystemthatputsmoneytoworktomakemoremoney.

Unstableratesof inflation during the pastdecade turnedthenation’smoneymarketstopsy‐turvy;escalatingpriceserodedcorporateearnings,discouragingthousandsofinvestorsfromacquiringshares incorporations.Manywould‐beentrepreneurswere unabletoformnewcompanies,whileexistingfirmshadtoshelveplanstoexpandoperations.Intoday’s economy,manyofthesetrendshavebeenreversedwithinterestratesdropping.Thenumberofhomeownershasincreased,themarkethasgrown,anditisagreattimetobeanentrepreneur.

Wideswingsinvaluesoftraditionalinvestmentssuchasstocksandbondsmakeitharderforsecuritiesfirms,banks,andotherfinancialinstitutionstoattractsavings.Theresults:anexplosionininvestmentopportunitiestailoredtoinflationsavvyinvestors.

Whyarethesechangessoimportant?Putsimply,oureconomyreliesonthefinancialmarketstofunnelpeople’ssavingsintoindustrialexpansion.Withoutanefficientinvestmentprocess,economicgrowthwouldbeimpossible.

Raising the Money 

Allthesesteps—startingabusiness,makingaprofit,andincreasedproductivity—takemoney,whichintoday’smarketplaceisbecomingevermoredifficulttoraise,especiallywith the government’stremendous demandforborrowedfunds.

Traditionally, corporations havereliedonthesaleofstocks toraisemoneyforgrowthandexpansion.Perhapsagoodplace tostartthisdiscussionisto respondtoafewbasicquestions.Whatisstock?Whydoesa companyissuestock?Whydo investorspaygoodmoneyfor littlepiecesofpapercalledstock certificates?Whataboutbonds?Asstatedabove,acompanymay needmoneyforgrowthandexpansion.Oneoptionisforthe companytoissuestock.Thereare othermethods,too,suchasissuingbondsandgettinga loan fromabank.However,stockraises capital (money)withoutcreating debt,withoutcreatinga legal obligationtorepaythesefunds. Buyersofthestockbecomeshareholders in thecorporation—thecompany’sowners.Fromtheir investment,theseshareholdersexpecttomakeagoodreturnon theirinvestment.Bonds,too,areanimportantcapitalsourceforcorporations.Innormalyears,the aggregatevalueofnewbond issuesmaybefivetimesgreater thanthevalueofnewstock issues.Infact,inthemodernera,Americanbusinesshasraisedlittlemorethan5percentofthemoneyithasneededthroughthe saleofstocks.Ithasraisedmost ofthebalancebysellingbonds. Thisiswhythebondmarketismanytimeslargerthanthestock market.

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In the Driver’s Seat—the Board of Directors 

Whilethousandsofindividualinvestorsmayownapieceofalargepublicfirm,itsrealcontrolisinthehandsofaboardofdirectors.

Boardmembersoftenincludeofficersofthecompany,majorstockholdersortheirrepresentatives,andoutsiderswhocanprovideusefulconnectionswithlawfirms,banks,investmenthouses,andcustomers.

In recent years, some firmshavebroadenedtheir boards beyond the typical white, wealthy,malemembershiptoincludewomenandminorities.In1980,TheChryslerCorporationaddedthepresidentoftheUnitedAutoWorkerstoitsboard,marking adramaticshiftinU.S.business‐laborrelations.

Althoughtheboardsetsoverallpolicies, the day‐to‐daydecisionsaremadebyprofessionalmanagerstrainedinlaw,businessmanagement,engineering,finance, and other fields. Beyond their salaries,thesemanagersmayhavenotiesorloyalty to theorganization, unlike the entrepreneur scramblingtomakeafirmasuccess.

Increasingly, top management is spendingmore timeonoutside issues that canhaveabigimpact on the firm. Among them: governmentregulations, consumer demands, environmentalrules,andcompetitionfromoverseas.

Yetcompaniesarebeginningtorealizethatsuchissues—andtheaddedcoststheybringwiththem—shouldnotbeallowedtokeepmanagersfromtheirmissionofputtingoutaproductorservicethatpeoplewillwanttobuy.

Stock Market 

The stock market is the hub of the investmentworld. More than 40 million individuals ownshares inU.S. corporations. Whenpeoplepurchase acompany’s stock, they actuallybecomepartowners,entitledtoashare ofthefirm’sprofits.

Stockscanprovidetwosourcesofincomefor theinvestor. The first is thedividend—profits a firmdistributestoitsshareholders.Thesecondis thecapitalgainaninvestorreapswhenastockis soldformorethanitsoriginalprice.However,investorshavenoguaranteethatastockwillpayany dividends,andashare’svaluecaneasilydecline.

Stockpricesareinfluencedbymanyfactors,includingthevalueofafirm’sassets,earningsprospects,andinvestordemand.That’swhyinvestorspaycloseattentiontodevelopmentssuchaschanges

inacompany’sproductline.Evenrumorscanhavedramaticimpact.

Stockpricesareakeybarometerofthebusinessoutlook.Abearmarket—whenpricesarefalling—indicatesinvestorsareworriedthattheeconomyisslippingandthatcorporateearningswilldecline.Incontrast,therisingstockpricesofabullmarketsignalthatinvestorsthinkbusinessconditionsandprofitswillimprove.Corporationscouldnotsellasingleshare,however,iftherewerenostockmarketwhereinvestorsinneedofcashcaneasilyselltheirholdings

Onatypicalbusinessday,morethan500 millionshares change hands.More than half of thesetradestakeplaceattheNewYorkStockExchange.CalledtheBigBoard,itliststhestocksfor more than2,800ofthe country’soldest, largest, andbest‐knowncorporations.

TheNewYorkStockExchangehadadailytradingvaluenorthof$169billionin2013.TheAmericanStockExchangeisalsoinNewYorkandisthethirdlargest trading flooraftertheNASDAQ.TheAmericanStockExchangeoptionslistisoneofthelargestintheworldwithover1,700optionstradedonstocks,Americandepositoryreceipts,indexes,exchangetradedfunds,andholders.

Foranideaofhowastockexchangeworks,notewhathappenswhenaninvestordecidestobuy100sharesof,say,theWidgetCompanyfor$5ashare.Theinvestorfirstasksabrokeragefirmto handlethepurchase.AtthestockexchangewhereWidgetsharesaretraded,thebroker’srepresentativelocatesanotherbrokerwhoseclientwantsto sell100sharesofWidgetatthesameprice.Once thetradeisexecuted,thebuyerhasfivebusiness daystocomeupwiththe$500forthestockand thesellerhasfivedaystodelivertheshares.

Somefirmsissuepreferredstockthatpaysinvestorsafixeddividend.Dividendsonthisspecialclassofstockmustbepaidbeforeanyearningsaredistributedamongothershareholders.

Buying and Selling Bonds 

When the stock market looks risky, manypeopleprefertoinvesttheirsavingsindebtsecurities,whichusuallyprovideadependableflowofincome.

Many companies and government agenciesborrowmoneybysellingbonds, typically inde‐nominationsof$1,000.AbondcertificateisanIOUthatpromises topay theholdera certain rateof interestand to redeem the full face valueof the notewhenitmatures.Termsofnew issues typicallyrangefromfiveto40years.

Table 1.  Comparison of Methods Doing Business in America by Different Types of Businesses   

  Type of Business 

    Corporate Form 

Features Compared   Individual   Partnership  Regular Corporation  Cooperative 

Cooperation  Whousestheservices?

Nonownercustomers Generallynonownercustomers

Generallynon‐ ownercustomers

Chieflythemember‐patrons

Whoownsthebusiness?

Theindividual Thepartners Thestockholders Themember‐patrons

Whovotes? Notnecessary Thepartners Commonstockholders

Themember‐patrons*

Howisvotingdone? Notnecessary Usuallybypartnersshareincapitol

Bysharesofcommonstock

Onememberonevoteorproportionaltopatronage

Whodeterminespolicies?

Theindividual Thepartners Commonstockholdersanddirectors

Thememberpatronsanddirectors

Arereturnsonownershipcapitollimited?

No No No Yes,8%orless*

Whogetsthenetoperatingproceeds?

Theindividual Thepartnersinproportiontointerestinbusiness

Thestockholdersinproportiontostockheld

Thepatronsonapatronagebasis*

*Basiccooperativecharacteristics. 

 

Bondsareconsidered lessriskythanstocks,sinceanyinterestobligationsmustbemetbeforeadividendispaid.Inaddition,bondholdersgetfirstcrackattheassetsofabankruptfirm.

Still,thepriceofabondcanvarygreatlyover itslifetime, depending on the course of interest rates.Whenratesfail,bondsellerscandemanda premium.

Ingeneral,higheryieldsareofferedonlongertermbonds,sinceinvestorsmustcommitfundsfor 20yearsorlonger.Inthepastthiscouldchange,butonlyifinterestratesbecamevolatile.Interestratesoverthepastcoupledecadeshavedropped.

Independentfirms,suchasStandard&Poor’s orMoody’s,evaluateanorganization’sabilitytocarry itsdebtburdenbeforeassigningarating,whichcan varyfromthetop‐qualitytriple‐Aratingtoasingle CorDforcompaniesindefault.Tooffsetlow‐qualityratings,issuersmustofferhigheryields.

Thetaxingpowerof thefederalgovernmentassuresthatitsdebtsecuritiesarevirtuallyrisk‐free, sothat theU.S. Treasury borrowsmore cheaply thandoprivatecorporations.However,thelowest bondratesareofferedbystateandlocalgovernments.Whiletheydon’tshareUncleSam’simpeccablebond

rating,theinteresttheypayisexempt fromfederalincometaxes.

Hedging Bets 

Soaringinterestratesencouragethecreation ofvarious devices enabling investors to hedge theirbets.

Today, investorscanprotectthemselves againstadversemovementsinstockvaluesbywriting optionsto buy or sell a stock at the current marketpricepriortoafuturedate.Forexample, aninvestorwhofearsthatthepriceofhis/hershareinCompanyAwillfallinthecomingmonthscan buyanoptiontosellthestocktoanotherinvestor atthepresentprice.

Ifthepricefallsbeforetheoptionexpiresin thenextninemonths,the investor isabletosell thestockatthehigherprice. Ifthemarketpricerises,theinvestorjustletstheoptionexpire.

 

 

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 Part V:   

SoleProprietorshipsandPartnerships“Justice is the infrastructure of proprietorship.” —Kemal Ataturk

 

THE INDIVIDUALLY OWNED BUSINESS 

Individualownershipistheoldestformofbusiness.Individuallyownedbusinessesincludefarms,localstores,repairshops,barbershops,restaurants,dentalpractices,andothers.

