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13JURIDICAL SCIENCES
INVESTMENT ISSUES IN THE WORKS OF THE FIRST ECONOMISTS
Shpinev Iu.
PhD in Law, Senior Researcher in the Sector of Business and Corporate Law, Institute of State and Law of
the Russian Academy of Sciences, Moscow, Russian Federation
Abstract
There is no single approach to the concept of investment in Russian legislation. There is no single approach to the emu concept in the scientific community. Such terms as investment, investment, capital, capital investment are often used as synonyms. Given that investment, capital, and capital investment are primarily economic, it seems quite reasonable to consider the emergence and development of these concepts in the retrospect of economic theories, in order to understand the essence of the phenomenon and finally solve the issue of its legal regulation. In this article, the author examines the positions of the first economists who consider investment issues in their works: Richard Catillon, Francois Quesnay, Jacques Turgot and Adam Smith.
Keywords: Richard Cotillion, François Quesnay, Jacques Turgot, Adam Smith, investment, capital, capital investment, profit.
It is no secret that the availability of high-quality investments is one of the key elements of the successful development of the state's economy in any corner of the world. Our country is no exception. Investment plays a particularly important role for Russia now, in the difficult conditions of the fight against the pandemic, complicated by economic sanctions from most developed countries.
The need to work to attract investment in the economy has been repeatedly expressed by top officials of our country.
The most important elements of attracting reliable and long-term investments in the country's economy are the creation of favorable conditions for potential investors and the availability of transparent investment legislation that contains both these favorable conditions and a reliable mechanism for protecting the rights of investors.
Despite the importance of this task, the issue of transparency of our legislation, as well as favorable conditions for investors, has not yet been resolved. And if the lack of preferences and benefits for investors comparable to economically developed countries can be explained by an insufficiently developed economy, undermined by sanctions and epidemics, then the lack of a well-thought-out and understandable investment legislation cannot be explained.
To date, not only the scientific community has not developed a single approach to the concept of investment, but also in the current regulations, this term has different definitions [12, 246], and the new laws adopted not only do not contribute to the end of false polysemy, but on the contrary, introduce another concept, further aggravating the situation.
In our opinion, it is high time to define what is investment, investment, capital, capital investment and use only one term in related regulatory acts that defines legal relations that are clear to all.
There is no doubt that investment, capital, and capital investment are primarily economic categories. Therefore, it seems quite reasonable to consider the emergence and development of these concepts in the
retrospect of economic theories, in order to understand the essence of the phenomenon and finally solve the issue of its legal regulation.
In this context, it seems very relevant to study the issues related to investment in one of the first works on economics, in which these issues are considered in sufficient detail.
One of the first investment issues was raised by the English banker and economist Richard Catillon. In his Essay on the Nature of Commerce in General, he divides the whole population of England into proprietors, entrepreneurs, and wage-labourers. He divides all entrepreneurs into two categories, one of which needs the initial capital for its enterprise, and the other costs only personal skills and abilities. The former include farmers, artisans, and merchants, while the latter include artists, doctors, and lawyers [10, 70-77]. Of course, now it is more than controversial to attribute robbers and beggars to entrepreneurs, as well as the opinion about the lack of initial costs for artists and doctors (the same paints, easels, medical devices). Catillon does not divide entrepreneurs from the point of view of the legality of earnings, taking as the main criterion for classifying this category of citizens the presence of uncertainty in obtaining profit and permanent income from their activities. The main risks of business activity, in his opinion, are the fickleness of customer tastes and competition. It should be noted that Catillon was the first to describe in detail the functions of the entrepreneur as a separate class. In addition, he was the first to point out the uncertainty of making a profit (risk) as an essential condition for entrepreneurial activity, as well as the need for the availability or possibility of access to primary capital to engage in their own business [18, 226].
The next scientist who, in our opinion, has made a significant contribution to the study of investment is the French economist physiocrat Francois Quesnay. As a result of observing small farms that could not start normal activities until they were provided with everything they needed, he defined the capital needed to start a business as the wealth accumulated before starting a
business. All the capital investments necessary for conducting business activities, Quesnay, who called such investments advances, divided into initial, long-term and current [4, 350-366].
Continuing Quesnay's research, the French economist, philosopher and statesman Anne Robre Jacques Turgot in his work «Reflections on the Creation and Distribution of Wealth» comes to the conclusion that the presence of initial capital is necessary not only when starting agricultural activities, but also is a prerequisite for the start of any business activity, both in industry and in trade. He was one of the first to explain the positive impact of the introduction of cash (primarily gold and silver) on the development of large industrial and trading companies, since it is very difficult to accumulate large reserves of wealth for further use in the enterprise in any other form [16, p.609].
