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Looking at das monde's question to even attempt to answer means I accept that capital is a thing. That it is a term, a noun, something that can the Subject or Predicate of a statement.
But what if it is a Verb? What if capital is Action or Being? If so, saying "capital is scarce" is exactly the same as saying "walking is scarce." If I went around saying, "Can't go down to the Post Office, WALKING IS SCARCE!!!!!" They'd lock me up for a nutter.
When you ... alright, when I ... look at capital I see Action and Being, not Person, Place, or Thing. She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
I accept that capital is a thing. That it is a term, a noun, something that can the Subject or Predicate of a statement. But what if it is a Verb? What if capital is Action or Being?
I accept that capital is a thing. That it is a term, a noun, something that can the Subject or Predicate of a statement.
But what if it is a Verb? What if capital is Action or Being?
whoa, now you're talking! this is ringing all kinds of mental bells, well done.
next words (after capital) to really parse? Commodify and Monetisation.
top comment, wonderful sunday morning brainfood, profound and excellent!
capital effort! 'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
"Financial assets," on the other hand, are promises. And financial assets are not capital.
One interesting little exercise to wrap your head around is to put ordinary double-entry bookkeeping in a slightly different form: The balance sheet for economic agent i can be written as
Ci + Fji + Bi - Ei - Fij - Rji = 0
summed over j, where Ci is the value upon liquidation of the capital of agent i, Fji is the long financial position of agent i in agent j (cash is a long position in the sovereign, while, e.g., student loans are a short position in the sovereign), Ei is the equity of agent i, Rji is the value of the risk of default by j on its obligation to i and Bi is the bezzle of agent i. The bezzle is composed of all the things that make a going concern more valuable than a liquidated concern - organisation, public confidence (whether misplaced or justified) in future earnings, brand value, political connections, as yet undiscovered embezzlement, etc.
Now sum the balance sheet equation over the whole of the private sector: All the financial obligations net out, and you're left with the identity
C + B + F0 - R = E
Where F0 is the net long position of the private sector in the sovereign (plus, in an open economy, the net long position in foreign countries).
The total equity in the private sector of your economy is, in other words, equal to the capital plant plus the net sovereign debt minus the net foreign debt minus the total cost of default risk, plus the bezzle.
What happens during a speculative episode is that the bezzle grows due to unjustified expectations of future revenue. This causes the total equity to go up, which allows (a) more of it to find its way into the hands of the wealthy and (b) total lending volume to go up, which makes aggregate lending risk go up too. Collective insolvency happens when the bubble bursts, leaving the bezzle unable to cover the increased aggregate lending risk.
(This analysis can, of course, be replicated for any relatively isolated sub-sector of the economy by replacing "sovereign" with "rest of the economy" in the above derivation.)
- Jake Friends come and go. Enemies accumulate.
What most do not understand is that it is their largest allies that are doing the most embezzling and that the hated national debt actually stands for the monetary value of the society in which they live. How patriotic would it have been to loathe War Bonds during WW II? Not only did they help finance victory, they helped underwrite the postwar economy.
What should be loathed and prosecuted is the fraud that has been allowed to pollute the national debt and the whole society, but, because government has been identified as the problem in the minds of so much of the public, there has been insufficient outrage at the actions of the fraudsters. "It is not necessary to have hope in order to persevere."
And the much loathed "National Debt", F, is a positive item
Well, the sovereign debt also carries a counterparty risk (though legal tender laws complicate the analysis somewhat on this point...), which is properly accounted for as a part of R. It is perfectly possible for the sovereign to engage in a debt binge to the point where F0 contributes a significant fraction of R. If the risk of sovereign default is underestimated, this is effectively equivalent to an unjustified increase in the bezzle and can lead to precisely the same situation of systemic insolvency.
until overwhelmed by the bezel, the perceived risk of which is represented by R.
No, R is the aggregate cost of default risk. The bezzle is different, and the bezzle isn't always bad (if it were that simple, you could have a computer run the central bank, like Friedman said he wanted...).