Thesoleproprietorshipremainsthemostcommontypeofcompany,accountingformorethan70percentofallfirms.Here,anindividualstandsalone, bearingfullresponsibilityforthesuccessorfailure oftheventure,suchaspermitsandlicensing.Ona smallscale,soleproprietorshipillustratesmanyof theactivitiescommontoallbusiness.

For example, perhaps your neighbor—ateacher—tiresoftheclassroom.Sheknowsfromexperiencethatprivatetutorsareindemand.So,after sizing up hermarket, she quits school andopensatutoringservice.

At first, shedoes everythingalone. Start‐upmoney,orcapital,foranofficeinherhomeandforstudymaterialscomesfromhersavings.

Throughtrialanderror,shediscoverswhatfeesstudentsarewillingtopay,andsheeventuallyearnsenoughtocoverexpensesandhavesomefundsleftover—aprofit.

Profitsmightgotoimprovethebusiness,perhapstopurchaseacomputer.Orshemight taketheextramoneyandhireanotherteacher if businessisboomingorspendmoreonadvertising ifitisslowing.Anotherportionoftheprofitsmay besetasideforfutureexpansionorforunforeseen events.Someshekeepsasapersonalrewardfor therisksofestablishingthebusiness.

Later,abiginjectionofcashmightbeneeded toopenanotherofficeoraddstaff.Shemaydecide tofindpartnerstosharecostsandprofits,orshe mightgotothebankorothersourcesofcapital. Lendersusuallydemandasuccessfultrackrecord beforetheywillmakealoantoanindividual.

Insomecases,too,lendersorventure‐capitalfirmsthatinvestingrowingbusinesseswilldemandashareofownership.Theresultisthattheentrepreneurgetsmoneytoexpandbutgivessomeof thecontrolandprofitstoothers.

 1. Theindividualownerservesthepublic.The

ownerbuysandsellsgoodsorprovidesservicestowhoeverwantsthem.

2. Littlelegalhelpisneededtostartthiskindofbusiness.Theownermayneedtobuyalicenseorapplyforapermit.Forexample,alicensetooperateabarbershoporhairsalonisallthatisneeded.

3. Theownerprovidesorborrowscapitaltostartabusinessandhastheliabilityforalldebtsthestoreowes.Ifthestorelosesmoney,theindividualstillmustpaythebills.

4. Managementistheresponsibilityoftheowner,althoughsomeonecanbehiredtooperatethebusiness.

5. Theindividualownercanmakealldecisionsanddeterminebusinesspolicies.

6. Theownerreceivesthenetmargins,themoneyleftafterallbillsarepaid.

7. Whentheownerretiresordies,heirsmaykeepthebusiness,sellit,orcloseit.

Belowaresomecharacteristicsofindividuallyownedbusinesses.Aretheyadvantagesordisadvantages?

Thebusinesscanbestartedquickly.Decisionsmaybemadequickly,policieschanged.Theownerisresponsibleformanagement.

Businesscreditisonlyasgoodasthecreditoftheowner.

Largeamountsofcapitalaredifficultto obtainforbusinessexpansion.

Althoughsomefarms,eventhefamilytypeones,arenowincorporated,thepredominanttypeoffarmbusinessisindustrialagriculture.

Theindividuallyownedbusinesshasthesead‐vantages:(1)itiseasytocontrol—theowner’sjudgmentisfinal,and(2)anyprofitsarethesolepropertyoftheowner—theyneednotbeshared.

Butithasthesedisadvantages:(1)anylossesarebornebytheowner—theycannotbeshared,and(2)capitalislimitedbywhattheownercanputuporborrow—whichoftenlimitsthesizeofthebusiness.

 

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THE BUSINESS PARTNERSHIP  

Apartnershipisavoluntaryassociationoftwoormorepersons,asco‐owners,tocarryonabusinessforprofit.Propertyusedinthebusinessmay beleased,butthebusinessasanenterprisemustbe ownedbyall thepartners. Partnershipsaregovernedstatelaw;moststates,however,haveadoptedtheUniformPartnershipAct,andadditionalrulesmaybeadoptedinthepartnershipagreement.

For federal income‐tax purposes, the term“partnership” includes a syndicate, group,pool,jointventure,orsimilarorganizationcarryingoutatradeorbusinessandisnotclassifiedasatrust,estate,orcorporation.Ajointundertakingmerelytoshareexpenses isnotapartnership.Mereco‐ownership of propertymaintained and leased orrented is not a partnership. However, if the co‐ownersprovideservicestothetenants,apartnershipexists.

Creating a Partnership 

Apartnershipiscreatedbyanoralorwrittenagreement.Insomeinstances,apartnershipmaybeimpliedwithoutanagreementifthebusinessisbeingcarriedonasapartnership.Severalcharacteristicsdefineapartnership: (1)eachperson involvedparticipates inmanagementdecisions;(2)assetsareownedjointly,profitsareshared;(4)lossesareshared;(5)thepartiesoperateunderafirmname;(6)thepartieshaveajointbankaccountfordoingbusinesstransactions;and(7)thepartieskeepasinglesetofbusinessrecords.

Legal Considerations 

Listedbelowaresomelegalfactorsthatpartners,orpotentialpartners,shouldconsider.

1. Unlessotherwisespecifiedintheagreement,eachpartnerlegallyhasanequalvoiceinmanagementcontrol,andamajorityofthepartnersmustcontrolbusinessdecisions.

2. Bothrealandpersonalpropertymaybeownedinthepartnershipname.

3. Profitsandlossesaredividedaccordingtothespecificagreement;partnersdonotnormallydrawcompensationfortheirservices,andanywithdrawalsorwagesshouldusuallybetreatedasadvancesontheirshareoftheprofits.Profitsdonothavetobedistributedonthebasisoftherelativeamountofcapitalcontributedtothepartnershipbyrespectivepartners.

4. Apartnershipmusthaveitsownrecords,especiallyforincometaxpurposes.Althoughthebusinesspaysnoincometaxes,areturnshowingpartnershipincometaxinformationmustbefiled.Thepartnersthenpayindividual

taxesontheirshareofthepartnershipincome,asspecifiedinthepartnershipagreement.

Family Partnership 

Membersofafamilycanbepartners. However,familymembers (or any otherperson)willberecognizedaspartnersonlyif oneofthefollowingrequirementsismet:(1)ifcapitalisamaterialincome‐producingfactor,theyacquiredtheircapitalinterestinabonafidetransaction,actuallyownthepartnershipinterest,andactuallycontroltheinterestor(2)ifcapitalisnota materialincome‐producingfactor,theymusthave joinedtogetheringoodfaithtoconductbusiness. Inaddition,theymusthaveagreedthatcontributionsofeachentitlethemtoashareintheprofits. Somecapitalorservicemustbeprovided.

General Partnership 

Therearethreetypesof partnerships:generalpartnerships,jointventures,andlimitedpartnerships.Ageneralpartnershipiscreatedwhentwoormoreindividualsagreetocreateabusinessandtojointlyowntheassets,profits,andlosses.There isnolimitonthenumberortypesofpartners.A generalpartnershipcanbeformedbyanoralagreement.Evenso,itisbetterforthegeneralpartners tohaveawrittenagreementthataddressesanumberofkeyissues,includingthefollowing:(1)how much timeand/ormoney the partners will contributetothebusiness;(2)howbusinessdecisions willbemade;(3)howprofitsand losseswillbe shared;(4)whatwillhappenifapartnerdies,becomesdisabled,orstopsworkingorcontributing tothebusiness;and(5)whenthepartnershipwill makepaymentstoitspartners.

Inageneralpartnership,eachpartnerisindividuallyaswellasjointlyliableforalloftheobligationsofthepartnership.Itisimportantthatgeneralpartnerscarefullyevaluatethefinancialstatusofeachotherbeforeformingageneralpartnership.

Limited Partnership 

Alimitedpartnership maybecreatedbyfollowingspecificstepssetout in each state’s statutes. Limitedpartners do not havepersonalliabilityforthebusinessofthepartnership. Limited partners are atrisk only to the extentofthecontributionsthattheyagreedtointhepartnershipagreement.

Joint Venture 

Consideredsimilartoageneralpartnership,ajointventurelastsonlyforalimitedperiodoftimeorforasingleproject.Partnersinajointventurecanberecognizedasanongoingpartnershipiftheycontinuetheventure,buttheymustfileassuch.

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Taxes in the Partnership 

Thepartnershipitselfisnotresponsibleforpayingtaxesontheincomegeneratedbythebusiness.Apartnershiptax returnisfiledbutforinformationalpurposesonly. Eachpartnerindividuallypaystaxesonhisorher shareofthebusinessincome.Theprofitsandlosses“flowdown”fromthepartnershiptotheindividualpartners.Partnersmustalsopayself‐employment taxontheirpartnershipincome.

Partnership Advantages 

Therearefourreal advantages inorganizingasapartnership.First, partnershipsarerelativelyeasytocreatewithout muchlegalexpense.Second,apartnershippermitsownershipbymorethanoneindividual.Third,a partnershippaysno incometaxsinceprofitsare distributedtopartnersasordinary

income.Fourth, apartnershipiseasytodissolveandhasfewlegalformalitiesforitsmaintenance.

Disadvantages of a Partnership 

First,partnershipssucceedonlyifeachpartnerhasfaithand trustintheotherpartners’businessabilities.Second,eachpartnerisindividuallyandfullyresponsibleforalldebtsowedbythepartnership;however,thisdoesnotextendtopersonaldebtsoftheother partners. Third, the partnership ends withdeath, bankruptcy, or incapacity of a partner.Fourth,generalpartnershipinterestmaynotbesoldortransferred.

Terminating a Partnership 

Apartnershipterminateswhen:(1)allofitsoperationsarediscontinued,andnopartofanybusiness,financialoperation,orventureiscontinuedbyanyofitspartnersinthepartnership;or(2)atleast50percent ofthetotalinterestinpartnershipcapitalandprofitsissoldorexchangedwithina12‐monthperiod, including a sale or exchange toanother partner. Anypartnermayterminatethepartnershipatwill.Althoughapartnershipiseasytoterminate,carefulthoughtshouldbegiventothisareaatthesametimethepartnershipbegins.

 

PART V 

QUESTIONS FOR DISCUSSION:   

1. Whataresomebusinessesinyourowncommunitythatareindividuallyownedorpartnerships?2. Howdoesthenumberofsuchbusinessesinyourcommunitycomparewiththenumberofcorporationsor

cooperatives?Checkwithothers.3. Ifyouhadinformationastotherateoffailureamongsingle‐ownerbusinessesandcorporations,whichwould

youthinkmighthavethehighestrateoffailureandwhy?4. Whataresomeoftheadvantagesanddisadvantagesoftheindividuallyownedbusiness?5. Whataresomeoftheadvantagesanddisadvantagesofthepartnership‐ownedbusiness?6. Howdoesanindividualgetenoughcapitaltobeginasingleownerbusiness?Whataresomeofthelimitations?

