Monday, June 8, 2009
Private property rights
According to the classical liberal view, a secure system of private property rights is an essential part of economic freedom. Such systems include two main rights: the right to control and benefit from property and the right to transfer property by voluntary means. These rights offer people the possibility of autonomy and self-determination according to theirs personal values and goals.[21] Economist Milton Friedman sees property rights as "the most basic of human rights and an essential foundation for other human rights."[22] With property rights protected, people are free to choose the use of their property, earn on it, and transfer it to anyone else, as long as they do it on a voluntary basis and do not resort to force, fraud or theft. In such conditions most people can achieve much greater personal freedom and development than under a regime of government coercion. A secure system of property rights also reduces uncertainty and encourages investments, creating favorable conditions for an economy to be successful.[23] Empirical evidence suggests that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights systems, and that a market system with significant private property rights is an essential condition for democracy.[24] According to Hernando de Soto, much of the poverty in the Third World countries is caused by the lack of Western systems of laws and well-defined and universally recognized property rights. De Soto argues that because of the legal barriers poor people in those countries can not utilize their assets to produce more wealth.[25] Pierre Proudhon, a socialist and anarchist thinker, argued that property is both theft and freedom.[26]
Institutions of economic freedom
Classical liberals argue that the rule of law both requires, and is required for economic freedom. Friedrich Hayek argued that the certainty of law contributed to the prosperity of the West more that any other single factor. Other important principles of the rule of law are the generality and equality of the law, which require that all legal rules apply equally to everybody. These principles can be seen as safeguards against severe restrictions on liberty, because they require that all laws equally apply to those with political and coercive power as well as those who are governed. Principles of the generality and equality of the law exclude special privileges and arbitrary application of law, that is laws favoring one group at the expense of other citizens.[18] According to Friedrich Hayek, equality before the law is incompatible with any activity of the government aiming to achieve the material equality of different people. He asserts that a state's attempt to place people in the same (or similar) material position leads to an unequal treatment of individuals and to a compulsory redistribution of income.[19] Both of those actions are contributing to a decline in economic freedom.
Economic freedom
Economic freedom is a term used in economic research and policy debates. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom.[1][2] One major approach to economic freedom comes from the libertarian tradition emphasizing free markets and private property, while another extends the welfare economics study of individual choice, with greater economic freedom coming from a "larger" (in some technical sense) set of possible choices.[3] Another more philosophical perspective emphasizes its context in distributive justice and basic freedoms of all individuals.[4]
Today the term is most commonly associated with a classical liberal (or free market) viewpoint, and defined as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.[5][6][3]
Indices of economic freedom attempt to measure (free market) economic freedom, and empirical studies based on these rankings have found them to be correlated with higher living standards, economic growth, income equality, less corruption and less political violence.[7][8][9][10][11] These economic freedom indices are sometimes used to rank countries by economic freedom, and are usually topped by Hong Kong and Singapore. Between 1985 and 2005, only a small number of surveyed countries did not increase their Economic Freedom of the World score.[12] Some empirical analysis suggests that the index is not closely correlated with economic growth,[13] but regression analysis of the disaggregated components suggests that some specific freedoms contribute to economic growth while others hamper it.[14]
Other conceptions of economic freedom include freedom from want[1][15] and the freedom to engage in collective bargaining.[16]
Today the term is most commonly associated with a classical liberal (or free market) viewpoint, and defined as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.[5][6][3]
Indices of economic freedom attempt to measure (free market) economic freedom, and empirical studies based on these rankings have found them to be correlated with higher living standards, economic growth, income equality, less corruption and less political violence.[7][8][9][10][11] These economic freedom indices are sometimes used to rank countries by economic freedom, and are usually topped by Hong Kong and Singapore. Between 1985 and 2005, only a small number of surveyed countries did not increase their Economic Freedom of the World score.[12] Some empirical analysis suggests that the index is not closely correlated with economic growth,[13] but regression analysis of the disaggregated components suggests that some specific freedoms contribute to economic growth while others hamper it.[14]
Other conceptions of economic freedom include freedom from want[1][15] and the freedom to engage in collective bargaining.[16]
Environmental rights
There are two basic conceptions of environmental human rights in the current human rights system. The first is that the right to a healthy or adequate environment is itself a human right (as seen in the both Article 21 of the African Charter of Human and People’s Rights, and Article 11 of the San Salvador Protocol to the American Charter of Human Rights).[91][92]. The second conception is the idea that environmental human rights can be derived from other human rights, usually - the right to life, the right to health, the right to private family life and the right to property (among many others). This second theory enjoys much more widespread use in human rights courts around the world, as those rights are contained in many human rights documents.
The onset of various environmental issues, especially climate change, has created potential conflicts between different human rights. Human rights ultimately require a working ecosystem and healthy environment, but the granting of certain rights to individuals may damage these. Such as the conflict between right to decide number of offspring and the common need for a healthy environment, as noted in the tragedy of the commons.[93] In the area of environmental rights, the responsibilities of multinational corporations, so far relatively unaddressed by human rights legislation, is of paramount consideration.[citation needed]
Environmental Rights revolve largely around the idea of a right to a livable environment both for the present and the future generations.
The onset of various environmental issues, especially climate change, has created potential conflicts between different human rights. Human rights ultimately require a working ecosystem and healthy environment, but the granting of certain rights to individuals may damage these. Such as the conflict between right to decide number of offspring and the common need for a healthy environment, as noted in the tragedy of the commons.[93] In the area of environmental rights, the responsibilities of multinational corporations, so far relatively unaddressed by human rights legislation, is of paramount consideration.[citation needed]
Environmental Rights revolve largely around the idea of a right to a livable environment both for the present and the future generations.
Human rights violations
Human rights violations occur when any state or non-state actor breaches any part of the UDHR treaty or other international human rights or humanitarian law. In regard to human rights violations of United Nations laws. Article 39 of the United Nations Charter designates the UN Security Council (or an appointed authority) as the only tribunal that may determine UN human rights violations.
Human rights abuses are monitored by United Nations committees, national institutions and governments and by many independent non-governmental organizations, such as Amnesty International, International Federation of Human Rights, Human Rights Watch, World Organisation Against Torture, Freedom House, International Freedom of Expression Exchange and Anti-Slavery International. These organisations collect evidence and documentation of alleged human rights abuses and apply pressure to enforce human rights laws.
Only a very few countries do not commit significant human rights violations, according to Amnesty International. In their 2004 human rights report (covering 2003), the Netherlands, Norway, Denmark, Iceland and Costa Rica are the only (mappable) countries that did not (in their opinion) violate at least some human rights significantly.[89]
There are a wide variety of databases available which attempt to measure, in a rigorous fashion, exactly what violations governments commit against those within their territorial jurisdiction.[citation needed] An example of this is the list created and maintained by Prof. Christian Davenport at the University of Maryland.[90]
Wars of aggression, war crimes and crimes against humanity, including genocide, are breaches of International humanitarian law and represent the most serious of human rights violations.
When a government closes a geographical region to journalists, it raises suspicions of human rights violations. Seven regions are currently closed to foreign journalists
Human rights abuses are monitored by United Nations committees, national institutions and governments and by many independent non-governmental organizations, such as Amnesty International, International Federation of Human Rights, Human Rights Watch, World Organisation Against Torture, Freedom House, International Freedom of Expression Exchange and Anti-Slavery International. These organisations collect evidence and documentation of alleged human rights abuses and apply pressure to enforce human rights laws.
Only a very few countries do not commit significant human rights violations, according to Amnesty International. In their 2004 human rights report (covering 2003), the Netherlands, Norway, Denmark, Iceland and Costa Rica are the only (mappable) countries that did not (in their opinion) violate at least some human rights significantly.[89]
There are a wide variety of databases available which attempt to measure, in a rigorous fashion, exactly what violations governments commit against those within their territorial jurisdiction.[citation needed] An example of this is the list created and maintained by Prof. Christian Davenport at the University of Maryland.[90]
Wars of aggression, war crimes and crimes against humanity, including genocide, are breaches of International humanitarian law and represent the most serious of human rights violations.
When a government closes a geographical region to journalists, it raises suspicions of human rights violations. Seven regions are currently closed to foreign journalists
Human rights vs. national security
With the exception of non-derogable human rights (international conventions class the right to life, the right to be free from slavery, the right to be free from torture and the right to be free from retroactive application of penal laws as non-derogable[84]), the UN recognises that human rights can be limited or even pushed aside during times of national emergency - although
“ the emergency must be actual, affect the whole population and the threat must be to the very existence of the nation. The declaration of emergency must also be a last resort and a temporary measure ”
—United Nations. The Resource[84]
Rights that cannot be derogated for reasons of national security in any circumstances are known as peremptory norms or jus cogens. Such United Nations Charter obligations are binding on all states and cannot be modified by treaty.
Examples of national security being used to justify human rights violations include the Japanese American internment during World War II,[85] Stalin's Great Purge,[86] and the actual and alleged modern-day abuses of terror suspects rights by some western countries, often in the name of the War on Terror
“ the emergency must be actual, affect the whole population and the threat must be to the very existence of the nation. The declaration of emergency must also be a last resort and a temporary measure ”
—United Nations. The Resource[84]
Rights that cannot be derogated for reasons of national security in any circumstances are known as peremptory norms or jus cogens. Such United Nations Charter obligations are binding on all states and cannot be modified by treaty.
Examples of national security being used to justify human rights violations include the Japanese American internment during World War II,[85] Stalin's Great Purge,[86] and the actual and alleged modern-day abuses of terror suspects rights by some western countries, often in the name of the War on Terror
National Labor Committee in Support of Human and Worker Rights
The National Labor Committee in Support of Human and Worker Rights, commonly known as the National Labor Committee or the NLC, is a non-profit non-governmental organization (NGO) founded in 1981 by David Dyson to combat sweatshop labor and United States government policy in El Salvador and Central America. Today the NLC has offices in New York City, Bangladesh, and Central America; when Dyson left to become Executive Minister of Fort Greene's Lafayette Avenue Presbyterian Church, Charles Kernaghan became Executive Director.
