The three essential functions
In search of the least common divisor
Several ways are possible to describe an economic entity; the things one wants to express are to a large extent decisive for the information that is brought together and also for the way it is presented. A publication that wants to show the historical development of an enterprise will contain photographs, figures and data and the necessary text that pays attention to crucial data, decisions and persons. A balance sheet tells from where an entity got the means to be able to function and to what assets it spent the means with the aim in mind.
In order to stress the specific own character of an entity details and comments come in handy. To describe what all economic entities have in common the contrary approach is needed: details and peculiarities have to be left out and the least common divisor has to be searched. The essential functions can best be distinguished in a simple entity. In the context of an approach to the flows of the societal system the aspect of flows serves as a guideline when one is looking for those elements that are common for all entities. The huge variety and specialization, which we see in our time, do not render that search easy. This difficulty is solved when one looks back at the almost uniform entities at the time of the agricultural societies.
Those small size enterprises combined a number of flows necessary to generate agricultural produce. As this still is the case today in agriculture: nature provisioned air, sunlight, and rainwater free of charge without which there is absolutely no fauna and flora. Moreover the farmer provided the necessary seeds and/or breeding cattle, and in many cases he would also take care of extra water, either by diverting water from a local watercourse or by the right to take a given quantity of water from the local spring or well.
The farmer of that time used a number of flows to get the yield he had in mind. Combining and ‘consuming’ energy and raw materials has always been an essential requirement to get the desired products.
Gathering a number of flows, however, did not do: additional efforts were needed to get those inputs at the right time, on the right place, in the appropriate proportions, accompanied by continuous supervision to get the desired results in a sufficient quantity. Those efforts, included the directed application of labour based on the right insights and the obtained knowledge, we call ‘producing’.
In addition to the efforts, which directly contributed to the growth or breeding process leading to the end product, means and working time were also used to improve the local circumstances (protection against trampling by animals, prevention of undesired flooding by rainwater, etc.) or to make the equipment more efficient (a more appropriate hoe or plough, a better/dryer storage of the crops, etc.). The assignation and leading away of means and labour from direct production, in order to spend them indirectly to improve or increase the production, we call ‘investing’.
Financial investing: a fourth function or not?
The uncoupling of most production from the family entities, scaling up, far-reaching specialization and a number of other developments may have led to a situation where most present-day economic entities no longer look like small agricultural entities at a first glance; as far as the flows are concerned that occur in the societal system, they still perform the same three essential functions everywhere.
Only one development has added something new to these three functions: the further development of the existing monetary system from the point at which the financial structures could unite the savings of a great deal of little entities in sufficiently large capitals in order to answer the investing needs of the much larger entities.
The specialization and the scaling-up led to a process where lots of small economic entities (most of them linked to the family level) had to confine themselves in the long run to certain niche-like activities, for which the limit of meaningful investments in the proper economic entity was quickly reached. When further progress or improvement within the own entity was no longer possible, although one disposed of means that could be used for it, participating in investments in other entities offered a solution. In principle the kind of activity that is helped that way, is of no importance; the monetary yield (interests and/or dividends), which flows back to the provider of the money, leaves him the freedom of further application.
Because the risks, connected with investments in another entity working in activities one is not always well acquainted with, are not easy to judge, small(er) entities do not usually directly participate in other entities, but make their financial means available through intermediate formulas, which bear less risks: (long term) saving accounts, investment funds, bonds. All these forms of financial investing are in essence substitutes for investments in the own entity, which are no longer meaningful provisionally or temporarily or because of a threshold reached in the own entity.
A generally valid representation of economic entities has to show ‘consuming’, ‘producing’, and ‘investing / financial investing’ in order not to miss one of the three essential functions connected with the flow-concept; they are present in the universal enterprise model (UEM) (see further on).
Not only the three essential functions can be found in the universal enterprise model (see menu button UEM-model) but at the same time also the three categories of transaction, that have to do with the layer structure of the system.