Why?7. Howmanypeoplemustbeinvolvedinorderfortheretobealegallimittothenumberofpartnersinabusiness

partnership?Whataresomeofthepracticalconsiderationsinvolvedindecidingonthenumberofpartnersinabusinesspartnership?

8. Ifthereareprofitsresultingfromtheoperationsofabusinesspartnership,towhomdotheseprofitsbelong?Howaretheydivided?

9. Wouldyoubewillingtoinvestinapartnershipbusinessinsomedistantcity?WhyorWhynot.

IDEAS FOR FURTHER STUDY AND TOPICS FOR TALKS AND DEMONSTRATIONS 

1. Invitealawyertotellyourgrouphowonestartsanindividualbusinessorpartnershipinyourcounty.2. Lookattheyellowpagesofyoursocialmediaoutletlocallyandtrytodeterminehowmanyindividual

businessesandpartnershipsareinyourlocalcommunity.Trytocategorizethembytypeofbusiness.Areindividualbusinessesandpartnershipsusuallyamongacertaintypeofbusinessactivity?Canyouthinkofreasonsforyourfindings?

 

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 Part VI:    

Investor‐ownedCorporationsandLimitedLiabilityCompanies“Never forget that you only have one opportunity to make a first impression- with investors, with customers, with public relations, and with marketing.”

—Natalie Massenet

CORPORATIONS 

Athirdofallbusinessorganizationiscalledthecorporation.Thecorporationisdefinedasalegalentityseparateanddistinctfromtheshareholderswhoownit,fromtheindividualswhomanageit,andfromitsemployees.Thereare fourmajorkindsofcorporations:atraditionalcorporation(ora“C”Corporation),anScorporation(namedbecauseofitsorganizationmeetingtheIRSrequirementstobetaxedundersubchapterSoftheInternalRevenueCode),professionalcorporations,andnon‐profitcorporations.

Thecorporationisconsideredaseparatelegalentityand,assuch,shareholdersinthecorporationarenotpersonallyresponsibleforthelossesofthebusiness.Asaseparatelegalentity,thecorporationhasmostofthelegalrightsanddutiesofanindividual.Forexample,thecorporationcanenterinto contracts,transactbusiness,holdproperty,sue,and besued.Itshouldbenotedthatitistheconceptof legalseparateness that sets the corporation apart fromthepartnershipandsoleproprietorship.

Moststatesalsowillrecognizenon‐stockcorporations,whicharecommonlyusedfornon‐profitorganizations.Therearenoownersinanon‐stockcorporation,althoughtheremaybemembers.

Forming a Corporation 

Formingacorporationinvolvesthetransferofmoney,property,orbothbyprospectiveshareholdersinexchangeforcapital‐stockinthecorporation.Perhapsthefirststepinorganizingacorporationistodefineclearlythegoalsthecorporation isexpectedtomeet.Thenext stepistoretaintheservicesofan experiencedattorney.The attorneywillbeinstrumentalin developing thearticlesofincorporationandother legal documents.Athirdstepinformingacorporationistoengage a certifiedpublic accountanttosetuprecord accounts.Theremainingstepsare toobtainastatecharter;issuedividend stock as prescribedwhengoalswereestablished; issuestockcertificates;holdthe first

meetingofstockholders; electaboardofdirectorsandadoptthebylawsofthecorporation;electofficers;setwagesand salariesandsettleonremunerationforassetsleasedtothe corporation;andestablishafiscalyear.

Corporations’ Legal Foundation 

Aninvestor‐ownedcorporationisestablishedbythefoundersaccordingtothelawsofthestatewherethecorporationisheadquartered.Articlesofincorporationoracertificateof incorporationexplaintheactivitiesandpurposesofthecorporation.Information in the articles of incorporationincludes:thenameofthebusiness,thetotalnumber ofsharesofstockthecorporationcansellorissue, thenumberofsharesofstockeachoftheownerswillbuy, the amountofmoneyorotherproperty eachownerwillcontributetobuyhisorhershares ofstock,thebusinessinwhichthecorporationwill engage,andwhowillmanagethecorporation.

Usuallybylawsareadoptedspecifyinghowbusinesswillbeconducted.Bylawsarereallyaset ofrulesofprocedurebywhichthecorporationis run.Suchruleswill include informationonhow toconductthestockholdermeetingsanddirectors’meetings, thenumberofofficers in thecorporation,andtheresponsibilityofeachofficer.

Who Owns the Corporation? 

Corporationsareownedbytheirshareholdersorstockholders.Suchcorporationsarecommonlyreferredtoas“investor–ownedcorporations.”Aninvestor‐ownedcorporationisoperatedasaprofitkeepingenterprise.Individualsaremotivatedtopurchaseshareofstockinthecorporationtomakeaprofitontheirinvestment.Thecorporationderivescapitalfundsbyissuingshareofstock.Thepriceofeachsharemayvaryfromdaytoday.

Stockofmanyinvestor‐ownedcorporationsisboughtandsolddailyonstockexchanges,thelargestbeingtheNewYorkStockExchange.Because weliveinaglobaleconomy,stockmarketsinothercountriessuchas Japanareofspecial interest to manystockholders.

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Stocks and Non‐Stock Corporations 

Stock corporations,asthenameimplies,arecorporationsthatraisealargepercentageoftheircapitalthrough thesaleofstocktostockholders.Astockcorporationmayelectsub‐chapterSstatusfortaxpurposes.Oncesuchanelectionismade,thecorporationis referredtoasasub‐chaptercorporation.

Capitalizing the Corporation 

Corporationsneedlong‐termcapitalforbuildings,facilities,andequipmentandshort‐termcapitaltocovertheday‐to‐dayexpenses.Somecapital fundsareobtainedbyissuingsharesofstocktoinvestorswhoarelookingtomakeaprofit.Corporations supplementthis capital byborrowing frombanks,otherfinancialinstitutions,andindividuals.

Controlling the Corporation 

The corporation is controlled by thestockholder(s)whoownthemajorityofsharesin thecorporation.Stockholders’wishesarereflectedby theactions of a board of directorswho are electedbythestockholders.Theboardofdirectors isresponsibleforthemajordecisionsof thecorporation.Theboardwillmeetaminimumofonce each year. Typically each director has one vote,andusuallyamajorityvoteofthedirectorsis sufficienttoapproveadecisionoftheboard.Once theboardofdirectorsisdeterminedbystockholders,theofficersoftheboard(president,vice‐president,secretary, andtreasurer) areelectedby the directorsfromamongtheirranks

Theofficers are responsible for running theday‐to‐daybusinessofthecorporation.

Taxing the Corporation 

Thecorporationmustfileitsownincometaxreturnsandpaytaxesonitsprofits.Thecorporationmustreportallincomeithasreceivedfromitsbusinessandmaydeductcertainexpenses ithaspaidinconductingitsbusiness.

Dividendspaidtoshareholdersbythecorporationaretaxedtoeachshareholderindividually. Thisprocessisoftenreferredtoas“doubletaxation.” This is true because thecorporation pays taxesonitsprofits,andshareholdersmustpaytaxes onthedividendspaidtothemfromtheprofits.

Advantages of Corporate Structure 

Themajoradvantagesoforganizingabusinessasaninvestor‐ownedcorporationare:

1. Liabilityislimitedtoassetsofthesamelegalrightsasanindividual.

2. Thecorporationcanoperateinpermanence,(continuityofoperation).

3. Itiseasytoaddadditionalownersorinvestors.

Limited Liability 

Acorporationistreatedasaseparateentity fromitsowners.Thissuggests thatcreditorsofthecorporation maylookonlytothecorporation andthebusinessassetsfor payment. Individualstockholdersarenotpersonallyliableforthe lossesofthebusinessifthe corporation is establishedproperly.Theextentofshareholdersriskistheirinvestmentinthecorporation.

Continuity of Operation 

Acorporationexists forany lengthoftimetheshareholdersdesire,aslongasitcontinuestofulfilltherequirementsoflaw.Inother words,acorporationdoesnot ceasetoexistifoneormoreofits ownersdies.Ownershipofa corporationcanalsobetransferredbysaleofalloraportionof thestock.

Easy to Add Additional  Investors   

Additionalownerscan beaddedeitherbysellingstockdirectly fromthecorporationorbyhavingthecurrentownersofthecorporationsellssomeoftheirstock.Thistransactioncanoccurwithoutanynegativeeffectsonthe corporation.

How Corporations Handle Risk and Uncertainty 

One way an enterprise can survive in thisriskiereraistobecomealargerandmorediversifiedcorporation.Whenonepartof itsoperation falters,otherpartsmaydoverywell,thusensuring theoverallhealthofthefirm.

CorporationsplaythelargestroleintheAmerican economyaccounting for t h e largestportionofallbusinesssalesreceipts,whilesingleproprietorsandpartnerships accountforasmallamount.https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States

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What’sbehindthistrendtobigness?Foronething,manyof theproductsandservicessoldtopeople now are too complex to be producedbysmallenterprises.Sizecanalsomeansavingsandgreaterefficiencythanarepossibleonasmallscale,frombuyingrawmaterialsbythetontomountingamasssales‐and‐deliverycampaign.

Thecorporateformofownershipalsoworksbetter for ventures involving large amounts ofmoneybecauseofitslimitedrisk.Legally,ifacorporationgoes bankrupt, theownersusuallycannotberequiredtomakegoodonunpaiddebts.

Whatcharacterizestoday’sgiantcorporations istheconstantsearchfortherightmix.Bymovingquicklyintothemostprofitablefieldsandphasing outproductsthatofferlittleopportunity,acompany candoverywell,despiteeconomicdownturns.

Thistrendisreshapingcountlessfirms.GeneralElectric,forexample,wasknowntraditionally foritselectricalandelectronicequipment.During theearly1970s,80percentof itsearningscame fromsuchequipment.Atlatestreport,thistypeof product,includingconsumerand lightinggoods, wasresponsibleforlessthan50percentofearnings.Theremainingprofitscamefromsuchthings asinformationservices,financialactivities,aerospace,medicalsystems,powersystems,transportationequipment,andenergyexploration.