The National Labor Committee engages in fact-finding missions throughout the world to expose and document labor and human rights abuses; they then use this information to raise public awareness in an effort to change corporate policy. In addition to targeting stores and manufacturers, they often target celebrities who have clothing lines. Their 1996 discovery that Kathie Lee Gifford's Wal-Mart clothing line was being manufactured in Honduran sweatshops is often cited as the beginning of mainstream media coverage of the sweatshop phenomenon. Since then, the NLC has exposed the conditions under which many celebrity labels are made, including those of Mary-Kate and Ashley Olsen, Sean Combs(also known as P Diddy) and, most recently, Thalia Sodi.
They often work with labor unions and other human rights groups; one their closest allies has been United Students Against Sweatshops (USAS), who they assisted in forming the Worker Rights Consortium in an effort to fight the use of sweatshops in manufacturing collegiate apparel.
The NLC has also worked with the United Steel Workers of America and Senator Byron Dorgan (D-ND) to draft the "Decent Working Conditions and Fair Competition Act," which was introduced in both the United States House of Representatives and the United States Senate in 2006.
The National Labor Committee engages in fact-finding missions throughout the world to expose and document labor and human rights abuses; they then use this information to raise public awareness in an effort to change corporate policy. In addition to targeting stores and manufacturers, they often target celebrities who have clothing lines. Their 1996 discovery that Kathie Lee Gifford's Wal-Mart clothing line was being manufactured in Honduran sweatshops is often cited as the beginning of mainstream media coverage of the sweatshop phenomenon. Since then, the NLC has exposed the conditions under which many celebrity labels are made, including those of Mary-Kate and Ashley Olsen, Sean Combs(also known as P Diddy) and, most recently, Thalia Sodi.
They often work with labor unions and other human rights groups; one their closest allies has been United Students Against Sweatshops (USAS), who they assisted in forming the Worker Rights Consortium in an effort to fight the use of sweatshops in manufacturing collegiate apparel.
The NLC has also worked with the United Steel Workers of America and Senator Byron Dorgan (D-ND) to draft the "Decent Working Conditions and Fair Competition Act," which was introduced in both the United States House of Representatives and the United States Senate in 2006.
Cultural effects
The internet breaks down cultural boundaries across the world by enabling easy, near-instantaneous communication between people anywhere in a variety of digital forms and media. The Internet is associated with the process of cultural globalization because it allows interaction and communication between people with very different lifestyles and from very different cultures. Photo sharing websites allow interaction even where language would otherwise be a barrier.
Someone in America can be eating Japanese noodles for lunch while someone in Sydney Australia is eating classic Italian meatballs. One classic culture aspect is food. India is known for their curry and exotic spices. Paris is known for its cheeses. America is known for its burgers and fries. McDonalds was once an American favorite with its cheery mascot, Ronald, red and yellow theme, and greasy fast food. Now it is a global enterprise with 31,000 locations worldwide with locations in Kuwait, Egypt, and Malta. This restaurant is just one example of food going big on the global scale.
Meditation has been a sacred practice for centuries in Indian culture. It calms the body and helps one connect to their inner being while shying away from their conditioned self. Before globalization Americans did not meditate or practice yoga. After globalization this is a common practice, it is even considered a chic way to keep your body in shape. Some people are even traveling to India to get the full experience themselves. Another common practice brought about by globalization would be Chinese symbol tattoos. These specific tattoos are a huge hit with today’s younger generation and are quickly becoming the norm. With the melding of cultures using another country's language in one's body art is now considered normal.
Culture is defined as patterns of human activity and the symbols that give these activities significance. Culture is what people eat, how they dress, beliefs they hold, and activities they practice. Globalization has joined different cultures and made it into something different. As Erla Zwingle, from the National Geographic article titled “Globalization” states, “When cultures receive outside influences, they ignore some and adopt others, and then almost immediately start to transform them.”[29]
Someone in America can be eating Japanese noodles for lunch while someone in Sydney Australia is eating classic Italian meatballs. One classic culture aspect is food. India is known for their curry and exotic spices. Paris is known for its cheeses. America is known for its burgers and fries. McDonalds was once an American favorite with its cheery mascot, Ronald, red and yellow theme, and greasy fast food. Now it is a global enterprise with 31,000 locations worldwide with locations in Kuwait, Egypt, and Malta. This restaurant is just one example of food going big on the global scale.
Meditation has been a sacred practice for centuries in Indian culture. It calms the body and helps one connect to their inner being while shying away from their conditioned self. Before globalization Americans did not meditate or practice yoga. After globalization this is a common practice, it is even considered a chic way to keep your body in shape. Some people are even traveling to India to get the full experience themselves. Another common practice brought about by globalization would be Chinese symbol tattoos. These specific tattoos are a huge hit with today’s younger generation and are quickly becoming the norm. With the melding of cultures using another country's language in one's body art is now considered normal.
Culture is defined as patterns of human activity and the symbols that give these activities significance. Culture is what people eat, how they dress, beliefs they hold, and activities they practice. Globalization has joined different cultures and made it into something different. As Erla Zwingle, from the National Geographic article titled “Globalization” states, “When cultures receive outside influences, they ignore some and adopt others, and then almost immediately start to transform them.”[29]
[edit] Effects of globalization
Globalization has various aspects which affect the world in several different ways such as:
Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries.[citation needed]
Financial - emergence of worldwide financial markets and better access to external financing for borrowers. As these worldwide structures grew more quickly than any transnational regulatory regime, the instability of the global financial infrastructure dramatically increased, as evidenced by the financial crises of late 2008.[citation needed]
Economic - realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectedness of these markets, however meant that an economic collapse in any one given country could not be contained.[citation needed]
Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. [21] Politically, the United States has enjoyed a position of power among the world powers; in part because of its strong and wealthy economy. With the influence of globalization and with the help of The United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power.[22]
Informational - increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephone and Internet.
Language - the most popular language is English.[23]
About 35% of the world's mail, telexes, and cables are in English.
Approximately 40% of the world's radio programs are in English.
About 50% of all Internet traffic uses English.[24]
Competition - Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition.[25]
Ecological - the advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living.
Cultural - growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture". Some bemoan the resulting consumerism and loss of languages. Also see Transformation of culture.
Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and Bollywood movies). Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between peoples.
Greater international travel and tourism. WHO estimates that up to 500,000 people are on planes at any time.[26]
Greater immigration, including illegal immigration
Spread of local consumer products (e.g. food) to other countries (often adapted to their culture).
Worldwide fads and pop culture such as Pokémon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible to those who have Internet or Television, leaving out a substantial segment of the Earth's population.
Worldwide sporting events such as FIFA World Cup and the Olympic Games.
Incorporation of multinational corporations in to new media. As the sponsors of the All-Blacks rugby team, Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete.[27]
Social - development of the system of non-governmental organisations as main agents of global public policy, including humanitarian aid and developmental efforts.[28]
Technical
Development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones
Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements.
Legal/Ethical
The creation of the international criminal court and international justice movements.
Crime importation and raising awareness of global crime-fighting efforts and cooperation.
The emergence of Global administrative law.
Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries.[citation needed]
Financial - emergence of worldwide financial markets and better access to external financing for borrowers. As these worldwide structures grew more quickly than any transnational regulatory regime, the instability of the global financial infrastructure dramatically increased, as evidenced by the financial crises of late 2008.[citation needed]
Economic - realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectedness of these markets, however meant that an economic collapse in any one given country could not be contained.[citation needed]
Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. [21] Politically, the United States has enjoyed a position of power among the world powers; in part because of its strong and wealthy economy. With the influence of globalization and with the help of The United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power.[22]
Informational - increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephone and Internet.
Language - the most popular language is English.[23]
About 35% of the world's mail, telexes, and cables are in English.
Approximately 40% of the world's radio programs are in English.
About 50% of all Internet traffic uses English.[24]
Competition - Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition.[25]
Ecological - the advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living.
Cultural - growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture". Some bemoan the resulting consumerism and loss of languages. Also see Transformation of culture.
Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and Bollywood movies). Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between peoples.
Greater international travel and tourism. WHO estimates that up to 500,000 people are on planes at any time.[26]
Greater immigration, including illegal immigration
Spread of local consumer products (e.g. food) to other countries (often adapted to their culture).
Worldwide fads and pop culture such as Pokémon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible to those who have Internet or Television, leaving out a substantial segment of the Earth's population.
Worldwide sporting events such as FIFA World Cup and the Olympic Games.
Incorporation of multinational corporations in to new media. As the sponsors of the All-Blacks rugby team, Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete.[27]
Social - development of the system of non-governmental organisations as main agents of global public policy, including humanitarian aid and developmental efforts.[28]
Technical
Development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones
Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements.
Legal/Ethical
The creation of the international criminal court and international justice movements.
Crime importation and raising awareness of global crime-fighting efforts and cooperation.
The emergence of Global administrative law.
Measuring globalization
Looking specifically at economic globalization, demonstrates that it can be measured in different ways. These center around the four main economic flows that characterize globalization:
Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population
Labor/people, e.g. net migration rates; inward or outward migration flows, weighted by population
Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population
Technology, e.g. international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone, motorcar, broadband)
As globalization is not only an economic phenomenon, a multivariate approach to measuring globalization is the recent index calculated by the Swiss think tank KOF. The index measures the three main dimensions of globalization: economic, social, and political. In addition to three indices measuring these dimensions, an overall index of globalization and sub-indices referring to actual economic flows, economic restrictions, data on personal contact, data on information flows, and data on cultural proximity is calculated. Data is available on a yearly basis for 122 countries, as detailed in Dreher, Gaston and Martens (2008).[19] According to the index, the world's most globalized country is Belgium, followed by Austria, Sweden, the United Kingdom and the Netherlands. The least globalized countries according to the KOF-index are Haiti, Myanmar the Central African Republic and Burundi.[20]
A.T. Kearney and Foreign Policy Magazine jointly publish another Globalization Index. According to the 2006 index, Singapore, Ireland, Switzerland, the Netherlands, Canada and Denmark are the most globalized, while Indonesia, India and Iran are the least globalized among countries listed.
Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population
Labor/people, e.g. net migration rates; inward or outward migration flows, weighted by population
Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population
Technology, e.g. international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone, motorcar, broadband)
As globalization is not only an economic phenomenon, a multivariate approach to measuring globalization is the recent index calculated by the Swiss think tank KOF. The index measures the three main dimensions of globalization: economic, social, and political. In addition to three indices measuring these dimensions, an overall index of globalization and sub-indices referring to actual economic flows, economic restrictions, data on personal contact, data on information flows, and data on cultural proximity is calculated. Data is available on a yearly basis for 122 countries, as detailed in Dreher, Gaston and Martens (2008).[19] According to the index, the world's most globalized country is Belgium, followed by Austria, Sweden, the United Kingdom and the Netherlands. The least globalized countries according to the KOF-index are Haiti, Myanmar the Central African Republic and Burundi.[20]
A.T. Kearney and Foreign Policy Magazine jointly publish another Globalization Index. According to the 2006 index, Singapore, Ireland, Switzerland, the Netherlands, Canada and Denmark are the most globalized, while Indonesia, India and Iran are the least globalized among countries listed.
Modern globalization
Globalization, since World War II, is largely the result of planning by politicians to breakdown borders hampering trade to increase prosperity and interdependence thereby decreasing the chance of future war. Their work led to the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, and the founding of several international institutions intended to oversee the processes of globalization.
These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade.
Since World War II, barriers to international trade have been considerably lowered through international agreements - GATT. Particular initiatives carried out as a result of GATT and the World Trade Organization (WTO), for which GATT is the foundation, have included:
Promotion of free trade:
elimination of tariffs; creation of free trade zones with small or no tariffs
Reduced transportation costs, especially resulting from development of containerization for ocean shipping.
Reduction or elimination of capital controls
Reduction, elimination, or harmonization of subsidies for local businesses
Creation of subsidies for global corporations
Harmonization of intellectual property laws across the majority of states, with more restrictions
Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)
Cultural globalization, driven by communication technology and the worldwide marketing of Western cultural industries, was understood at first as a process of homogenization, as the global domination of American culture at the expense of traditional diversity. However, a contrasting trend soon became evident in the emergence of movements protesting against globalization and giving new momentum to the defense of local uniqueness, individuality, and identity, but largely without success. [16]
The Uruguay Round (1986 to 1994)[17] led to a treaty to create the WTO to mediate trade disputes and set up a uniform platform of trading. Other bilateral and multilateral trade agreements, including sections of Europe's Maastricht Treaty and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.
Global conflicts, such as the 9/11 terrorist attacks on the United States of America, is interrelated with globalization because it was primary source of the "war on terror", which had started the steady increase of the prices of oil and gas, due to the fact that most OPEC member countries were in the Arabian Peninsula.[18]
World exports rose from 8.5% of gross world product in 1970 to 16.1% of gross world product in 2001.
These institutions include the International Bank for Reconstruction and Development (the World Bank), and the International Monetary Fund. Globalization has been facilitated by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of the General Agreement on Tariffs and Trade (GATT), which led to a series of agreements to remove restrictions on free trade.
Since World War II, barriers to international trade have been considerably lowered through international agreements - GATT. Particular initiatives carried out as a result of GATT and the World Trade Organization (WTO), for which GATT is the foundation, have included:
Promotion of free trade:
elimination of tariffs; creation of free trade zones with small or no tariffs
Reduced transportation costs, especially resulting from development of containerization for ocean shipping.
Reduction or elimination of capital controls
Reduction, elimination, or harmonization of subsidies for local businesses
Creation of subsidies for global corporations
Harmonization of intellectual property laws across the majority of states, with more restrictions
Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)
Cultural globalization, driven by communication technology and the worldwide marketing of Western cultural industries, was understood at first as a process of homogenization, as the global domination of American culture at the expense of traditional diversity. However, a contrasting trend soon became evident in the emergence of movements protesting against globalization and giving new momentum to the defense of local uniqueness, individuality, and identity, but largely without success. [16]
The Uruguay Round (1986 to 1994)[17] led to a treaty to create the WTO to mediate trade disputes and set up a uniform platform of trading. Other bilateral and multilateral trade agreements, including sections of Europe's Maastricht Treaty and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.
Global conflicts, such as the 9/11 terrorist attacks on the United States of America, is interrelated with globalization because it was primary source of the "war on terror", which had started the steady increase of the prices of oil and gas, due to the fact that most OPEC member countries were in the Arabian Peninsula.[18]
World exports rose from 8.5% of gross world product in 1970 to 16.1% of gross world product in 2001.
Globalization
Globalization (globalisation) is a term for the process by which local, regional or national phenomena become integrated on a global scale.
Globalization is often used to refer to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology.[1] This process is usually recognized as being driven by a combination of economic, technological, sociocultural, political and biological factors.[2] The term can also refer to the transnational dissemination of ideas, languages, or popular culture.
Globalization is often used to refer to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology.[1] This process is usually recognized as being driven by a combination of economic, technological, sociocultural, political and biological factors.[2] The term can also refer to the transnational dissemination of ideas, languages, or popular culture.
Industrialisation
Industrialization is the process of social and economic change whereby a human group is transformed from a pre-industrial society into an industrial one. It is a part of a wider modernization process, where social change and economic development are closely related with technological innovation, particularly with the development of large-scale energy and metallurgy production. It is the extensive organization of an economy for the purpose of manufacturing.[1] Industrialization also introduces a form of philosophical change, where people obtain a different attitude towards their perception of nature.
There is considerable literature on the factors facilitating industrial modernization and enterprise development.[2] Key positive factors identified by researchers have ranged from favorable political-legal environments for industry and commerce, through abundant natural resources of various kinds, to plentiful supplies of relatively low-cost, skilled and adaptable labor.
One survey of countries in Africa, Asia, the Middle East, and Latin America and the Caribbean in the late 20th century found that high levels of structural differentiation, functional specialization, and autonomy of economic systems from government were likely to contribute greatly to industrial-commercial growth and prosperity. Amongst other things, relatively open trading systems with zero or low duties on goods imports tended to stimulate industrial cost-efficiency and innovation across the board. Free and flexible labor and other markets also helped raise general business-economic performance levels, as did rapid popular learning capabilities. Positive work ethics in populations at large combined with skills in quickly utilizing new technologies and scientific discoveries were likely to boost production and income levels – and as the latter rose, markets for consumer goods and services of all kinds tended to expand and provide a further stimulus to industrial investment and economic growth. y the end of the century, East Asia was one of the most economically successful regions of the world – with free market countries such as Hong Kong being widely seen as models for other, less developed countries around the world to emulate
There is considerable literature on the factors facilitating industrial modernization and enterprise development.[2] Key positive factors identified by researchers have ranged from favorable political-legal environments for industry and commerce, through abundant natural resources of various kinds, to plentiful supplies of relatively low-cost, skilled and adaptable labor.
One survey of countries in Africa, Asia, the Middle East, and Latin America and the Caribbean in the late 20th century found that high levels of structural differentiation, functional specialization, and autonomy of economic systems from government were likely to contribute greatly to industrial-commercial growth and prosperity. Amongst other things, relatively open trading systems with zero or low duties on goods imports tended to stimulate industrial cost-efficiency and innovation across the board. Free and flexible labor and other markets also helped raise general business-economic performance levels, as did rapid popular learning capabilities. Positive work ethics in populations at large combined with skills in quickly utilizing new technologies and scientific discoveries were likely to boost production and income levels – and as the latter rose, markets for consumer goods and services of all kinds tended to expand and provide a further stimulus to industrial investment and economic growth. y the end of the century, East Asia was one of the most economically successful regions of the world – with free market countries such as Hong Kong being widely seen as models for other, less developed countries around the world to emulate
Risks in international trade
[edit] Economic risks
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
Risk of exchange rate
Susceptibility to changing standards & regulations within other countries
[edit] Political risks
Risk of cancellation or non-renewal of export or import licenses
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
Influence of political parties in importer's company
Relations with other countries
Risk of insolvency of the buyer,
Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
Risk of non-acceptance
Surrendering economic sovereignty
Risk of exchange rate
Susceptibility to changing standards & regulations within other countries
[edit] Political risks
Risk of cancellation or non-renewal of export or import licenses
War risks
Risk of expropriation or confiscation of the importer's company
Risk of the imposition of an import ban after the shipment of the goods
Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
Surrendering political sovereignty
Influence of political parties in importer's company
Relations with other countries
International trade
International trade is exchange of capital, goods, and services across international borders or territories.[1] In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. International trade is a major source of economic revenue for any nation that is considered a world power. Without international trade, nations would be limited to the goods and services produced within their own borders.
International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade does not change fundamentally depending on whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or a different culture.
International trade uses a variety of currencies, the most important of which are held as foreign reserves by governments and central banks. Here the percentage of global cummulative reserves held for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after currency, with the Euro in strong demand as well.Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in good and services can serve as a substitute for trade in factors of production. Instead of importing the factor of production a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.
International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade does not change fundamentally depending on whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or a different culture.
International trade uses a variety of currencies, the most important of which are held as foreign reserves by governments and central banks. Here the percentage of global cummulative reserves held for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after currency, with the Euro in strong demand as well.Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in good and services can serve as a substitute for trade in factors of production. Instead of importing the factor of production a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.
Agricultural economics
Agricultural economics originally applied the principles of economics to the production of crops and livestock — a discipline known as agronomics. Agronomics was a branch of economics that specifically dealt with land usage. It focused on maximizing the yield of crops while maintaining a good soil ecosystem. Throughout the 20th century the discipline expanded and the current scope of the discipline is much broader. Agricultural economics today includes a variety of applied areas, having considerable overlap with conventional economics.