Turgot distinguishes five types of use of previously accumulated capital: the acquisition of real estate, investment of money in agriculture, investment of capital in industrial enterprises and factories, the placement of capital in commercial enterprises, the transfer of capital in return for interest [16, pp. 624-625].
The author convincingly shows that the money invested in the business should bring more income than the amounts transferred to the loan, and significantly more than the money invested in real estate, since in addition to the interest paid to the capitalist, the entrepreneur should receive an annual profit for his work, merits, talents and risk, as well as compensate for the inevitable unforeseen losses in the conduct of business.
In describing the advances, Turgot went further than previous economists. He was perhaps the first to describe in detail the investment and its most important role in the economy of any state.
Developing Catillon's teaching about entrepreneurs, Smith writes that there is a category of people who, if they have accumulated capital, try to use these funds to make additional profits. These people, entrepreneurs, using previously accumulated funds, provide hardworking people with everything necessary (means of subsistence, materials) in order to earn income on the sale of the product of the labor of employees. Based on this, the economist concludes that the cost of the finished product must include, in addition to the cost of materials and wages, a certain amount, which he calls the profit of the entrepreneur who risks his capital in this. Workers added to the cost of materials the cost according to Smith consists of two parts: the wages of workers and the profits of the entrepreneur in all of the capital which he had advanced, i.e., wage workers and material. The author quite reasonably points out that in the absence of any profit beyond the compensation of the spent capital from the entrepreneur, there would be no property interest to carry out entrepreneurial activities by hiring workers and purchasing material [15, 103].
It should be noted that here Smith does not include machine tools and other large equipment in the price of the finished product. Perhaps this happened as a result of the fact that the work was written literally on the eve
of the first industrial revolution. At the same time, further in its work, it already includes both machine tools and steam engines as part of its fixed capital.
Reflecting on the profit on the capital invested in the business, Smith points out that the profit of an entrepreneur is not his salary for specific work, including supervision and management of the business, does not depend on its (labor) quantity, severity and complexity, but is determined on completely different principles, including the size of the investment invested in the business [15, 104].
Smith develops the idea expressed by Turgot regarding the ratio of the size of the entrepreneur's profit and the income from the loan of money. Dividing the types of income into wages (income from labor), profit (income from investing capital in a particular business) and interest (income from lending money to another person), he defines the latter as the remuneration that the borrower pays to the lender for being able to make a profit with the money borrowed. Thus obtained entrepreneur profit includes the income of the entrepreneur, taking care on the use of capital in the business and all the attendant risks and income of the borrower, which gave the owner the opportunity to profit by giving loan [15, 107].
Today, business activity in any field is closely related to obtaining access to this or that information and its further use. It is no secret that currently commercial information is a specific product that has a certain, quite high value. Important information is also provided by closed data on upcoming or existing investments, while such information may be of interest to competitors not only in the economic, but also in the political field.
However, it should be noted that it was Smith who was one of the first to describe the importance of commercial information in the investment process. If, due to an increase in actual demand, the price of a certain product rises significantly relative to its usual price, the author wrote, the persons who have invested their capital in this product will hide this increase by all means, because otherwise their increased profits would encourage competitors to invest more in these products or lead to an increase in the number of competitors, as a result of which the demand would be satisfied, and the market price returned to previous levels or even decreased due to an oversupply of goods [15, 114].
Interesting from the point of view of investment are Smith's reflections on the change in profit depending on the changes in certain business conditions. The paper considers the dependence of profit on changes in the amount of capital invested, the economic development of the country of business, and the very nature of the enterprise in which the capital is invested.
Thus, analyzing the dependence of profit on the amount of capital invested, he comes to the conclusion that an increase in capital, which will subsequently lead to an increase in wages, will ultimately lead to a decrease in profit, since if several rich merchants invest in the trade of one commodity, then the competition that appears in this case naturally leads to a decrease in profit. Conversely, a decrease in the capital used to finance industry, by lowering wages, will increase profits, because, first, a decrease in wages will reduce the
cost of delivering goods to the market, and secondly, with a decrease in capital, the quantity of goods on the market also decreases, as a result of which its deficit is formed and the price increases. However, the dependence of profit on capital is described by the law of equality of profit on equal capital under the condition of intersectoral competition, but Smith, who could not explain this dependence, suggested that profit is generated by capital [2, 50].
As for the dependence of profit on the level of development of the country, according to Smith, in economically developed countries that have reached the maximum level of development relative to other states, where all sectors of the economy (industry, trade) are fully provided with capital, the net profit will be very small. This is what we can see now, when investors in developed countries are trying to find the most profitable industries for investment in developing countries.