Investor‐ownedcorporationshavethesecharacteristics:

1. Liketheindividuallyownedbusinessandpartnership,theinvestor‐ownedcorporationserves thegeneralpublic.

2. Capitalforinvestor‐ownedcorporationsisusuallyprovidedbysellingstockorbyborrowing. Corporationsmayborrowfromlendinginstitutions. They can also issuebonds and pay backthepeoplewhobuythebonds.Thecorporationisresponsiblefordebts.Ifthebusinessfails,eachownerofstockcanloseonly theamountpaid for thestock.Thecorporationcanloseitspropertyorassets.

3. Businessdecisionsandmattersofpolicyaredecidedbytheboardofdirectorsandofficers,whoareelectedbystockholders.Ifstockholderswishtochangepolicies,theycanelectotherdirectors at the next annual meeting. Eachstockholderhasasmanyvotesintheseelectionsasthenumberofsharesheorsheowns. Thosewhoownthelargestnumberofshares ofstockcontrolthecorporation.

4. Managementofthecorporationisbytheofficers,whoareselectedbytheboardofdirectorsinaccordancewiththecharter.

5. Net margins are either divided among thestockholders on the basis of the amount ofstockownedorusedtoexpandthebusiness.

Theboardofdirectorsdecideshownetmarginswillbeused.

6. Whenastockholderdies,hisorherstockgoestoheirs,whomaykeeporsellit.Businessoperationsareusuallynotaffected.

Belowaresomecharacteristicsof investor‐ownedcorporations.Aretheyadvantagesordisadvantages?

Thepurposeofinvestor‐ownedcorporationsistomakemoneyforstockholders.Thefinancialresponsibilityofeachinvestor‐ownerislimitedtotheamounthe/shehasinvestedinstock.

The investor‐owned corporation is structuredtocontinueinbusinessindefinitely.Long‐rangeplanningandresearchcanbeconducted.

Often, many owners of stock do not attendmeetings.Theycanvotebyproxy.Someownersofstockpaylittleattentiontobusinessoperations. They are primarily interested inthe dividendsearnedbythestocktheyown.

LIMITED LIABILITY COMPANIES 

Alimitedliabilitycompany(LLC)isatypeofcompanyauthorizedonlyincertainstates,whoseownersandmanagershavelimitedliabilityandtaxbenefits.AnLLC isablendof someof thebestcharacteristics of corporations,partnerships, andsoleproprietorships.Itisaseparatelegalentitylikeacorporation,but it isentitledtobetreatedasa

partnershipfortaxpurposes.Becauseitisaseparateentity,noneofitsmembersarepersonallyliableforitsdebts.But,likeapartnership,theLLC isnotatax‐payingentity.Profits,losses,etc.flow directlythroughandarereportedontheindividualtaxreturn.Itisveryflexibleandsimpletorunand, likeasoleproprietorship,thereisnostatutorynecessity tokeepminutes,holdmeetings,ormake resolutionsthatcantripupmanycorporations.

Forming an LLC 

TheformationofanLLCisnotadifficultprocess.AnLLCisformedbyfilingaform,usually calledarticlesoforganization,withtheSecretaryofState.Moststatesrequirethatanannualreport befiledtokeepthemuptodateontheLLC’scurrentstatus,butotherthanthat,therearenoother ongoingreportsorforms.Moststatesrequirethat theLLChavean

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operatingagreement.Theoperatingagreementistheagreementbetweenthe membersastohowtheLLCwillbemanaged,and it contains provisions thatwillqualify it for the beneficial partnership taxtreatment.

Who Owns the LLC? 

Theownersarecalledmembersandcanbevirtuallyanyentity,includingindividuals,corporations,otherLLCs,trusts,pensionplans,etc.Unlikeacorporation,which isnotrequiredtohavemorethanoneshareholder,moststatesrequirethatanLLCconsistoftwoormoremembers.ManagementandcontrolofanLLCarevestedinitsmembers,andnoone canbecomeamemberofanLLCwithouttheconsentofmembershavingamajorityininterestunless thearticlesoforganizationstateotherwise.

LLCs’ Legal Foundation 

TheexistenceofanLLCbeginsuponthefilingofthearticlesoforganizationwiththeSecretaryofState.ThearticlesmustbeontheformprescribedbytheSecretaryofState.Amongtherequiredinformationontheformarethelatestdateat whichtheLLCistodissolveandastatementasto whether the LLCwillbemanagedby onemanager,morethanonemanager,orbythemembers. To validly complete theformation of the LLC, membersmustenterintoan

operationagreement. Thisoperatingagreementmaycomeintoexistence eitherbeforeorafterthefilingofthearticlesof organizationandmaybeeitheroralorinwriting. Thearticlesoforganizationmustspecifythedate onwhichtheLLC’sexistencewillterminate.Unlessotherwiseprovidedinthearticlesoforganizationorawrittenoperatingagreement,anLLC goesoutofbusinessatthedeath,withdrawal,resignation, expulsion, or bankruptcy of amember(unlesstheremainingmembersattainamajorityvotewithin90daystocontinuetheLLC).

Advantages vs. Disadvantages 

AdvantagesofanLCC Itsowners,managers,andofficersarenot

personallyliableforthecompany’sdebts. Itdoesnotpaytaxes. Itdoesnotrequireasmuchpaperworkor

recordkeepingasacorporation.

DisadvantagesofanLCC Itisnotwidelyacceptedsincethisisa

relativelynewformofcompany. Itisdifficulttotransactbusinessinstatesnot

allowingthisformofbusiness. Itsfilingfeeisusuallymuchhigherthanfor

corporations.

TypeofCompany Liability Operations Management RaisingCapitolSoleProprietorship Unlimited Simple Proprietor DifficultPartnership Partners Simple Partners ‐‐‐‐‐LLC NO Medium Members PossibleCorporations NO Difficult Board Stock 

   

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 PART VI 

QUESTIONS FOR DISCUSSION:  

1. WhataretheADVANTAGESofINCORPORATING abusiness?DISADVANTAGES?2. Howdoesonebecomeapartownerina corporation?HowOWNERSHIPisusually represented?3. Howdoescommonstockusually differfrompreferredstock?Whichkindwould YOUpreferto

owninacompany?Mightthis differfordifferentpeople?Why?4. Arecorporationsusuallysetuporchartered understatelawsorunderfederallaws?5. Arestocksofallcorporationstradedonthesecuritiesmarkets?Arethelocalbrokeragesfirmsinyour

communitythroughwhichyoucanbuyorsellstocksonthesetwomajorstockexchanges?Whatismeantby“overthecounter?”

6. Doestheownerofcommonstockinacorporationusuallyhaveanyvoteintheaffairsofthecorporation?Onwhatbasis,usually?

7. Wherewouldyouexpecttofindthestatementastothedutiesoftheboardofdirectorsforanyparticularcorporation?

8. Whentheinvestor‐ownedcorporationmakesaprofitfromitsoperations,towhomdoestheprofitbelong?Towhomaretheprofitsdistributed,andonwhatbasis?

9. Isitnecessaryforacorporationtomakedistributionofitsprofitseachyearafterpayingcorporationincometaxes?Explain.

10. Ifyouwereconsideringacareerinatypeofbusinessinwhichthereweresingle‐ownerfirms,partnerships,andalsocorporations,wouldyoureducationsandtrainingnecessarilybesignificantlydifferentdependingonwhichkindofbusinessorganizationyouweretoconsiderasacareeropportunity?Explain.

11. Howdocorporationscompareinsizetopartnershipsandsingleownerbusinessesontheaverage?Howwouldyoumeasuresizeforthiskindofcomparison?Totalcapitalrequired?Amountofcapitalinvested?Dollarvolumeofbusinessperyear?Whatwouldyouexpecttofindusually?

IDEAS FOR FURTHER STUDY AND TOPICS FOR TALKS AND DEMONSTRATIONS 

1. Trytodeterminehowmanycorporationsthereareinyourcommunity?Thencallsomeofthemtofindouthowbigtheyare?Howmuchvariationisthereintheirrespectivesizes?

2. Haveyourgroupdiscussstartingacorporation.Whatkindofcorporationwouldyoucreate?Whatstepswouldyoutaketocreatethiscorporation?

  

    

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 Part VII:    

Cooperatives“We are stronger as a group than an individual. Think in a cooperative and communal way, set up local food hubs, and create growing communities.”

—Arthur Potts Dawson

 

INTRODUCTION  

Acooperativecorporationisalsoastate‐charteredbusiness,butitexiststoperformspecificservicesforandprovideeconomicbenefitstoitsmembersratherthantomakeaprofitforinvestor‐owners.Also,itobtainsaportion,orall,ofitscapital fundsfromthemembersitservesratherthanfrom outsideinvestors.

Somecooperativesraiseaportionoftheircapitalneedsbychargingamembershipfee;othersby thesaleofsharesofstock.Cooperativestock,however,isnottradedonthestockexchanges.Thereis no activemarket because net operatingmargins belongtopatronsratherthantoinvestors.

Thefundamentaldifferencebetweencooperativesandothertypesofbusinessesisinobjective. Acooperativeseekstorealizeeconomicbenefits foritsmembersfromservicesthatreducecosts,increasemembers’income,improvequality,provide animprovedservice,anddevelopthebestuseofmembers’ resources.

Cooperatives thus exist to meet members’needseconomicallyandefficiently.Othertypesofbusinessesaremotivatedbyprospectiveprofitsoninvested capital. Their entire pattern ofoperations—commoditieshandled,servicesperformed, operating procedures—is planned andexecuted withprofitsasthegoal.Actualoperationsmaybe similarorcomparable,butthemotiveisdifferent.

Thedifferenceinmotiveisevidentinwhoreceivesthenetmargins. Inan individuallyowned business,itistheowner;inapartnership,thepartners;inaninvestor‐ownedcorporation,thestock‐holders;inacooperative,themember‐patrons.

Cooperatives(like investor‐ownedfirms)arenearlyalwaysincorporatedtoprovidetheirmember‐patrons the shelter of limited liability if thebusiness should fail. In relatively rare instances,smallcooperativesprovidingalimitednumberofservicesmaychoose tooperateasanunincorporatedbusiness.Underthesecircumstances,thecooperativehasalegalstatusnotunlikethatofapartnership.There,liabilityisunlimited,andthedeath, entry,or

withdrawalofamembermakesitnecessarytorestate,usuallyinwriting,thenatureoftherelationshipbetweenmembers.

Cooperative corporations have these characteristics: 1. The cooperative corporation operates as an

agent. It either buys and sells goods for itsmembersorprovidessomeserviceforthem.Some manufacture and process products.Farmermarketingandpurchasingcooperativesactasbusinessagentsforfarmers.Consumercooperativesbuyforanddistributegoodstoindividualmembers.Creditunionsandorganizations,suchasgrouphealthassociations,provideservicesformembers.