Evolution of Agricultural Economics:
The field of agricultural economics has evolved over many decades. One scholar summarizes its development as follows:
"Agricultural economics arose in the late 19th century, combined the theory of the firm with marketing and organization theory, and developed throughout the 20th century largely as an empirical branch of general economics. The discipline was closely linked to empirical applications of mathematical statistics and made early and significant contributions to econometric methods. In the 1960's and afterwards, as agricultural sectors in the OECD countries contracted, agricultural economists were drawn to the development problems of poor countries, to the trade and macroeconomic policy implications of agriculture in rich countries, and to a variety of production, consumption, and environmental and resource problems."[4]
Agricultural economists have made many well-known contributions to the economics field with such models as the cobweb model,[5] hedonic regression pricing models,[6] new technology and diffusion models (Zvi Griliches),[7] multifactor productivity and efficiency theory and measurement,[8][9] and the random coefficients regression.[10] The farm sector is frequently cited as a prime example of the perfect competition economic paradigm.
Since the 1970s, agricultural economics has primarily focused on seven main topics, according to a scholar in the field: technical change and human capital; agricultural environment and resources; risk and uncertainty; consumption and food supply chains; prices and incomes; market structures; and trade and development.[11]
Evolution of Agricultural Economics:
The field of agricultural economics has evolved over many decades. One scholar summarizes its development as follows:
"Agricultural economics arose in the late 19th century, combined the theory of the firm with marketing and organization theory, and developed throughout the 20th century largely as an empirical branch of general economics. The discipline was closely linked to empirical applications of mathematical statistics and made early and significant contributions to econometric methods. In the 1960's and afterwards, as agricultural sectors in the OECD countries contracted, agricultural economists were drawn to the development problems of poor countries, to the trade and macroeconomic policy implications of agriculture in rich countries, and to a variety of production, consumption, and environmental and resource problems."[4]
Agricultural economists have made many well-known contributions to the economics field with such models as the cobweb model,[5] hedonic regression pricing models,[6] new technology and diffusion models (Zvi Griliches),[7] multifactor productivity and efficiency theory and measurement,[8][9] and the random coefficients regression.[10] The farm sector is frequently cited as a prime example of the perfect competition economic paradigm.
Since the 1970s, agricultural economics has primarily focused on seven main topics, according to a scholar in the field: technical change and human capital; agricultural environment and resources; risk and uncertainty; consumption and food supply chains; prices and incomes; market structures; and trade and development.[11]
Concepts in the economic problem
Wants:
While the basic needs of human survival are important in the function of the economy, human wants are the driving force which stimulates demand for goods and services. In order to curb the economic problem, economists must classify the nature and different wants of consumers, as well as prioritize wants and organize production to satisfy as many wants as possible. One of the assumptions made in economics and the methods which attempt to solve the economic problem is that humans are overall greedy, and thus the market must produce as much as possible to satisfy them. These wants are often classified into individual wants (which depend on the individual preferences and an individual's purchasing power parity) and collective wants (those of entire communities). Things such as food and clothing can be classified as either wants or needs, depending on what type of good and how often.
Choice:
The economic problem fundamentally revolves around the idea of choice. Due to the limited resources available, businesses must determine what to produce first to satisfy demand. Consumers are obviously the biggest influences of this choice, as the goods which they want must also fit within their budgets and purchasing power parity. Different economic models place choice in different hands. Socialism asserts that (at least) some economic choices are best made for the greatest good of society if they are made at the societal level for everyone, e.g. via a government agency. Communism takes this further and argues that most or even all major economic choices should be made through central planning by the government. Only by constructing a cohesive plan that takes the good of everyone into account, so the thinking goes, can the best allocation of resources be achieved. See also Marxism. Capitalism argues for a more laissez-faire approach, wherein the role of the government is to protect the property rights of individuals and companies so that they can have the confidence to undertake the economic activity (and risks) that will create the most value. In a free-market economy without the constraints of government wage and price controls, proponents of market capitalism argue, resources are automatically allocated toward the things that society, collectively, values most. If a good or service is overvalued (i.e., the price is too high), the surplus will force providers of the good or service to lower their prices or to re-allocate their capacity to produce something more worthwhile. If the supply of a good or service is inadequate, rising prices increase the value and so cause more production capacity to be directed toward the item. Adam Smith's The Wealth of Nations has been an extremely influential book for this school of thought.
While the basic needs of human survival are important in the function of the economy, human wants are the driving force which stimulates demand for goods and services. In order to curb the economic problem, economists must classify the nature and different wants of consumers, as well as prioritize wants and organize production to satisfy as many wants as possible. One of the assumptions made in economics and the methods which attempt to solve the economic problem is that humans are overall greedy, and thus the market must produce as much as possible to satisfy them. These wants are often classified into individual wants (which depend on the individual preferences and an individual's purchasing power parity) and collective wants (those of entire communities). Things such as food and clothing can be classified as either wants or needs, depending on what type of good and how often.
Choice:
The economic problem fundamentally revolves around the idea of choice. Due to the limited resources available, businesses must determine what to produce first to satisfy demand. Consumers are obviously the biggest influences of this choice, as the goods which they want must also fit within their budgets and purchasing power parity. Different economic models place choice in different hands. Socialism asserts that (at least) some economic choices are best made for the greatest good of society if they are made at the societal level for everyone, e.g. via a government agency. Communism takes this further and argues that most or even all major economic choices should be made through central planning by the government. Only by constructing a cohesive plan that takes the good of everyone into account, so the thinking goes, can the best allocation of resources be achieved. See also Marxism. Capitalism argues for a more laissez-faire approach, wherein the role of the government is to protect the property rights of individuals and companies so that they can have the confidence to undertake the economic activity (and risks) that will create the most value. In a free-market economy without the constraints of government wage and price controls, proponents of market capitalism argue, resources are automatically allocated toward the things that society, collectively, values most. If a good or service is overvalued (i.e., the price is too high), the surplus will force providers of the good or service to lower their prices or to re-allocate their capacity to produce something more worthwhile. If the supply of a good or service is inadequate, rising prices increase the value and so cause more production capacity to be directed toward the item. Adam Smith's The Wealth of Nations has been an extremely influential book for this school of thought.
Economic problem
The economic problem, sometimes called the fundamental economic problem, is one of the fundamental economic theories in the operation of any economy. It asserts that there is scarcity, that the finite resources available are insufficient to satisfy all human wants. The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labour) are to be allocated. Economics revolves around methods and possibilities of solving the economic problem.
Anarchism and capitalism
This article examines anarchism vis a vis capitalism. "Some anarchists advocate free-market, laissez-faire capitalism",[1], while other anarchists oppose it.
In anarchists writings concerning capitalism, one must take into account context, as the definition of capitalism has changed over time. Early anarchist movements operated with a definition unlike contemporary definitions. For example, the 1909 Century Dictionary defined capitalism as "1. The state of having capital or property; possession of capital. 2. The concentration or massing of capital in the hands of a few; also, the power or influence of large or combined capital." In contrast, the contemporary Merriam-Webster Dictionary (unabridged) refers to capitalism as "an economic system characterized by private or corporation ownership of capital goods, by investments that are determined by private decision rather than by state control, and by prices, production, and the distribution of goods that are determined mainly in a free market."
[edit] Anarchist support of capitalism or aspects thereof
Some anarchists, such as Murray Rothard, express support for what they call "capitalism," but this is not the limited state capitalism of Adam Smith. Rather they advocate a theoretical ideal of a market economy with absolutely no intervention by the state and advocate abolition of the state itself. Rothbard identifies "capitalism" with "the market" and any state action on the market as "intervention," including the existence of the state itself which he sees as an anti-market parasite.[2] Anarchism of this type is sometimes called anarcho-capitalism. In this system, private property is embraced, and protection of it would be provided by the market itself by competing for-profit enterprises.
The anarcho-capitalist Murray Rothbard believed that anarchism is not fully developed unless it accepts capitalism and that capitalism was not complete unless it accepted abolition of the state: "In other words, we believe that capitalism is the fullest expression of anarchism, and anarchism is the fullest expression of capitalism. Not only are they compatible, but you can't really have one without the other. True anarchism will be capitalism, and true capitalism will be anarchism."[3]
On the subject of wage labor, anarcho-capitalists vary. Being that the idea of contract is central to anarcho-capitalism."[4], in an anarcho-capitalist society, any individual would be free to contract with any other individual to provide for any good or service, provided that it is done without the use of force or fraud. This includes the right to sell one's labor to another. Though the right to do this is supported, some anarcho-capitalists prefer to see self-employment prevail over wage labor. For example, David Friedman has expressed preference for a society where "almost everyone is self-employed" and "instead of corporations there are large groups of entrepreneurs related by trade, not authority. Each sells not his time, but what his time produces."[5]
Some writers, including capitalists, have critiqued the anarcho-capitalist version of anarchism.
In anarchists writings concerning capitalism, one must take into account context, as the definition of capitalism has changed over time. Early anarchist movements operated with a definition unlike contemporary definitions. For example, the 1909 Century Dictionary defined capitalism as "1. The state of having capital or property; possession of capital. 2. The concentration or massing of capital in the hands of a few; also, the power or influence of large or combined capital." In contrast, the contemporary Merriam-Webster Dictionary (unabridged) refers to capitalism as "an economic system characterized by private or corporation ownership of capital goods, by investments that are determined by private decision rather than by state control, and by prices, production, and the distribution of goods that are determined mainly in a free market."
[edit] Anarchist support of capitalism or aspects thereof
Some anarchists, such as Murray Rothard, express support for what they call "capitalism," but this is not the limited state capitalism of Adam Smith. Rather they advocate a theoretical ideal of a market economy with absolutely no intervention by the state and advocate abolition of the state itself. Rothbard identifies "capitalism" with "the market" and any state action on the market as "intervention," including the existence of the state itself which he sees as an anti-market parasite.[2] Anarchism of this type is sometimes called anarcho-capitalism. In this system, private property is embraced, and protection of it would be provided by the market itself by competing for-profit enterprises.