Investing in unpopular industries, according to Smith, increases the income received. As proof of his correctness, the author cites the example of an inn, an owner who is not engaged in the most popular business, but at the same time receives a much greater profit per unit of invested capital, compared to more revered areas of activity [15, 149]. We can observe a similar situation now. So, in recent years, the trend is becoming socially responsible behavior of investors, in which they refuse to invest in ethically and socially questionable industries [13, 43]. When reducing the funding for such unpopular but necessary industries, such as coal mining, there is a lack of investment, which will lead, in our opinion the profit increase, since a substantial profit increase can compensate for companies the loss of reputation caused by the investment unpopular industry.
According to Smith, the amount of profit does not depend on the «ease or difficulty of studying» the industry, the constancy or impermanence of the occupation, the degree of trust in the entrepreneur [15, 150]. At the same time, investments in high-tech companies currently have the greatest income growth, as a result of which investors actively invest in such companies not only in developing countries, but also in the most developed countries [9, 139].
The author makes an obvious conclusion that the return on capital increases in proportion to the increase in the risk of reliability or unreliability of income generation. So when investing in an enterprise engaged in foreign trade, according to Smith, you should expect a greater profit than when investing inside the country, but the risks are much higher, and the probability of making a profit is less.
Describing the cycle of social capital, Smith equated the annual product of society with income [19, 155]. This was first noted by the Swiss economist and historian Jacques Sismondi, who noted that since in the field of national wealth, the capital of one person becomes the income of another, it becomes problematic to determine what is capital and what is income [14, 138].
Comparing the role of Adam Smith in the constitution of economic theory, with the role of Newton in
mechanics, O. Comte in sociology («the founding fathers»), they often limit themselves to retelling the corresponding fragment from the "Wealth of Nations", according to which each individual person constantly tries to find the most profitable use of the capital that he can dispose of, while he means his own benefit, and not the benefits of society [3, 139]. Thus, the interest of the owner of capital is always somewhat different, and sometimes may contradict the interest of society [1, 5].
But even if he considers only personal gain, it is inevitable, according to Smith, even in this case, he, guided by an invisible hand, will come to the most profitable occupation for society.
At the same time, the generally accepted opinion, according to which Smith concludes that the market turns a person's personal interest into a public benefit, is now called into question [7, 197].
One of the most important achievements of Smith is the development of the categories of «initial» and «annual» advances of Quesnay and their generalization in the categories of fixed and working capital. At the same time, it is impossible to agree with the opinion that it was in Smith's work that the capital invested in the business went beyond the features of agriculture [17, 32], since Turgot spoke about the need for initial capital for any branch of the economy.
Despite the complete disregard of the social nature of capital, the disclosure of its essence and the division into the main and circulating capital is the greatest achievement of its time [6, 183].
All property of any person (stocks) Smith divides into stocks for personal consumption and stocks on which a person expects to receive income in the future. Smith calls such reserves capital [15, 291].
Capital, in turn, Smith divides into fixed and working capital.
Working capital is used to buy, process, or produce goods for resale for profit, and does not make a profit until it changes form or changes owner. I.e., since this capital leaves the entrepreneur in one form and returns to another, and only as a result of such a turnover does it make a profit, Smith called it working capital.
Fixed capital is used to improve agricultural land, to purchase machines, tools or other devices that require significant expenses and is able to bring income to the entrepreneur without transferring to another owner, i.e. without turnover. Fixed capital is characterized by the fact that it brings the entrepreneur income without changing the owner and without entering into circulation.
Fixed capital, according to Smith, includes useful machinery and equipment, commercial real estate, the cost of improving agricultural land, as well as the acquired and useful abilities of all people [15, 294].
We see one of the first attempts to determine the role of the human factor in the development of production during the formation of the economic form of management [5, 188].
Working capital, according to Smith, includes:
- money;
- food stocks that are not intended for personal consumption, but for sale or profit in the future in another way;
- materials processed or unprocessed, which are in the hands of masters (workers) in the process of work;
- finished products that have already been produced, but have not yet been put into circulation and are still in the hands of the master or in warehouses.
Analyzing the ratio of fixed and working capital, Smith concludes that
- the first arises from the second, since all machines and buildings are created from the materials that make up the working capital;
- working capital can not bring any benefit without working capital, because without the materials that use these materials and the means of subsistence for the workers working on them, these machines will stand idle and will not be able to bring any income [15, 295].
Smith was one of the first to understand the importance of investing in fixed assets. The main purpose of fixed capital, he saw in increasing the productivity of labor, allowing the same number of workers to do more work. Funds wisely invested in fixed capital always yield a much greater return than the cost of investment spent on improving the means of production, and, therefore, any technical innovation that contributes to increasing labor productivity, especially with the help of inexpensive and simple machines, is useful for society, Smith wrote [15, 299].
Before Smith, no one considered capital as the main factor of production [11, 119].