2. Capital forcooperativecorporationsmaybeprovidedbythesaleofstockthathas,bylaw, alimitedreturn,interestrate,ordividend.Innon‐stock cooperatives, capital may beobtainedfrommembershipfees.Additionalcapitalmaybeborrowedfrommembersaswellas otherlenders.Thecooperativeisresponsible fordebtstothelimitofitsassets.Membersare responsibleonlyformoneyeachhasinvested.

3. Cooperativesaremanagedbyofficerswhoarehiredbytheboardofdirectors.Boardsofdi‐rectorsareelectedby thecooperativemembersfromtheirmembership.Directorsactfor members,makingpoliciesandemployingpersonstotransactbusiness.Unliketheinvestor‐ownedcorporation,eachpersonormemberof a cooperative usually has onlyone vote, no matterhowmanysharesofstocktheperson owns.

4. Policiesaredecidedattheannualmeetingofmembers.Directorsareelectedatthismeetingtomakepolicydecisionsbetweentheannualmeetings.

5. Cooperativesusuallychargeenoughforgoodsandservicestocovercosts.Netmarginsleftoveratthecloseofthebusinessyeararere‐turned tomembers according to theamountof business each did with the cooperative.These returns areoften calledpatronagerefunds.

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6. Theownershipofamemberofacooperativebecomes an asset of themember’s estate atdeath.Cooperativeoperationisnotaffected.

DISTINCTIVE PRINCIPLES 

Cooperativeshavethreedistinctiveprinciples:

1. Democraticcontrol2. Limitedreturnsoninvestedcapital3. Operationonacost‐of‐doingbusinessbasis

Controlofthecooperativerestswiththemembers,whonormallyexercisetheirvotes,byelectingaboardofdirectorsatanannualmeeting.Mostcooperativesallowonevotepermember.

Consumercooperativesusuallylimittherateofinterestpaidonmemberinvestment.Returnstomembersofagriculturalcooperativesaremoredefinite.TheCapper‐VolsteadActgiveslegalsanctiontotherightoffarmerstoformallyorganizeandacttogetherwithoutfearofantitrustactionagainstthemforactingtogether.Toqualifyfortheprotectionofthisact,acooperativemusteitherlimitdividendsonstockormembershipcapitalto8%eachyear,orrestrictvotingrighttoonemember,onevote.Eachstatehasitsownlawsthatregulatetheformationandoperationofcooperatives.

Acooperativenormallyreturnstoitsmembersanyexcessofgrossproceedsoverexpenses.Inaninvestor‐orientedfirm,thisexcessiscalledprofits.Inthecooperative,itismargin.

Thisprocedurehas important federalincometaximplications.If excessfundsarenotretainedasprofitsbythecooperative,they cannotbetaxedascorporate income.

Manypeople formand join cooperativecorporations.They form cooperative corporationsforstoresinurbancommunities, credit unions,mutual insurance companies,andmany otherbusinesses.For example,AssociatedPress isacooperative service thatgathersnews from aroundtheworldformember newspapers.

HOW COOPERATIVES ARE ORGANIZED  

Articles of incorporation underwhich a co‐operativefunctionsarenormallyapprovedbytheSecretaryofStateinthestateinwhichthecooperative’scorporateheadquartersarelocated.

Thesearticlesspecifythenameofthecooperative,itsauthority,itsplaceofbusiness,thenumberofdirectors,andwhetherthecapitalisstockornon‐stock.Inthisrespect,thecooperativedoesnotdifferfromtheinvestor‐ownedcorporation.

Allcorporationsmusthavebylaws,andthese tellhowthecorporation isgoingtooperate.Typically,

thesecontainprovisionsformembershipeligibility,electionofdirectors,annualmeetings,officers’ duties,votingrights,duesandassessments,andrate ofdividends,ifany,tobepaidonmembercapital.

Amarketingcooperativemayalsohaveamarketingagreementwithitsmembers.Thisagreementmayrequire the member to deliver and market throughthecooperativehis/herentiremarketableproduction.Itmightbeonlyaspecifiedcommodityproducedonaspecifiedblockorblocksofland. Itmightrequireproductioninaspecifiedmanner.

The relationship between a cooperative and itsmembersoftendependsonthetypeofservice thecooperativeperforms.Someassociations,particularlymarketingassociations,requireaformal applicationformembershipandissueamembershipcertificate.Paymentofamembershipfee,usuallyrefundableonterminationofmembership,may alsoberequired.

Cooperativesnormallyfallwithinthreeclassifications:localassociations,whichserveneedswithinafairlyconfinedarea;regionalorganizations,whichencompassmuchwiderareas;andfederatedcooperatives,whichactuallyarecooperativesofcooperatives.

COOPERATIVES AS A BUSINESS FIRM 

Fourgroupsareinvolvedintheoperationofacooperative:themember‐patrons,thedirectors,thegeneralmanager,andtheoperatingemployees.

Member‐patrons.Member/patronsaretheowners,thefoundationuponwhichacooperativeisbuilt.Theirvoicemaybeheardonanyissuebroughtbeforethegeneralmembershipattheannualmembershipmeeting.Inmostcooperatives,theone‐voteruleisfollowedforeachmemberregardlessofthescopeof thatmember’sparticipationincooperativeservices.

Directors.Directorsareelectedbythemember/patronsduringanannualmembershipmeeting.Directorsarechargedwithestablishingpoliciesofoperation,andtheyemployageneralmanagertooverseetheenactmentofthesepolicies.

Manager.Themanager,inturn,employsastaffandservesastheintermediarybetweenemployeesandtheboardofdirectors.

Employees.Employeesanswertothemanager,themanageranswerstothedirectors,andthedirectoranswertothegeneralmembership.

FINANCING  

Cooperatives use all the standard methodsemployed by other business corporations to finance

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theiroperation,plusafewthatareunique tocooperatives.

Iftheassociation(cooperative)isacapitalstockorganization,itissuesstockcertificatesasevidenceofownershipinterest.Iftheassociationisanoncapitalstockorganization,itissuessomekindofcertificatetoshowcapitalcontributionsofmembers.

Capitalneedsaregenerallyobtainedfromtwosources:memberswhoinvestinthecooperativetogetneededservices,andloansthatareobtainedfromlendingagenciessuchasabankforcooperatives,acommercialbank,or,incertaincases,agovernmentagency.

Fundsforday‐to‐dayoperationofacooperativeareobtainedthroughday‐to‐dayservicesprovidedbytheorganization.Long‐termcreditfortheconstruction of buildings and othermajor needscomesthroughloansobtainedfromlendingagencies,suchasabank,forcooperatives.

Revolving‐capitalfinancing,widelyusedbycooperatives,ispeculiarlysuitedtocooperativeoperations.Hereisthewayitworks:

Asmembersdobusiness throughacooperative,theyauthorize thecooperative touseaportion ofthe money it has accumulated or saved throughtheirpatronage.Orthemembersmayfurnishcapitalbasedonthedollarvalueorphysical volumeofproductssoldorboughtthroughthecooperative.Ineithercase,thismoneyis identified asacapitalinvestmentofthemembersandisused forcapitalpurposesonly.

Themoneythuscollectedbythecooperativefrompatronageiscreditedtoeachmemberonthecooperative’s books. At the end of the year, thememberisnotifiedorissuedsomeevidenceofthetotal amount he/she has invested in cooperativecapitalfortheyear.

Thecapitalaccumulatedinthismannermay betreatedasarevolvingfund.Thefundsmaybe usedforrepaymentofdebt,expansion,orforothercapitalpurposesasauthorizedbytheboard ofdirectors.Assuchfundscontinuetobeaccumulated;theboardauthorizestherepaymentoffunds tothosememberswhocontributedinthepast.

Repaymentgoesfirsttomemberswhosecontributionsaretheoldestintherevolvingfund.Normallyeachyear’scontributionsareissuedinanumericalseries.Thus,theoldestofthenumberedseriescomesupforrepaymentfirst.

Asageneralrule,themember’sevidenceofrevolving‐fundcontributionsdoesnothaveaspecifiedrepaymentdate(duedate).Rather,theboardestablishesrevolvingfundperiodsaftertakingintoaccounttheassociation’sfinancialrequirements.Some

cooperativesrevolvefundsatintervalsoffive,seven,or10years.Thesetimeperiodsarenotlegalrequirements,buttheyareconsideredasmoralcommitmentsonthepartofthecooperative.

Therevolving‐capitalplanallowsmemberstobuildupequityintheirassociationinproportiontotheamountofbusinesstheydo.Itensuresthatcurrentinvestmentinthecooperativeislargelybythecurrentpatrons.Itprovidesanorderlyprocessforreturningorwithdrawingamember’sinvestmentwithoutimpairingthetotalcapitalstructure.Anditgivesthebusinessflexibilitytomeetchangingconditionsthatmaycausefinancialneedstochange.

Discussthefollowingstatementsaboutthemember/user‐ownedcooperativecorporation.Aretheyadvantagesordisadvantages?

Cooperatives are part of the Americantraditionofprivateenterprise.Peoplemaypooltheireffortsandfundsandsolvebusinessproblems thatwouldbebeyondtheabilityofanyperson alone.

Cooperativesareusedbybusinessessuchasfarms, newspapers,railroads,florists,pharmacies,hardwarestores,aswellasbyindividuals.

Controlofpolicies isachieved throughmeetings ofmembers or the directors theyelect.Membersareencouraged toparticipateindecidingthefutureoftheircooperative.

Membersbenefitfromthecooperativeaccordingtohowmuchtheyuseit.

COOPERATIVE SERVICES 

Therearefourbasicareasinwhichagriculturecooperativesoperate:

1. Marketing2. Purchasing3. Providingservices4. Providingcredit

Marketing Cooperatives 

Overtheyears,Americanfarmershavelearnedmanynewtechniquesforincreasingyieldsandreducingmanual labor. At the same time, findingsatisfactorymarketsfortheirproductshasbecome anincreasingproblem.

Manyfarmersaremoreeffectiveinproducingthaninmarketing.Frequentlytheylackthetime orframeofreferencetounderstandandsatisfythedemandsoftoday’smassmarkets.Cooperativesprovidethemwiththemarketingtoolstheyneed.For onething,theyfurnishanincreasingvarietyofoff‐farmmarketingservices.Inresponsetothemarket demandforhigh‐qualityandstandardizedproducts, theyhave

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pioneeredinassemblingproductsfrom manyproducers.

Bypayingproducersonthebasisofgradeandquality,cooperativesencouragefarmerstoproducethekindandqualityofproductmostindemand.