The anarcho-capitalist Murray Rothbard believed that anarchism is not fully developed unless it accepts capitalism and that capitalism was not complete unless it accepted abolition of the state: "In other words, we believe that capitalism is the fullest expression of anarchism, and anarchism is the fullest expression of capitalism. Not only are they compatible, but you can't really have one without the other. True anarchism will be capitalism, and true capitalism will be anarchism."[3]
On the subject of wage labor, anarcho-capitalists vary. Being that the idea of contract is central to anarcho-capitalism."[4], in an anarcho-capitalist society, any individual would be free to contract with any other individual to provide for any good or service, provided that it is done without the use of force or fraud. This includes the right to sell one's labor to another. Though the right to do this is supported, some anarcho-capitalists prefer to see self-employment prevail over wage labor. For example, David Friedman has expressed preference for a society where "almost everyone is self-employed" and "instead of corporations there are large groups of entrepreneurs related by trade, not authority. Each sells not his time, but what his time produces."[5]
Some writers, including capitalists, have critiqued the anarcho-capitalist version of anarchism.
Anarchist economics
Anarchist economics is the set of theories and practices of economic activity within the political philosophy of anarchism. Anti-capitalist anarchists (most notably anarcho-syndicalists and anarcho-communists) primarily oppose capitalism because they claim that its characteristic institutions promote and reproduce various forms of economic activity which they consider oppressive, including private property, hierarchical production relations, collecting rents from private property, taking a profit in exchanges,[clarification needed] and collecting interest on loans. Such anarchists endorse soft propertarianism based on usufruct and possession rather than inalienable ownership.
By contrast, anarcho-capitalists fully support an alternate conception of capitalism as a free market ideal laissez-faire. Influential anarcho-capitalists such as Murray Rothbard, David D. Friedman and Hans-Hermann Hoppe worked as professional economists, and developed their political and economic theory in close connection. Rothbard and Hoppe are notable advocates of the marginalist Austrian school of economics. Not all anarchists subscribe to heterodox economics; Friedman for example endorses the positivism of the Chicago school, a variant of the dominant Neoclassical economics.[1]
By contrast, anarcho-capitalists fully support an alternate conception of capitalism as a free market ideal laissez-faire. Influential anarcho-capitalists such as Murray Rothbard, David D. Friedman and Hans-Hermann Hoppe worked as professional economists, and developed their political and economic theory in close connection. Rothbard and Hoppe are notable advocates of the marginalist Austrian school of economics. Not all anarchists subscribe to heterodox economics; Friedman for example endorses the positivism of the Chicago school, a variant of the dominant Neoclassical economics.[1]
Disciplines related to political economy
Because political economy is not a unified discipline, there are studies using the term that overlap in subject matter, but have radically different perspectives:
Sociology studies the effects of persons' involvement in society as members of groups, and how that changes their ability to function. Many sociologists start from a perspective of production-determining relation from Karl Marx.
Political Science focuses on the interaction between institutions and human behavior, the way in which the former shapes choices and how the latter change institutional frameworks. Along with economics, it has made the best works in the field by authors like Shepsle, Ostrom, Ordeshook, among others.
Anthropology studies political economy by studying the relationship between the world capitalist system and local cultures.
Psychology is the fulcrum on which political economy exerts its force in studying decision-making (not only in prices), but as the field of study whose assumptions model political economy.
History documents change, using it to argue political economy; historical works have political economy as the narrative's frame.
Economics focuses on markets by leaving the political—governments, states, legal frameworks—as givens. Economics dropped the adjective political in the 19th century, but works backwards, by describing "The Ideal Market", urging governments to formulate policy and law to approach said ideal. Economists and political economists often disagree on what is preeminent in developing production, market, and political structure theories.
Law concerns the creation of policy and its mediation via political actions that have specific results, it deals with political economy as political capital and as social infrastructure—and the sociological results of one society upon another.
Human Geography is concerned with politico-economic processes, emphasizing space and environment.
Ecology deals with political economy, because human activity has the greatest effect upon the environment, its central concern being the environment's suitability for human activity. The ecological effects of economic activity spur research upon changing market economy incentives.
International Relations often uses political economy to study political and economic development.
Cultural Studies studies social class, production, labor, race, gender, and sex.
Communications examines the institutional aspects of media and telecommuncation systems, with particular attention to the historical relationships between owners, labor, consumers, advertisers, and the state.
Sociology studies the effects of persons' involvement in society as members of groups, and how that changes their ability to function. Many sociologists start from a perspective of production-determining relation from Karl Marx.
Political Science focuses on the interaction between institutions and human behavior, the way in which the former shapes choices and how the latter change institutional frameworks. Along with economics, it has made the best works in the field by authors like Shepsle, Ostrom, Ordeshook, among others.
Anthropology studies political economy by studying the relationship between the world capitalist system and local cultures.
Psychology is the fulcrum on which political economy exerts its force in studying decision-making (not only in prices), but as the field of study whose assumptions model political economy.
History documents change, using it to argue political economy; historical works have political economy as the narrative's frame.
Economics focuses on markets by leaving the political—governments, states, legal frameworks—as givens. Economics dropped the adjective political in the 19th century, but works backwards, by describing "The Ideal Market", urging governments to formulate policy and law to approach said ideal. Economists and political economists often disagree on what is preeminent in developing production, market, and political structure theories.
Law concerns the creation of policy and its mediation via political actions that have specific results, it deals with political economy as political capital and as social infrastructure—and the sociological results of one society upon another.
Human Geography is concerned with politico-economic processes, emphasizing space and environment.
Ecology deals with political economy, because human activity has the greatest effect upon the environment, its central concern being the environment's suitability for human activity. The ecological effects of economic activity spur research upon changing market economy incentives.
International Relations often uses political economy to study political and economic development.
Cultural Studies studies social class, production, labor, race, gender, and sex.
Communications examines the institutional aspects of media and telecommuncation systems, with particular attention to the historical relationships between owners, labor, consumers, advertisers, and the state.
Human resources development
In organizations, in terms of selection it is important to consider carrying out a thorough job analysis to determine the level of skills/technical abilities, competencies, flexibility of the employee required etc. At this point it is important to consider both the internal and external factors that can have an effect on the recruitment of employees. The external factors are those out-with the powers of the organization and include issues such as current and future trends of the labor market e.g. skills, education level, government investment into industries etc. On the other hand internal influences are easier to control, predict and monitor, for example management styles or even the organizational culture.
[edit] Major trends
In order to know the business environment in which any organization operates, three major trends should be considered:
Demographics – the characteristics of a population/workforce, for example, age, gender or social class. This type of trend may have an effect in relation to pension offerings, insurance packages etc.
Diversity – the variation within the population/workplace. Changes in society now mean that a larger proportion of organizations are made up of "baby-boomers" or older employees in comparison to thirty years ago. Traditional advocates of "workplace diversity" simply advocate an employee base that is a mirror reflection of the make-up of society insofar as race, gender, sexual orientation, etc.
Skills and qualifications – as industries move from manual to a more managerial professions so does the need for more highly skilled graduates. If the market is "tight" (i.e. not enough staff for the jobs), employers will have to compete for employees by offering financial rewards, community investment, etc.
[edit] Individual responses
In regard to how individuals respond to the changes in a labour market the following should be understood:
Geographical spread – how far is the job from the individual? The distance to travel to work should be in line with the pay offered by the organization and the transportation and infrastructure of the area will also be an influencing factor in deciding who will apply for a post.
Occupational structure – the norms and values of the different careers within an organization. Mahoney 1989 developed 3 different types of occupational structure namely craft (loyalty to the profession), organization career (promotion through the firm) and unstructured (lower/unskilled workers who work when needed).
Generational difference –different age categories of employees have certain characteristics, for example their behavior and their expectations of the organization.
[edit] Recruitment methods
While recruitment methods are wide and varied, it is important that the job is described correctly and that any personal specifications are stated. Job recruitment methods can be through job centres, employment agencies/consultants, headhunting, and local/national newspapers. It is important that the correct media is chosen to ensure an appropriate response to the advertised post.
Where organisations don't have the internal resource to be able to conduct an effective recruitment exercise this is where they may outsource this to a third party, typically a recruitment or hr consultancy that specialises in the area that the organisation requires.
[edit] Framework
Human Resources Development is a framework for the expansion of human capital within an organization or (in new approaches) a municipality, region, or nation. Human Resources Development is a combination of training and education, in a broad context of adequate health and employment policies, that ensures the continual improvement and growth of both the individual, the organisation, and the national human resourcefulnes. Adam Smith states, “The capacities of individuals depended on their access to education”.[8] Human Resources Development is the medium that drives the process between training and learning in a broadly fostering environment. Human Resources Development is not a defined object, but a series of organised processes, “with a specific learning objective” (Nadler,1984)[9] Within a national context, it becoms a strategic approach to intersectoral linkages between health, education and employment.[10]
[edit] Structure
Human Resources Development is the structure that allows for individual development, potentially satisfying the organization’s, or the nation's goals. The development of the individual will benefit both the individual, the organization, or the nation and its citizens. In the corporate vision, the Human Resources Development framework views employees, as an asset to the enterprise whose value will be enhanced by development, “Its primary focus is on growth and employee development…it emphasises developing individual potential and skills” (Elwood, olton and Trott 1996)[11] Human Resources Development in this treatment can be in-room group training, tertiary or vocational courses or mentoring and coaching by senior employees with the aim for a desired outcome that will develop the individual’s performance. At the level of a national strategy, it can be a broad intersectoral approach to fostering creative contributions to national productivity [12]
[edit] Training
At the organizational level, a successful Human Resources Development program will prepare the individual to undertake a higher level of work, “organized learning over a given period of time, to provide the possibility of performance change” (Nadler 1984). In these settings, Human Resources Development is the framework that focuses on the organizations competencies at the first stage, training, and then developing the employee, through education, to satisfy the organizations long-term needs and the individuals’ career goals and employee value to their present and future employers. Human Resources Development can be defined simply as developing the most important section of any business its human resource by, “attaining or upgrading the skills and attitudes of employees at all levels in order to maximise the effectiveness of the enterprise” (Kelly 2001)[13]. The people within an organization are its human resource. Human Resources Development from a business perspective is not entirely focused on the individual’s growth and development, “development occurs to enhance the organization's value, not solely for individual improvement. Individual education and development is a tool and a means to an end, not the end goal itself”. (Elwood F. Holton II, James W. Trott Jr)[14]. The broader concept of national and more strategic attention to the development of human resources is beginning to emerge as newly independent countries face strong competition for their skilled professionals and the accompanying brain-drain they experience.