According to Smith, the main reason for the increase in capital is not hard work, but thrift. Despite the fact that it is hard work that produces what then accumulates savings, capital would not be able to increase if thrift did not save it, as noted in Chapter 3 of the Second Book. According to Smith, savings are an integral factor of economic growth, and he practically equates the value of savings with investment [8, 186].
Smith identifies four ways of using capital, in other words, the most interesting sectors of the national economy from the point of view of investment:
- extraction of the raw product necessary for society, where it includes agriculture, fishing, as well as the extractive industry;
- processing of the raw product extracted in the first method, namely, production directly at the manufactories;
- transportation of raw or finished products, i.e. wholesale trade;
- the division of the product into small volumes necessary for the consumer and the direct sale of this product, i.e. retail trade [15, 364].
Analyzing the work of Adam Smith «Research on the nature and causes of the wealth of nations» from the point of view of the doctrine of investment, we can state that this work is an outstanding example of economic thought of its time, describing in sufficient detail the newly emerging relations of investing capital in entrepreneurial activities for the purpose of making a profit, i.e., nothing more than investment. But this work did not arise from scratch. It was preceded by the work of outstanding economists, among whom, first of all, it is necessary to mention Richard Catillon, who introduced the concept of the entrepreneur, Francois Quesnay, who first described the advances (harbingers of investment)
necessary for the functioning of agricultural enterprises, and, of course, Jacques Turgot, who developed the doctrine of Quesnay's advances in detail and transferred their importance to all spheres of activity.
The most significant, in our opinion, in the study of investments in Smith's work is the allocation of all the stocks collected by a person, the capital necessary for use for profit, as well as the division of this capital into fixed and working capital. In our work, we find only nascent knowledge about the nature of investment. We do not see any hints about any regulation of this phenomenon, as a result of which we can conclude that, firstly, the legal regulation of investments will arise much later, and secondly, that legal relations in the field of investment are primarily private law, since otherwise the state regulation of these relations would arise together or immediately after the occurrence of this phenomenon itself.
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LEGAL REGULATION OF FOREIGN ECONOMIC ACTIVITY OF UKRAINE: CURRENT STATE
AND PROSPECTS FOR IMPROVEMENT
Hrechyn Ye.
Doctor of Law, senior lecturer National Academy of the Security Service of Ukraine,
Kyiv, Ukraine
Abstract
In the paper, the normative and legal acts in the sphere of foreign economic activity of Ukraine are analyzed. The main shortcomings in the legal regulation of foreign economic activity of Ukraine are defined. Possible directions of improving the legal mechanism for regulating the above-mentioned sphere are suggested. Keywords: state security, foreign economic activity, legislation, export, import.
Nowadays the legal regulation of foreign economic activity of Ukraine is a system of legislative, executive and control measures carried out by authorized state institutions to maintain foreign economic balance, stimulate progressive changes in the exports and imports structure, encourage foreign capital inflows, protect national interests, etc.
In the legal literature, foreign economic activity is considered as an activity aimed at developing cooperation with other countries in the sphere of trade, economy, technology, culture, tourism. According to various scholars, it is a special form of social and industrial relations between individual states, states and international organizations, international organizations in the field of international economic cooperation, which is the subject of international economic law as an independent branch of public international law [1, p. 461].
Moreover, it should be noted that the above-mentioned activity, being studied by the international economic law, is also administered by a number of state laws and regulations. Let us now consider them in more detail.
State regulation of foreign economic activity of Ukraine is carried out by the Verkhovna Rada of Ukraine, the Cabinet of Ministers of Ukraine, the National Bank of Ukraine, The Ministry of Economic Development, Trade and Agriculture of Ukraine and the State Customs Service of Ukraine in accordance with their competence defined in Article 380 of the Com-
mercial Code of Ukraine, as well as by local governments, whose competence in the sphere of foreign economic activity is defined in Article 10 of the Law of Ukraine of 21.05.2007 "On Local Self-Government".
The state regulates foreign economic activity of Ukraine by means of:
- currency control (Law of Ukraine of 21.06.2018 "On currency and foreign exchange transactions", where the legal basis for foreign exchange transactions, currency regulation and currency supervision, the rights and obligations of foreign exchange transactions and authorized institutions are defined and their liability for currency legislation violation is established);
- customs control (carried out in accordance with the Law of Ukraine of 16.04.1991 "On Foreign Economic Activity" and the Customs Code of Ukraine of 13.03.2012 and is performed through licensing and quotas).
The regulatory and legal regulation of foreign economic activity of Ukraine, in its turn, is carried out by a number of general economic legislation acts and special legislation on foreign economic activity. Therefore, the legislation acts dealing with foreign economic activity can be divided into general (include regulations containing general provisions on foreign economic activity) and special (include legislation or norms determining the specific character of foreign economic activity in certain sectors of the economy, territories, with the participation of individual entities, etc.