Cooperativestransport,store,advertise,andpromoteproductsfortheirmembers.Theyexploreordevelopnewtradechannels—domesticandforeign.

Throughresearchtheydevelopnewproductsorfindnewusesforwhattheyproduce.

Cooperativeshavebecomeavaluablebargainingtoolforfarmers.Comparedwithproducersinotherindustries,agriculturalproducerstypicallylackbargainingpower.Why?Becauseindividualfarmersproducerelativelysmallvolumesandbecausetheylackthebargainingadvantagethatisassociatedwithproductdifferentiation.(Adifferentiatedproduct,i.e.,abrand‐nameproduct,isonewithdistinctivecharacteristicsthatcanbeemphasizedinadvertisingandthatgiveitspecialdesirabilityforuserswhovaluesuchcharacteristics.)

Duringrecentdecades,businessfirmsthatbuyagriculturalproductshavesteadilygrowninsize.Forexample,manyfoodprocessorsandpackersarelargecorporationswithgreatbargainingstrength.Similarly,chainfoodstoresthatbuyfreshproduceandotherproductsinlargeamountspossesscommensuratebargainingpower.Cooperativeshelpfarmersmatchthebargainingstrengthofotherfirms.

Marketingcooperativesbenefitconsumersaswellasproducers.Becausetheyemphasizegradeandquality,theyhavemadeproducersmorequalityconscious.Standardizedpacksoffoodandfoodproductshelpconsumersshopmoreefficiently.

Purchasing Cooperatives 

Farmerscharacteristicallyhavesoldtheiroutputatwholesalepriceswhilepayingretailpricesformanyoftheirinputneeds.Theygainedlittleadvantagefromproductdifferentiation;theypurchasedinrelativelysmallamountsandconsequentlypaidhighpricesforproductswithnamebrands,suchasfeeds,farmequipment,andpetroleumproducts.

Toovercometheseproblems,farmersturnedtothecooperativeasaneconomictool.Insomecases,whollynewcooperativeswereorganizedtomanufactureready‐mixedfeeds,topurchase,clean,anddistributehigh‐qualityseedtomembers,ortoprovideotherrelatedproductionservices.

Majorobjectivesofpurchasingcooperativesare:

(1) toeffectsavingsformember‐patronsthroughquantitypurchasingandmanufacturingandefficientdistributionmethods;

(2) toprocurethetypeandqualityofsuppliesbestadaptedtothemembers’farmsandneeds;and

(3) toproviderelatedservicesthatmeettheneedsofmember‐patrons.

Service Cooperatives 

Indiscussingcooperatives,weusuallypaythemostattentiontowaysinwhichtheycontributetoourincome.Butsomecooperativesprovideservicesonlyindirectlyrelatedtothewaywemakeourliving.Thesecooperativeshelpmakeourlivesalittlemorecomfortableinonewayoranother.Theseincludehealth,ruralelectric,telephone,insurance,irrigation,andgrazingco‐opsaswellasnon‐farmercreditunions.

Credit Cooperatives 

Anotherimportantsourceofloans,whichisonlyavailabletofarmersandfisheryoperators,istheFarmCreditSystem.Herefarmersdonotsavemoney,asincreditunions,buttheymayborrowfromlocalcreditcooperatives.TheFarmCreditSystemwillbebrieflydiscussedherebecauseofitsimportancetoagriculture.

TheFarmCreditSystemisanationwidefinancialcooperativethatlendstoagricultureandruralAmerica.Congresscreatedthesystemin1916toprovideAmericanagriculturewithadependablesourceofcredit.

Today,thesystemprovidesmorethan$199billioninloanstomorethanahalfmillioncustomers,includingfarmers,ruralhomeowners,andagribusinesses.Overall,morethanonethirdofthecreditneedsofU.S.agriculturearemetbysysteminstitutions.Theyalsoprovideothervalue‐addedservicessuchasleasing,insurance,andfinancialconsulting.

TheFederalFarmCreditBanksFundingCorporationisthefiscalagentfortheFarmCreditSystemBanks.BecauseSysteminstitutionsdonotacceptdeposits,theyrelyontheFundingCorporationtoraisemoneyforloansandleasesthroughthesaleofFarmCreditSystemwidedebtsecuritiesintheU.S.andinternationalmoneymarkets.ThefundsarechanneledbacktoruralAmericathroughanationwidenetworkofmorethan200FarmCreditlendinginstitutions.

Morespecifically,theFarmCreditSystemismadeupofthreeFarmCreditBanks:AgFirst,AgriBank,FarmCreditBankofTexas,andoneAgriculturalCreditbank,CoBank.Thesebanksprovidefundsandsupportservicesto203locallyownedFarmCreditassociationsandnumerouscooperativesnationwide.

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TypicalservicesofferedbytheregionalFarmCreditbanksandassociationstoeligibleborrowersincluderealestateloans,operatingloans,ruralhomemortgageloans,credit‐relatedlifeinsurance,andvariousfinanciallyrelatedservicessuchasfarmrecordkeepingandfinancialplanning.AllFarmCreditbanksandassociationsaregovernedascooperativesbyboardsofdirectorselectedbymember/borrowers/stockholders.

ThereisonlyonebankleftwithnationalchartersintheFarmCreditSystemandthatisCoBank,whichfinancesagriculturalcooperatives,ruralutilitysystems,andotherruralbusinessesthroughouttheUnitedStates.HeadquarteredinDenver,Colorado,CoBankalsoprovidescredittotheFarmCreditassociationsservingagriculturalproducersintheNewEnglandstates,NewYork,andNewJersey.Thelast

bankotherthanCoBankwasthebankofSt.PauluntilitmergedwiththeFarmCreditBankofSt.Louisin1992toformAgriBank.

CoBank,whichhasbankingcentersacrosstheUnitedStatesandrepresentativeofficesinMexicoCityandSingapore,alsofinancesU.S.agriculturalexportsandprovidesinternationalbankingservicesforthebenefitoffarmer‐ownedcooperativesandAmericanagriculture.

TheFarmCreditSystemalsohastwonationalserviceentities,FarmCreditLeasingandtheFederalFarmCreditBanksFundingCorporation.FarmCreditLeasingprovidesequipment‐leasingservicestoeligibleagriculturalproducers,cooperatives,andruralutilities.HeadquarteredinMinneapolis,Minnesota,itisownedbythesystembanksandhas11salesofficesnationwide.

 PART VII 

QUESTIONS FOR DISCUSSION:  

1. Howisacooperativecorporationlikeanordinarybusinesscorporation?Howisitdifferent?

2. Howdoesthepurposeofacooperativecooperationdifferfromthatofanordinarybusinesscorporation?Doesthismakeitabetterorganization?

3. Howisthesystemofcontrolthroughvotinginacooperativecorporationdifferentfromthatinanordinarybusinesscorporation?Why?

4. Whatisthereasonthatlawsgoverningcooperativecorporationsprescribelegallimitsastothereturns(dividends)thatcanbepaidoninvestedcapital?

5. Whatisthemeaningofnonprofitinacooperativecorporation?IsthisnotinconflictwithwhatwebelievetobesomeoftheadvantagesofthecapitalisticsystemofbusinessintheUnitedStates?

6. Doesthegovernmentexerciseanycontroloverthecooperativecorporations?

7. Ifagroupoffarmersorganizesacooperativeandraisesasubstantialpartoftheneededmoneythemselves,whataresomeofthesourcefromwhichtheymaybeabletoborrowmoney?

8. Aresharesofcapitalstockincooperatives,ingeneral,tradedasfreelyassharesofstockinordinarybusinesscorporations?

9. Whatarethreecommonlyacceptedprinciplesofcooperatives?

10. WhatistheCapper‐VolsteadAct?Howdoesitaffectcooperatives?

IDEAS FOR FURTHER STUDY AND TOPIC FOR TALKS AND DEMONSTRATIONS 

1. Gotoyourlibrary/onlineresourcesandfindwhatyoucanabouttheRoachdaleCooperativeinEngland.2. Tracethehistoryofthecooperative.Whatwerethefirstcooperatives?Whereweretheylocated?3. Supposeyourgroupwantedtoorganizeandberesponsibleforanorganizationtokeepyourschoolclassroom

clean.Whattypeoforganizationwouldyoucreate?Haveagroupdiscussionaboutthis?

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 Part VIII:   

E‐Commerce…ANewAvenueofDoingBusiness“Guess what? The world changes. eBay has defined e-commerce.”

—Meg Whitman  

Thissectionintroducesaformofbusiness,e‐commerce,whichisupwardlytrendingintoday’seconomy.Highlightingtheimportance,usesandstepsofinitiatingthistypeofbusinesstothenationalandinternationaleconomy,thissectionfurtherdiscussestheamazingopportunitiesthatexistintoday’sbusinessworldaswethinkabouttheAmericanPrivateEnterpriseSystem.Thissectionalsoshareswaystodevelopyourownbusinessandprovidetipstoconsiderwhenaggressivelypursuingopportunitiesine‐commerce.

TounderstandtheAmericanPrivateEnterpriseSystemistounderstandtheimpacte‐commercehashadonoureconomy.Today,consumersareverydiverseintheirneedsandwants.Theyutilizetheinternettobrowse,learnaboutproducts,show,andbuyavarietyofgoodsandservices.IndividualswithaccesstotheWorldWideWebviewitasanavenueofconstantinformationthatprovidesameanstoconnecttotheworldatanygiventime.

E‐commercehasbeengrowingatarapidratesincetheinceptionoftheinternet.Showingtheincreaseininternetuse,in199718.0%ofallhouseholdshadinternetuseathome.Fifteenyearslater,74.8%ofallhouseholdshadinternetuseathome.Inaddition,78.9%ofpeoplehaveacomputerathomeand94%utilizethecomputertoconnecttotheinternet.

Further,in2012,45.3%ofadults25andoverwereusingsmartphonesthathaveinternetaccess.Smartphonescanbeusedtosendemail,browsetheweb,downloadapps,maps,socialmedia,listentomusic,andplaygames.Theincreaseduseofsmartphonesandhomeinternetusehasmadethemarketreadilyavailableforconsumersatanygiventime,highlightingtheimportanceofe‐commerceinoureconomy.Bytheendof2013,itisestimatedthat150million(47.3%)ofthecountry’spopulationof317millionbecameregularmobileInternetusers.

What is E‐Commerce? 