[edit] Modern concept of human resources
Though human resources have been part of business and organizations since the first days of agriculture, the modern concept of human resources began in reaction to the efficiency focus of Taylorism in the early 1900s. By 1920, psychologists and employment experts in the United States started the human relations movement, which viewed workers in terms of their psychology and fit with companies, rather than as interchangeable parts. This movement grew throughout the middle of the 20th century, placing emphasis on how leadership, cohesion, and loyalty played important roles in organizational success. Although this view was increasingly challenged by more quantitatively rigorous and less "soft" management techniques in the 1960s and beyond, human resources development had gained a permanent role within organizations, agencies and nations, increasingly as not only an academic discipline, but as a central theme in development policy.
[edit] Major trends
In order to know the business environment in which any organization operates, three major trends should be considered:
Demographics – the characteristics of a population/workforce, for example, age, gender or social class. This type of trend may have an effect in relation to pension offerings, insurance packages etc.
Diversity – the variation within the population/workplace. Changes in society now mean that a larger proportion of organizations are made up of "baby-boomers" or older employees in comparison to thirty years ago. Traditional advocates of "workplace diversity" simply advocate an employee base that is a mirror reflection of the make-up of society insofar as race, gender, sexual orientation, etc.
Skills and qualifications – as industries move from manual to a more managerial professions so does the need for more highly skilled graduates. If the market is "tight" (i.e. not enough staff for the jobs), employers will have to compete for employees by offering financial rewards, community investment, etc.
[edit] Individual responses
In regard to how individuals respond to the changes in a labour market the following should be understood:
Geographical spread – how far is the job from the individual? The distance to travel to work should be in line with the pay offered by the organization and the transportation and infrastructure of the area will also be an influencing factor in deciding who will apply for a post.
Occupational structure – the norms and values of the different careers within an organization. Mahoney 1989 developed 3 different types of occupational structure namely craft (loyalty to the profession), organization career (promotion through the firm) and unstructured (lower/unskilled workers who work when needed).
Generational difference –different age categories of employees have certain characteristics, for example their behavior and their expectations of the organization.
[edit] Recruitment methods
While recruitment methods are wide and varied, it is important that the job is described correctly and that any personal specifications are stated. Job recruitment methods can be through job centres, employment agencies/consultants, headhunting, and local/national newspapers. It is important that the correct media is chosen to ensure an appropriate response to the advertised post.
Where organisations don't have the internal resource to be able to conduct an effective recruitment exercise this is where they may outsource this to a third party, typically a recruitment or hr consultancy that specialises in the area that the organisation requires.
[edit] Framework
Human Resources Development is a framework for the expansion of human capital within an organization or (in new approaches) a municipality, region, or nation. Human Resources Development is a combination of training and education, in a broad context of adequate health and employment policies, that ensures the continual improvement and growth of both the individual, the organisation, and the national human resourcefulnes. Adam Smith states, “The capacities of individuals depended on their access to education”.[8] Human Resources Development is the medium that drives the process between training and learning in a broadly fostering environment. Human Resources Development is not a defined object, but a series of organised processes, “with a specific learning objective” (Nadler,1984)[9] Within a national context, it becoms a strategic approach to intersectoral linkages between health, education and employment.[10]
[edit] Structure
Human Resources Development is the structure that allows for individual development, potentially satisfying the organization’s, or the nation's goals. The development of the individual will benefit both the individual, the organization, or the nation and its citizens. In the corporate vision, the Human Resources Development framework views employees, as an asset to the enterprise whose value will be enhanced by development, “Its primary focus is on growth and employee development…it emphasises developing individual potential and skills” (Elwood, olton and Trott 1996)[11] Human Resources Development in this treatment can be in-room group training, tertiary or vocational courses or mentoring and coaching by senior employees with the aim for a desired outcome that will develop the individual’s performance. At the level of a national strategy, it can be a broad intersectoral approach to fostering creative contributions to national productivity [12]
[edit] Training
At the organizational level, a successful Human Resources Development program will prepare the individual to undertake a higher level of work, “organized learning over a given period of time, to provide the possibility of performance change” (Nadler 1984). In these settings, Human Resources Development is the framework that focuses on the organizations competencies at the first stage, training, and then developing the employee, through education, to satisfy the organizations long-term needs and the individuals’ career goals and employee value to their present and future employers. Human Resources Development can be defined simply as developing the most important section of any business its human resource by, “attaining or upgrading the skills and attitudes of employees at all levels in order to maximise the effectiveness of the enterprise” (Kelly 2001)[13]. The people within an organization are its human resource. Human Resources Development from a business perspective is not entirely focused on the individual’s growth and development, “development occurs to enhance the organization's value, not solely for individual improvement. Individual education and development is a tool and a means to an end, not the end goal itself”. (Elwood F. Holton II, James W. Trott Jr)[14]. The broader concept of national and more strategic attention to the development of human resources is beginning to emerge as newly independent countries face strong competition for their skilled professionals and the accompanying brain-drain they experience.
[edit] Modern concept of human resources
Though human resources have been part of business and organizations since the first days of agriculture, the modern concept of human resources began in reaction to the efficiency focus of Taylorism in the early 1900s. By 1920, psychologists and employment experts in the United States started the human relations movement, which viewed workers in terms of their psychology and fit with companies, rather than as interchangeable parts. This movement grew throughout the middle of the 20th century, placing emphasis on how leadership, cohesion, and loyalty played important roles in organizational success. Although this view was increasingly challenged by more quantitatively rigorous and less "soft" management techniques in the 1960s and beyond, human resources development had gained a permanent role within organizations, agencies and nations, increasingly as not only an academic discipline, but as a central theme in development policy.
Corporate management
In the very narrow context of corporate "human resources" management, there is a contrasting pull to reflect and require workplace diversity that echoes the diversity of a global customer base. Foreign language and culture skills, ingenuity, humor, and careful listening, are examples of traits that such programs typically require. It would appear that these evidence a general shift through the human capital point of view to an acknowledgment that human beings do contribute much more to a productive enterprise than "work": they bring their character, their ethics, their creativity, their social connections, and in some cases even their pets and children, and alter the character of a workplace. The term corporate culture is used to characterize such processes at the organizational level.
The traditional but extremely narrow context of hiring, firing, and job description is considered a 20th century anachronism. Most corporate organizations that compete in the modern global economy have adopted a view of human capital that mirrors the modern consensus as above. Some of these, in turn, deprecate the term "human resources" as useless. Yet the term survives, and if related to `resourcefulness', has continued and emerging relevance to public policy.
In general the abstractions of macro-economics treat it this way - as it characterizes no mechanisms to represent choice or ingenuity. So one interpretation is that "firm-specific human capital" as defined in macro-economics is the modern and correct definition of "human resources" - and that this is inadequate to represent the contributions of "human resources" in any modern theory of political economy.
The traditional but extremely narrow context of hiring, firing, and job description is considered a 20th century anachronism. Most corporate organizations that compete in the modern global economy have adopted a view of human capital that mirrors the modern consensus as above. Some of these, in turn, deprecate the term "human resources" as useless. Yet the term survives, and if related to `resourcefulness', has continued and emerging relevance to public policy.
In general the abstractions of macro-economics treat it this way - as it characterizes no mechanisms to represent choice or ingenuity. So one interpretation is that "firm-specific human capital" as defined in macro-economics is the modern and correct definition of "human resources" - and that this is inadequate to represent the contributions of "human resources" in any modern theory of political economy.
Labour mobility
An important controversy regarding labor mobility illustrates the broader philosophical issue with usage of the phrase "human resources": governments of developing nations often regard developed nations that encourage immigration or "guest workers" as appropriating human capital that is rightfully part of the developing nation and required to further its growth as a civilization. They argue that this appropriation is similar to colonial commodity fiat wherein a colonizing European power would define an arbitrary price for natural resources, extracting which diminished national natural capital.
The debate regarding "human resources" versus human capital thus in many ways echoes the debate regarding natural resources versus natural capital. Over time the United Nations have come to more generally support the developing nations' point of view, and have requested significant offsetting "foreign aid" contributions so that a developing nation losing human capital does not lose the capacity to continue to train new people in trades, professions, and the arts.
An extreme version of this view is that historical inequities such as African slavery must be compensated by current developed nations, which benefited from stolen "human resources" as they were developing. This is an extremely controversial view, but it echoes the general theme of converting human capital to "human resources" and thus greatly diminishing its value to the host society, i.e. "Africa", as it is put to narrow imitative use as "labor" in the using society.
In a series of reports of the UN Secretary-General to the General Assembly [e.g. A/56/162 (2001)], a broad inter-sectoral approach to developing human resourcefulness [see United Nations Expert Meeting on Human Resources Development. `Changing Perspectives on Human Resources Development. ST/TCD/SER.E/25. June 1994] [6] has been outlined as a priority for socio-economic development and particularly anti-poverty strategies. This calls for strategic and integrated public policies, for example in education, health, and employment sectors that promote occupational skills, knowledge and performance enhancement (Lawrence, J.E.S.) [7].
[edit] Perceptions
Terms like "human resources" and "human capital" may be perceived as insulting to people. They create the impression that people are merely commodities, like office machines or vehicles, despite assurances to the contrary.