Therearemanydifferentdefinitionsandbasicsinunderstandinge‐commerce.Thedefinitionusedinthissectionexplainselectroniccommerceore‐commerceasatermforanytypeofbusinessorcommercialtransactionthatinvolvesthetransferof

informationacrosstheinternet.Itcoversarangeofdifferenttypesofbusinesses,fromconsumerbasedretailsitesthroughauctionormusicsitestobusinessexchangestradinggoodsandservicesbetweencorporations.Inaddition,itinvolvesavarietyofpostandpresaleactivitiesanditiscurrentlyviewedasoneofthemostimportantaspectsoftheInternettorecentlyemerge.

Types of E‐Commerce 

BusinessNewsDailyclassifiese‐commerceintofourtypesthatprovideanexcellentfoundationfordiscussioninthissection;businesstobusiness(b2b),businesstoconsumer(b2c),consumertobusiness(c2b),andconsumertoconsumer(c2c).

B2B(BusinesstoBusiness)—inthistypeofe‐commerce,companiesnormallyengageinbusinesswitheachother.Specifically,manufacturerssellingtodistributorsandwholesalerssellingtoretailers.

B2C(BusinesstoConsumer)—thisformisthecommonassociationof"e‐commerce."Itencompassesbusinessessellingtothegeneralpublicthroughshoppingcartsoftware,withoutneedinganyhumaninteraction.AnexampleofthiswouldbeAmazon.Thisformofe‐commerceisverypopular.In2012,B2Cecommercesalesgrew21.1%totop$1trillionforthefirsttime,accordingtonewglobalestimatesbyeMarketer.Thisyear,saleswillgrow18.3%to$1.298trillionworldwide,eMarketerestimates,asAsia‐PacificsurpassesNorthAmericatobecometheworld'sNo.1marketforB2Ce‐commercesales.B2Ce‐commercesalesinAsia‐Pacificgrewmorethan33%to$332.46billionin2012.Thisyear,theregionwillseesalesincreasebymorethan30%toover$433billion—ormorethanone‐thirdofallglobalB2Cecommercesales.

C2B(ConsumertoBusiness)—inthisscenario,aconsumerwouldpostaprojectwithasetbudgetonline,andcompaniesbidontheproject.Theconsumerreviewsthebidsandselectsthecompany—Elanceisanexampleofthistypeofe‐commerce.

C2C(ConsumertoConsumer)—thistypeofe‐commerceismadeupofonlineclassifiedsorforumswhereindividualscanbuyandselltheirgoods.ApaymentsystemsuchasPayPal

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enablescustomerstopayinaconsumertoconsumertypeofe‐commerce.AspecificexampleofthistypeofwouldbeeBayorEtsy.

Benefits of E‐Commerce 

Therearemanybenefitsofe‐commercethatmakeitrelevanttodoingbusinessatalocal,national,andinternationallevel.Forexample,itallowsconsumerstoelectronicallyexchangegoodsandserviceswithnobarriersoftimeordistance.Inaddition,ithasexpandedrapidlyoverthepastfiveyearsresultinginmorebusinessestransferringsectionsoftheiroperationsontotheinternet,potentiallycuttingoperationcosts.Belowaretrendsthatarefavoringe‐commerceincomparisontotraditionalretail(Colao,2012).

Stores Realizing More Profit Online 

Businessesarerealizingtheopportunitiesthatexistine‐commerce.(Colao,2012)highlightsMacy’s,whichhasseenanonlinesaleincreaseof40%in2011whilesame‐storesalesgrewjust5.3%.Further,Nordstromisofferingfreeshippingandfreereturnsinitsonlinestore;thecompanyhasnotchedthreestraightquartersof35%gainsinonlinesalesfocusingoniPodTouchesandsmartphones.Businessesareseeingincreasedgrowthandprofitine‐commerce.

Cost Efficiency and Receiving the Best Price 

Consumersarenoticingthatproductsareoftenmarkedupatleastthreetimeswhenpurchasingfromtraditionalretailoutlets.Specifically,whentheproductchangeshands,thepurchasepriceisusually2xto5xtheinitialprice(Colao,2012).Whilecuttingoutthemiddleman,manyonlineretailersmakeaprofitbutalsosellatacheaperpricethanthosethataresellingoutofphysicallocations.Ultimately,consumersarerealizingthatonlinehasmoreoptionsandcheaperprices.

The Benefit of Free 

Consumerswantthebestpricesandprefertonotbepenalizedwhentheymakeawrongdecision.Manybusinessesareofferingreturnsforfreeandshippingforfreeonproductsthatessentiallywerethewrongdecisiontoconsumersintermsoftaste,size,orfeel.Manyconsumersinitiallyhaddoubtsofpurchasingproductsonlineinfearofbeingthewrongsize,color,orstyle.However,withfreeshippingandfreereturns,itmakesthedecisionmoreacceptableifconsumersareallowedtochangetheirmindontheirpurchasewithnoadditionalcost.

The Art of Individualism and Personal Satisfaction 

Companiesareofferingclothingthatisaccustomedtofitthemanytypesofbodiesthatresembletheconsumer.Consumershavemanydifferentbodytypes,styles,andinterestsinpurchasing.Manycompaniesareaskingshoppersfortheirmeasurements,alongwithalistoftheirbestfittingclothestomatchwiththerightsizes.Moreover,companieslikeAccustomApparel,whichuses3Dbodyscannersalongwithpatternmakingsoftwaretoscalethecreationofcustomfittedclothingatadigestiblepricepoint.Consumersenjoythepersonaltouchandattentionprovidedtheirindividualneedsandwants.Theartofmakingindividualsfeeluniqueandcateredtoismakinge‐commerceveryattractivetoconsumers.

The Self‐Appointed Shopper 

Manybusinessesaremakingiteasierontheconsumerbyorganizingaconsistentpurchasefortheconsumertoobtainroutinegoodsandservices.Somecriticsmayviewthisasalazyshopper,whileotherssayitisamatterofconvenience.Forexample,apurchasercanrelyonaroutinedeliveryofhouseholdproductstoshowuponthesamedateeverymonth.

E‐Commerce here to stay 

Questionsmaycomeforthonwhethere‐commerceisatrendorisitheretostay?However,researchsupportstheclaimthate‐commercehasaroletoplayinthelongtermimpactoftheUnitedStateseconomyandinit’sretail.Forexample,itisprojectedthatUnitedStatesretailsalesareexpectedtogrowfrom$263billionin2013to$414billionin2018,acompoundannualgrowthrateof9.5%,accordingtoanewonlineretailsalesforecastfromForesterResearchInc.

Growthine‐commercecanbecontributedtomanythings.Inparticular,increasedshoppingbyconsumersonmobilephonesandtabletsleadstothegrowth.Increasedspendingbydigitalnatives—consumerswhogrewupusingtheInternetfromtheirearliestyears—willalsocontributetothegrowthastheymoveintotheirprimespendingyears.Inexamininggenerations;Consumersages25and33yearsold(GenerationY)alreadyspendmoreonlinethananyotheragegroup,anaverageof$563inthelastthreemonths.Further,Consumersages34to47yearsold(GenerationX),bycomparison,spentanaverageof$535onlineduringthelastthreemonths.Moreover,theyoungergenerationismorelikelytospendalargershareoftheirretaildollarsontheweb.Today,69%ofUnitedStatesadultsregularlybuyonlineandpurchaseabout16%oftheirproductsonline. 

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Averyimportantstatistictothefutureoutlookofe‐commercestatesthatbytheyear2017,60%ofallUnitedStatesretailsaleswillinvolvetheInternetinsomeway,eitherasadirecte‐commercetransactionoraspartofashopper’sresearchonalaptopormobiledevice,accordingtoanewreportbyForresterResearchInc.entitled“U.S.Cross‐ChannelRetailForecast,2012To2017.”Further,approximately10.3%oftotalretailsalesintheUnitedStatesinfiveyearswillbeonlinepurchases,or$370billioninwebsalescomparedto$3.6trillionintotalretailsales.

The Future  

Thefutureofe‐commerceisbrightanddiverse.ThecategoriesofgoodsthatwillbemostinfluencedbyInternetresearchinfiveyearswillbegrocery,apparelandaccessories,homeimprovement,andconsumerelectronics,inparticularthroughmobileactivitysuchasreadingcustomerreviewswhileintheaisle.

Forexample,shoppersoftenbuyconsumerelectronicsonline,buttheymoreoftenbuygroceryandhomeimprovementitemsinstores,thoughtheyresearchthoseproductsonlinemorefrequentlythanconsumerelectronics.

Researchvoicesthatretailersshouldfocusonthreemainareasinordertopreparefortheweb‐immersedshoppersofthefuture.First,retailersshouldmakesuretosupportself‐servicemobilefunctionalityforin‐storeshoppersorprovideassociateswithmobiletoolstohelpshoppers.Forexample,Wal‐MartStoresInc.’smobileappdetectswhenashopperisinthestoreandhelpsherfindproductsordiscounts,whilePacificSunwearofCaliforniaInc.givesstoreassociatesiPadstohelpshoppersorderonlineproductsthatareoutofstockinstores.

Alongwithconnectingwebandstoreinventories,thethirdtaskforretailerstomasteristoresolvepricedifferencesbetweene‐commerceandstorecatalogs.Asmoreshoppershavesmartphonesandareabletoaccesspricesinstantaneously,suchdiscrepanciesarelikelytoworkagainstretailers,particularlyifthepricingvariancesarelargeanddon’tfavorthecustomer.

International E‐Commerce 

E‐commercehasplayedahugerolenotonlyintheAmericanwayofdoingbusiness,butalsointheInternationalEconomy.Althoughtherehavebeenadvancementsinsomecountries,severalopportunitiesstillexisttocapitalizeininternationale‐commerce.Pleasefindexamplesofafewmarketsbelow.

China: 

Therearebeautyretailersthatsellcosmeticsandhavebeenslowtoadoptane‐commercestrategythatisspecifictoChina.Thirty‐twopercentoftopbeautyretailersfailtohaveaChinese‐languagesite(includingbignamessuchasCalvinKlein,Dior,Gucci,andChanel).TheseretailersaremissingoutonanopportunitytocapturemoresalesinChina;20%ofcosmeticssalesinthecountryoccuronline,comparedtojust5%thatdointheUnitedStates.(L2ThinkTank)

Nigeria:  

Nigeria'se‐commercemarkethasconsistentlygrown25%andisbeginningtohaveasignificantimpactonthecountry'sGDP.However,wehavefoundthatinmostAfricancountries,thegrowthisonlysustainableifmorepotentialconsumersgainaccesstotheInternet.AfricanandMiddleEasternregionsareamongtheleastdevelopedmarketsine‐commercecitinghugefutureopportunitiesthatexistinthearea.(VenturesAfrica)

Inordertoexcelininternationale‐commerce,itisimportanttohaveflexiblepricing,understandexchangerates,andhaveasoundpresentationinpricing,localpayments,andtaxes.

Flexible pricing is important.  

Itisimportantine‐commercetobranchoutandattempttoreachconsumersinalldifferentareas.However,themoreareasyousellyourproducts,themoremarketpricestobeknowledgeableof.Ifyousellaproductcompetitivelyfor1,300PesosintheDominicanRepublic,convertingthatproducttodollarsresultsinaproductthatcostsabout$32.However,competitorsintheUnitedStatesmightpricetheirproductat$50,soeventhoughyouarepricinginthelocalcurrency,youarenotpricedcompetitivelyandshopperswillabandonyoursiteforacompetitors’site.

Understanding exchange rates is crucial.   

Exchangeratesallowyoutodeterminehowmuchofonecurrencyyoucanexchangeforanother.Thedollar’sexchangeratetellsyouhowmuchadollarisworthinaforeignexchangerateorviceversa.Forexample,inSeptember2013,adollarwasworth1.03Canadiandollars.Soapairoftennisshoesthatcost$105Americandollarswouldcost$108.15Canadiandollars.Relatingtoe‐commerce,seeinganunfamiliarcurrencyonane‐commercesiteisconfusingtoalotofpeopleandcanleadtotheabandonmentofonlineshoppingcarts.Todecreasee‐commercemisunderstandingandavoidlosingoutonpotentialcustomers,setpricesinlocalcurrency. 

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A sound presentation can make a difference.   

Presentationisalwaysimportantwhenappealingtoconsumers.Intermsofpresentationofpricing,roundingnumberscanmakeapsychologicaldifferencetoconsumers.Exchangeratescancausefriendly‐lookingpricefigurestoturntolessrounded,oddlookingnumbers.IfyoushowanEUcustomeraproductpricedat€23,81ratherthanamorecustomer‐friendlypriceof€25,00,youareincreasinge‐commerceuncertaintyandmakingthemawareofthefactthatyourcompanyisobviouslynotlocatedintheirhomecountry.Customersshouldseeproductpricesinclean,roundnumberstomaketheshoppingexperienceasquickandefficientaspossible.

Provide a means for a local payment that is quick and efficient.  

Itisimportanttoconsiderthemethodsofpaymentthatareconsistentwithwhatconsumersareutilizingintheirlocalarea.Requestingpaymentfromonlinecustomerstopayinawaytowhichtheyarenotaccustomedcancutintoyourrevenue.Aimtomaketheexperienceofyourconsumersaseasyaspossible.Youcanmakethemfeelathomebyworkingwithwhattheyknow.InGermany,wiretransfersarethemostimportantlocalpaymentmethodandinJapan,theKonbinipaymentmethodisapopularalternative,representingnearly40%ofsomeofclients’Japanesetransactions.

Showing taxes in a way that is familiar and easily understood.    

Revisitingourpreviousdiscussiononpresentation,itisimportanttoshowsalestaxesinwayonlinecustomersarefamiliarwithtoavoidconfusiontotheconsumer.Therearealsolegalpoints,assomecountrieshavedifferenttaxdisclosurerequirements.IntheUnitedStatessalestaxisaddedtothemarketedpriceandvarieswidelyacrossthecountryandwithinindividualstates.IntheEurope,valueaddedtax(VAT)isataxontheperceivedvalueofaproduct,soitismarketedasacomponentofthefinalprice.

Steps in the Right Direction for Starting an Online Business. 

Thechoicetostartabusinesscanbeanimportantwaytosell,market,andadvertiseyourbusiness’sgoodsandservices.Thefollowingprovidesanoutlinetostartinganonlinebusiness:Starting a Business

Anytimeonechoosestostartabusiness,theyaresetrequirementsorguidelines.Beforeinitiatinganonlinebusiness,therearesetupstepsinstartingabusinessingeneral.TheSmallUnitedStatesBusinessAdministrationhasputtogethertoolsandresources

andwhichwewillaidyoufrompreparingyourbusinessplanandtobecomingasuccessfulbusinessowner.

1. Registering a Domain Name  

Adomainnameisthewebaddressofyouronlinebusiness.Itisimportanttochooseandregisteradomainname,whichisverycostfriendlyandnotverydifficult.TheavenuestoregisterareCertifiedRegisteringAuthorities,InternetDomainNameRegistrationServicesandAbusiveDomainNameRegistration.Bemindfulofsecurityrisksandscams.TheFederalTradeCommissionissuedaconsumeralertaboutDomainNameRegistrationscams.

TheInternetCorporationforAssignedNamesandNumbershasoversightofInternetprotocoladdressspaceallocation,protocolparameterassignment,domainnamesystemmanagement,androotserversystemmanagementfunctions.Inaddition,itprovidesupdatedandcurrentissuesondomainnames.

2. Select a Web Host 

Awebhostprovidessupportandspacefordevelopmentofyourwebsite.Asabusiness,onewouldwanttotakeintoconsiderationthecostsandabilities,suchassitemaintenance,searchregistration,andsitedevelopment.Theseoptionsvaryfromhosttohost.

3.  Design of a Website 

Oneofthemostimportantaspectsofawebsiteisitsdesign.Thisisthemessage,thestorefront,andthevisiblepresencethatyouwillbeassociatedwithtoyourconsumers.Inaddition,thisistheopportunitytoshowyourcreativityanduniquenessthatmakesyourbusinessspecial.Websitescanbedesignedpersonallyorbyhiringsomeoneasyoursitedesigner.ItisimportanttofollowthesameU.S.trademarkandintellectualpropertylawsasyouwouldfollowinaregularbusiness.Rememberthatanonlinebusinessobeysandoperatesthesamewayasaregularbusinessdespitehavinganonlinepresence.

4.   Advertising and Marketing 

Animportantcomponentofabusinessisthemessagesentouttotheconsumers.Onlinebusinessescannotbesuccessfulwithoutcustomersvisitingthesite.Visitstothesitearethewayinwhichconsumerscanengageinbusinesswithyourcompany.Registerwithsearchenginesandusekeywordsthatwilldrivethemosttraffictoyoursite.Inaddition,advertisingandmarketingonlineisregulatedthesamewayitisintherealworldandsomeofthesamerulesmayapply.Toassistwiththeseregulationstherearetheadvertisingandmarketingontheinternet;rulesofthe

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roadanddotcomdisclosures,andinformationaboutonlineadvertising.

5.  Comply with Online Business Regulations 

Onlinebusinessesmustcomplywithspeciallawsandregulationsthatapplyonlytothem.TheselawsmayinrelationtothedifferentcontentallowedontheInternetandalsoonimagesandpotentialvisitorstothesite.Toassistwiththesebusinessregulations,thereistheanti‐cybersquattingConsumerProtectionActof1999,sellingontheInternet:PromptDeliveryRules,andChildren’sOnlinePrivacyProtectionAct.

6.    State and Local Compliance Information 

Therearecertainfederal,state,andcitylawsthatallbusinessesmustfollowinginanonlinebusiness.Itisimportanttounderstandandbeknowledgeableoftheselaws.

7.   Tax Requirements of Federal, State, and local Businesses 

Onlinebusinessesmustfollowthesamelawsasregularbusinessesandfollowthesamefederal,state,andlocaltaxlaws.Inparticular,ifyouareoperatingyouronlinebusinessinastatethatchargesasalestax;orleviesagrossreceiptsorexcisetaxonbusinesses,youmayhavetoapplyforataxpermitorregisterwithyourstaterevenueagency.Inaddition,onlinebusinessesareresponsibleforcollectingstateand

localtaxesfromtheircustomersandpayingthesetaxestostateandlocalrevenues.

8.   Understanding International Trade Laws 

Differentcountrieshavedifferentlaws.Itisimportanttofollowinternationaltradelawsforonlinebusinessestobesureyouareincompliancewithallregulations.

9.   Resources to Consider When Starting a      Business 

Whenstartingabusiness,youwanttoalsothinkaboutotheravenuesofadvertising,suchassocialmedia,Facebook,Twitter,Instagram.Inaddition,maywanttothinkaboutwhetherornotyouwanttohaveadditionalemployeestohelpintheadvertisement,marketing,anddesignofproductandwebsitematerials.

Thissectionhasprovidedsomeveryimportantinformationcurrentlyfacingoursocietyandalsointermsofafutureoutlookonhowweoffergoodsandservices.Howcanwebranchoutourbusinesstotherestoftheworldwithlimitedresources?Howcanwemakeourproductsglobal?Howcanwediversifyourindustry?Alloftheseareimportantquestionsandhowweanswerthemmakesadifferenceinourlivesandthoseinourlocal,national,andinternationalcommunities.

 

 Part VIII 

Questions for Discussion: 

1. Whatarethebenefitsandor/disadvantagesofe‐commerce?2. Doyoufeelconsumersvalueonlineversestraditionalretailorisitjustamatterofconvenience?3. Doyoufeelthattimeofarrivalwillplayaroleinthefutureofe‐commerce?4. Thinkaboutyourhomecommunity;hase‐commerceimpactedyourcommunityinanyway?5. Howhassocialmediaimpactede‐commerceinyouropinion?6. Doyoueverviewthetrendofe‐commercereversing?7. Howdoese‐commerceinfluencethethreequestionsinabusinessofwhattoproduce,howtoproduce,and

forwhomtoproduce?8. Whydoyoufeelcertainindustries,suchaselectronics,aregettingmorepopularine‐commerceversusother

industries,suchasfood?9. Nameanindustrythatyouutilizethatspecializesine‐commerce?10. Thinkaboutyourpurchasingdecisions.Doese‐commerceallowyoutopurchaseaproductthatyounormally

wouldnothaveaccessinyourhomecommunity?11. Whatimpactdoese‐commercehaveonlocaljobs?

 

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BibliographyThefollowingpublicationswereusedinpartasabasisfortheinformationintheAmericanPrivateEnterprise

Systemproject:

BusinessinOurCommunity,AmericanInstituteofCooperation,Washington,D.C.

CooperativesinAgribusinesses,AgriculturalCooperativeService,CooperativeInformationReport5,September1993.

U.S.BureauofCensusStatisticalAbstractoftheUnitedStates:1995(115thedition),WashingtonD.C.1995.

BoardofGovernorsoftheFederalReserveSystem,FederalReserveBulletin,monthly;andannualStatisticalDigest,1980‐1994.

U.S.FederalDepositInsuranceCorporation,StatisticsonBanking,annualandFDICQuarterlyBankingProfile,1990‐1994.

U.S.BureauofEconomicAnalysis,NationalIncomeandProductAccountsoftheUnitedStates,Volume2,1959‐88,andSurveyofCurrentBusiness,July1992,August1993,July1994,andMarch1995.