The debate regarding "human resources" versus human capital thus in many ways echoes the debate regarding natural resources versus natural capital. Over time the United Nations have come to more generally support the developing nations' point of view, and have requested significant offsetting "foreign aid" contributions so that a developing nation losing human capital does not lose the capacity to continue to train new people in trades, professions, and the arts.
An extreme version of this view is that historical inequities such as African slavery must be compensated by current developed nations, which benefited from stolen "human resources" as they were developing. This is an extremely controversial view, but it echoes the general theme of converting human capital to "human resources" and thus greatly diminishing its value to the host society, i.e. "Africa", as it is put to narrow imitative use as "labor" in the using society.
In a series of reports of the UN Secretary-General to the General Assembly [e.g. A/56/162 (2001)], a broad inter-sectoral approach to developing human resourcefulness [see United Nations Expert Meeting on Human Resources Development. `Changing Perspectives on Human Resources Development. ST/TCD/SER.E/25. June 1994] [6] has been outlined as a priority for socio-economic development and particularly anti-poverty strategies. This calls for strategic and integrated public policies, for example in education, health, and employment sectors that promote occupational skills, knowledge and performance enhancement (Lawrence, J.E.S.) [7].
[edit] Perceptions
Terms like "human resources" and "human capital" may be perceived as insulting to people. They create the impression that people are merely commodities, like office machines or vehicles, despite assurances to the contrary.
Financial modeling
Financial modeling is the task of building an abstract representation (a model) of a financial decision making situation. This is a mathematical model, such as a computer simulation, designed to represent (a simplified version of) the performance of a financial asset or a portfolio, of a business, a project, or any other form of financial investment.
Financial modeling is a general term that means different things to different users. For some, it means the development of a mathematical model to predict a fair equilibrium price for an asset. For others, it means the development of a mathematical model and the associated computer implementation to simulate scenarios of financial events, such as asset prices, market movements, portfolio returns and the like. Or it might mean the development of optimization models for managing and controlling the risk of a financial investment.
While there has been some debate in the industry as to the nature of financial modeling whether it is a tradecraft, such as welding, or a science, such as metallurgy, the task of financial modeling has been gaining acceptance and rigor over the years. Several scholarly books have been written on the topic, in addition to numerous scientific articles, and the definitive series Handbooks in Finance by Elsevier contains several volumes dealing with financial modeling issues.
There are non-spreadsheet software platforms available on which to build financial models. However, the vast proportion of the market is spreadsheet-based, and within this market Microsoft Excel now has by far the dominant position, having overtaken Lotus 1-2-3 in the 1990s. From this it is easy to see how the uninformed can equate Financial modeling competency with 'learning Excel'. However, the fallacy in this contention is the one area on which professionals and experts in the financial modeling industry agree.
Financial modeling is a general term that means different things to different users. For some, it means the development of a mathematical model to predict a fair equilibrium price for an asset. For others, it means the development of a mathematical model and the associated computer implementation to simulate scenarios of financial events, such as asset prices, market movements, portfolio returns and the like. Or it might mean the development of optimization models for managing and controlling the risk of a financial investment.
While there has been some debate in the industry as to the nature of financial modeling whether it is a tradecraft, such as welding, or a science, such as metallurgy, the task of financial modeling has been gaining acceptance and rigor over the years. Several scholarly books have been written on the topic, in addition to numerous scientific articles, and the definitive series Handbooks in Finance by Elsevier contains several volumes dealing with financial modeling issues.
There are non-spreadsheet software platforms available on which to build financial models. However, the vast proportion of the market is spreadsheet-based, and within this market Microsoft Excel now has by far the dominant position, having overtaken Lotus 1-2-3 in the 1990s. From this it is easy to see how the uninformed can equate Financial modeling competency with 'learning Excel'. However, the fallacy in this contention is the one area on which professionals and experts in the financial modeling industry agree.
Relationship with other areas in finance
Investment banking
Use of the term “corporate finance” varies considerably across the world. In the United States it is used, as above, to describe activities, decisions and techniques that deal with many aspects of a company’s finances and capital. In the United Kingdom and Commonwealth countries, the terms “corporate finance” and “corporate financier” tend to be associated with investment banking - i.e. with transactions in which capital is raised for the corporation.[2]
[edit] Personal and public finance
Corporate finance utilizes tools from almost all areas of finance. Some of the tools developed by and for corporations have broad application to entities other than corporations, for example, to partnerships, sole proprietorships, not-for-profit organizations, governments, mutual funds, and personal wealth management. But in other cases their application is very limited outside of the corporate finance arena. Because corporations deal in quantities of money much greater than individuals, the analysis has developed into a discipline of its own. It can be differentiated from personal finance and public finance.
Use of the term “corporate finance” varies considerably across the world. In the United States it is used, as above, to describe activities, decisions and techniques that deal with many aspects of a company’s finances and capital. In the United Kingdom and Commonwealth countries, the terms “corporate finance” and “corporate financier” tend to be associated with investment banking - i.e. with transactions in which capital is raised for the corporation.[2]
[edit] Personal and public finance
Corporate finance utilizes tools from almost all areas of finance. Some of the tools developed by and for corporations have broad application to entities other than corporations, for example, to partnerships, sole proprietorships, not-for-profit organizations, governments, mutual funds, and personal wealth management. But in other cases their application is very limited outside of the corporate finance arena. Because corporations deal in quantities of money much greater than individuals, the analysis has developed into a discipline of its own. It can be differentiated from personal finance and public finance.
Financial risk management
Risk management is the process of measuring risk and then developing and implementing strategies to manage that risk. Financial risk management focuses on risks that can be managed ("hedged") using traded financial instruments (typically changes in commodity prices, interest rates, foreign exchange rates and stock prices). Financial risk management will also play an important role in cash management.
This area is related to corporate finance in two ways. Firstly, firm exposure to business risk is a direct result of previous Investment and Financing decisions. Secondly, both disciplines share the goal of creating, or enhancing, firm value. All large corporations have risk management teams, and small firms practice informal, if not formal, risk management.
Derivatives are the instruments most commonly used in Financial risk management. Because unique derivative contracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usually involve derivatives that trade on well-established financial markets. These standard derivative instruments include options, futures contracts, forward contracts, and swaps.
This area is related to corporate finance in two ways. Firstly, firm exposure to business risk is a direct result of previous Investment and Financing decisions. Secondly, both disciplines share the goal of creating, or enhancing, firm value. All large corporations have risk management teams, and small firms practice informal, if not formal, risk management.
Derivatives are the instruments most commonly used in Financial risk management. Because unique derivative contracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usually involve derivatives that trade on well-established financial markets. These standard derivative instruments include options, futures contracts, forward contracts, and swaps.
Management of working capital
Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.
Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).
Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).
Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Decision criteria
Working capital is the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the decisions relating to working capital are always current, i.e. short term, decisions.
In addition to time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations; they are also "reversible" to some extent. (Considerations as to Risk appetite and return targets remain identical, although some constraints - such as those imposed by loan covenants - may be more relevant here).
Working capital management decisions are therefore not taken on the same basis as long term decisions, and different criteria are applied here: the main considerations are cash flow and liquidity - cashflow is probably the more important of the two.
The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This represents the time difference between cash payment for raw materials and cash collection for sales. The cash conversion cycle indicates the firm's ability to convert its resources into cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. (Another measure is gross operating cycle which is the same as net operating cycle except that it does not take into account the creditors deferral period.)
In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. As above, firm value is enhanced when, and if, the return on capital, exceeds the cost of capital. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.
In addition to time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations; they are also "reversible" to some extent. (Considerations as to Risk appetite and return targets remain identical, although some constraints - such as those imposed by loan covenants - may be more relevant here).
Working capital management decisions are therefore not taken on the same basis as long term decisions, and different criteria are applied here: the main considerations are cash flow and liquidity - cashflow is probably the more important of the two.
The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This represents the time difference between cash payment for raw materials and cash collection for sales. The cash conversion cycle indicates the firm's ability to convert its resources into cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. (Another measure is gross operating cycle which is the same as net operating cycle except that it does not take into account the creditors deferral period.)
In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. As above, firm value is enhanced when, and if, the return on capital, exceeds the cost of capital. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making.
Working capital management
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities.
As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital investment decisions, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital.
The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA).
As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital investment decisions, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital.
The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA).
The dividend decision
The dividend is calculated mainly on the basis of the company's unappropriated profit and its business prospects for the coming year. If there are no NPV positive opportunities, i.e. where returns exceed the hurdle rate, then management must return excess cash to investors. These free cash flows comprise cash remaining after all business expenses have been met.
This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that the company will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though an opportunity is currently NPV negative, management may consider “investment flexibility” / potential payoffs and decide to retain cash flows; see above and Real options.
Management must also decide on the form of the distribution, generally as cash dividends or via a share buyback. There are various considerations: where shareholders pay tax on dividends, companies may elect to retain earnings, or to perform a stock buyback, in both cases increasing the value of shares outstanding; some companies will pay "dividends" from stock rather than in cash; see Corporate action. Today, it is generally accepted that dividend policy is value neutral (see Modigliani-Miller theorem).
This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that the company will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though an opportunity is currently NPV negative, management may consider “investment flexibility” / potential payoffs and decide to retain cash flows; see above and Real options.
Management must also decide on the form of the distribution, generally as cash dividends or via a share buyback. There are various considerations: where shareholders pay tax on dividends, companies may elect to retain earnings, or to perform a stock buyback, in both cases increasing the value of shares outstanding; some companies will pay "dividends" from stock rather than in cash; see Corporate action. Today, it is generally accepted that dividend policy is value neutral (see Modigliani-Miller theorem).
The financing decision
Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. As above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix can impact the valuation. Management must therefore identify the "optimal mix" of financing—the capital structure that results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.)
The sources of financing will, generically, comprise some combination of debt and equity. Financing a project through debt results in a liability that must be serviced—and hence there are cash flow implications regardless of the project's success. Equity financing is less risky in the sense of cash flow commitments, but results in a dilution of ownership and earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.
Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows.
One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity.
The sources of financing will, generically, comprise some combination of debt and equity. Financing a project through debt results in a liability that must be serviced—and hence there are cash flow implications regardless of the project's success. Equity financing is less risky in the sense of cash flow commitments, but results in a dilution of ownership and earnings. The cost of equity is also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.
Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows.
One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity.
Capital investment decisions
Capital investment decisions [1] are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.
[edit] The investment decision
Main article: Capital budgeting
Management must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows.
[edit] Project valuation
Further information: stock valuation and fundamental analysis
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: Theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. These future cash flows are then discounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV.
The NPV is greatly affected by the discount rate. Thus selecting the proper discount rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.)
In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include discounted payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI; see list of valuation topics.
[edit] Valuing flexibility
Main articles: Real options analysis and decision tree
In many cases, for example R&D projects, a project may open (or close) paths of action to the company, but this reality will not typically be captured in a strict NPV approach. Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the “flexibile and staged nature” of the investment is modelled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility" inherent in the project.
The two most common tools are Decision Tree Analysis (DTA) and Real options analysis (ROA):
DTA values flexibility by incorporating possible events (or states) and consequent management decisions. In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to management; (2) given this “knowledge” of the events that could follow, management chooses the actions corresponding to the highest value path probability weighted; (3) (assuming rational decision making) this path is then taken as representative of project value. See Decision theory: Choice under uncertainty. (For example, a company would build a factory given that demand for its product exceeded a certain level during the pilot-phase, and outsource production otherwise. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" - each scenario must be modelled separately.)
ROA is used when the value of a project is contingent on the value of some other asset or underlying variable. Here, using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option - valuation is then via the Binomial model or, less often for this purpose, via Black Scholes; see Contingent claim valuation. The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.)
[edit] Quantifying uncertainty
Further information: Sensitivity analysis, Scenario planning, and Monte Carlo methods in finance
Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model. In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a change in that factor is then observed (calculated as Δ NPV / Δ factor). For example, the analyst will set annual revenue growth rates at 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best Case" – and produce three corresponding NPVs.
Using a related technique, analysts may also run scenario based forecasts so as to observe the value of the project under various outcomes. Under this technique, a scenario comprises a particular outcome for economy-wide, "global" factors (exchange rates, commodity prices, etc...) as well as for company-specific factors (revenue growth rates, unit costs, etc...). Here, extending the example above, key inputs in addition to growth are also adjusted, and NPV is calculated for the various scenarios. Analysts then plot these results to produce a "value-surface" (or even a "value-space"), where NPV is a function of several variables. Another application of this methodology is to determine an "unbiased NPV", where management determines a (subjective) probability for each scenario – the NPV for the project is then the probability-weighted average of the various scenarios. Note that for scenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivity approach these need not be so.
A further advancement is to construct stochastic or probabilistic financial models – as opposed to the traditional static and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the project’s NPV. This method was introduced to finance by David B. Hertz in 1964, although has only recently become common; today analysts are even able to run simulations in spreadsheet based DCF models, typically using an add-in, such as Crystal Ball.
Using simulation, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to the scenario approach above, the simulation produces several thousand trials (i.e. random but possible outcomes) and the output is a histogram of project NPV. The average NPV of the potential investment – as well as its volatility and other sensitivities – is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). See: Monte Carlo Simulation versus “What If” Scenarios.
Here, continuing the above example, instead of assigning three discrete values to revenue growth, the analyst would assign an appropriate probability distribution (commonly triangular or beta). This distribution – and that of the other sources of uncertainty – would then be "sampled" repeatedly so as to generate the several thousand realistic (but random) scenarios, and the output is a realistic, representative set of valuations. The resultant statistics (average NPV and standard deviation of NPV) will be a more accurate mirror of the project's "randomness" than the variance observed under the traditional scenario based approach.
[edit] The investment decision
Main article: Capital budgeting
Management must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows.
[edit] Project valuation
Further information: stock valuation and fundamental analysis
In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: Theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. These future cash flows are then discounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV.
The NPV is greatly affected by the discount rate. Thus selecting the proper discount rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.)
In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include discounted payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI; see list of valuation topics.
[edit] Valuing flexibility
Main articles: Real options analysis and decision tree
In many cases, for example R&D projects, a project may open (or close) paths of action to the company, but this reality will not typically be captured in a strict NPV approach. Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the “flexibile and staged nature” of the investment is modelled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility" inherent in the project.
The two most common tools are Decision Tree Analysis (DTA) and Real options analysis (ROA):
DTA values flexibility by incorporating possible events (or states) and consequent management decisions. In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to management; (2) given this “knowledge” of the events that could follow, management chooses the actions corresponding to the highest value path probability weighted; (3) (assuming rational decision making) this path is then taken as representative of project value. See Decision theory: Choice under uncertainty. (For example, a company would build a factory given that demand for its product exceeded a certain level during the pilot-phase, and outsource production otherwise. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" - each scenario must be modelled separately.)
ROA is used when the value of a project is contingent on the value of some other asset or underlying variable. Here, using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option - valuation is then via the Binomial model or, less often for this purpose, via Black Scholes; see Contingent claim valuation. The "true" value of the project is then the NPV of the "most likely" scenario plus the option value. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.)
[edit] Quantifying uncertainty
Further information: Sensitivity analysis, Scenario planning, and Monte Carlo methods in finance
Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model. In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a change in that factor is then observed (calculated as Δ NPV / Δ factor). For example, the analyst will set annual revenue growth rates at 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best Case" – and produce three corresponding NPVs.
Using a related technique, analysts may also run scenario based forecasts so as to observe the value of the project under various outcomes. Under this technique, a scenario comprises a particular outcome for economy-wide, "global" factors (exchange rates, commodity prices, etc...) as well as for company-specific factors (revenue growth rates, unit costs, etc...). Here, extending the example above, key inputs in addition to growth are also adjusted, and NPV is calculated for the various scenarios. Analysts then plot these results to produce a "value-surface" (or even a "value-space"), where NPV is a function of several variables. Another application of this methodology is to determine an "unbiased NPV", where management determines a (subjective) probability for each scenario – the NPV for the project is then the probability-weighted average of the various scenarios. Note that for scenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivity approach these need not be so.
A further advancement is to construct stochastic or probabilistic financial models – as opposed to the traditional static and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the project’s NPV. This method was introduced to finance by David B. Hertz in 1964, although has only recently become common; today analysts are even able to run simulations in spreadsheet based DCF models, typically using an add-in, such as Crystal Ball.
Using simulation, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to the scenario approach above, the simulation produces several thousand trials (i.e. random but possible outcomes) and the output is a histogram of project NPV. The average NPV of the potential investment – as well as its volatility and other sensitivities – is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). See: Monte Carlo Simulation versus “What If” Scenarios.
Here, continuing the above example, instead of assigning three discrete values to revenue growth, the analyst would assign an appropriate probability distribution (commonly triangular or beta). This distribution – and that of the other sources of uncertainty – would then be "sampled" repeatedly so as to generate the several thousand realistic (but random) scenarios, and the output is a realistic, representative set of valuations. The resultant statistics (average NPV and standard deviation of NPV) will be a more accurate mirror of the project's "randomness" than the variance observed under the traditional scenario based approach.
Corporate Finance
Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate company's financial needs and raise the appropriate type of capital that best fits those needs.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate company's financial needs and raise the appropriate type of capital that best fits those needs.
Managerial FInance
Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique.
The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. One concerned with technique would be primarily interested in measurement. They would ask: are moneys being assigned to the right categories? Were generally accepted accounting principles GAAP followed?
One concerned with management though would want to know what the figures mean.
They might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If so, what is the source of the problem? Do we have the same profit margins? If not why? Do we have the same expenses? Are we paying more for something than our peers?
They may look at changes in asset balances looking for red flags that indicate problems with bill collection or bad debt.
They will analyze working capital to anticipate future cash flow problems.
Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance.
Contents
1 The Role of Managerial Accounting
2 The Role of Corporate Finance
3 See also
4 References
[edit] The Role of Managerial Accounting
To interpret financial results in the manner described above, managers use Financial analysis techniques.
Managers also need to look at how resources are allocated within an organization. They need to know what each activity costs and why. These questions require managerial accounting techniques such as activity based costing.
Managers also need to anticipate future expenses. To get a better understanding of the accuracy of the budgeting process, they may use variable budgeting.
[edit] The Role of Corporate Finance
Managerial finance is also interested in determining the best way to use money to improve future opportunities to earn money and minimize the impact of financial shocks. To accomplish these goals managerial finance uses the following techniques borrowed from Corporate finance:
Valuation
Portfolio theory
Hedging
Capital structure
The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. One concerned with technique would be primarily interested in measurement. They would ask: are moneys being assigned to the right categories? Were generally accepted accounting principles GAAP followed?
One concerned with management though would want to know what the figures mean.
They might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If so, what is the source of the problem? Do we have the same profit margins? If not why? Do we have the same expenses? Are we paying more for something than our peers?
They may look at changes in asset balances looking for red flags that indicate problems with bill collection or bad debt.
They will analyze working capital to anticipate future cash flow problems.
Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance.
Contents
1 The Role of Managerial Accounting
2 The Role of Corporate Finance
3 See also
4 References
[edit] The Role of Managerial Accounting
To interpret financial results in the manner described above, managers use Financial analysis techniques.
Managers also need to look at how resources are allocated within an organization. They need to know what each activity costs and why. These questions require managerial accounting techniques such as activity based costing.
Managers also need to anticipate future expenses. To get a better understanding of the accuracy of the budgeting process, they may use variable budgeting.
[edit] The Role of Corporate Finance
Managerial finance is also interested in determining the best way to use money to improve future opportunities to earn money and minimize the impact of financial shocks. To accomplish these goals managerial finance uses the following techniques borrowed from Corporate finance:
Valuation
Portfolio theory
Hedging
Capital structure
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