The bezzle can be perfectly justified - take the balance sheet of a major medical company, for instance. They have physical assets, financial assets, intellectual property, etc., but their biggest asset does not show up at all: Their organisation - their trained cadres of specialists working together in a coherent institutional framework. Why does this not show up in their book value? Well, because it has no liquidation value. Never the less, such intangible assets are very much real. In fact, the bezzle is the entire reason for keeping the going concern a going concern rather than liquidating it.
But it's impossible to device an objective way to compute the proper size of the bezzle from first principles, because (among other things) the bezzle includes expected future earnings, and there is no way to definitively state that any given expectation is justified. So while it is possible to say whether any given bezzle is clearly far too big or small, providing a precise number for its value involves a component of subjectivity. Part of the mechanism in a speculative boom is that this subjective valuation is exploited to substitute mysticism and glamour for reasoning and substance.
It's this ambiguity that makes economics interesting. And, incidentally, what makes precision in economics "a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of our quantitative analysis."
That's OK and should not be the least controversial.
An intangible thing ("object") is foremost an idea. It is a mental or intellectual representation of some fact ("event") that is imperceptible to human senses which is merely the interface of the environment in which one acts. It is the thing that has yet to occur to objective measure. The unuttered idea is a fact and an intangible object.
The attribute common to yet that differentiates tangible and intangible things is time; that which is present and that which is not present.
Any demand for or claim to a future state of something, intangible or tangible object referent, is an intangible object.
The ideology of GAAP attempts to describe the essential subjectivity of business practices by enforcing applications of recognition to transaction events and objects. Diversity is the key to economic and political evolution.
You are equating what is normally called "intangible assets" with the "bezel". I presume this is deliberately provocative.
Deliberate, yes. Provocative, perhaps. Deliberately provocative, no.
The reason that I lump together justified and unjustified expectations of future gains is that, in the snapshot that the balance sheet represents, there is no way to tell the two apart in any manner that is both objective and precise at the same time. Nor is it relevant to the phenomena that I designed the model to analyse.
Take a company that is leveraged 4:1 and capitalised at 150 % times its liquidation value on the expectation of future earnings - that is, it has a bezzle of +50 % of its liquidation value and an equity of +37.5 % of its liquidation value. So if its bezzle shrinks below +37.5 % of its liquidation value for whatever reason, its creditors will start liquidating it in order to avoid being left as the last creditor holding claims on an insolvent institution.
The original bezzle could have been perfectly justified, based on what everybody knew or could reasonably know at the time. The new bezzle could also be completely justified, due to changes in market conditions. Or one or both could be entirely due to the overactive imagination of stock market speculators. That doesn't matter, because all that the creditors see is that the company's stock just went to zero, which is a signal for them to start sending out margin calls.
Or take a company that, due to the prevalent discount rate on the money markets, has a negative bezzle - that is, the liquidation of its plant and the sale of its patents would give more money than the money markets are prepared to pay for the future cash flow that they believe the company will generate. In that case, the company will be targeted for liquidation by corporate raiders. And it really doesn't matter whether the negative bezzle is justified on the basis of the company having an unsound business model, or the negative bezzle is due to unjustified required rates of return on money or even due exclusively to overactive pessimism on part of the stockholders.
(Of course the story about corporate raiding is a little more complicated, because it's also a story of corporate raiders exploiting loopholes in the law to liquidate companies without paying out their deferred expenses, like pensions, in full. Obviously, the ability to shaft creditors during the liquidation of an otherwise solvent company creates an incentive to liquidate perfectly sound going concerns.)
So separating the bezzle into a justified part based on brand recognition, organisation, business models and so on versus an unjustified one based on hype, glamour and mysticism does not, I think, add sufficient analytical power to the model to compensate for the demarcation problem it introduces.
Nitzan and Bichler include a term for "hype", a coefficient that accounts for differences between "actual" value and the value that the market assigns to assets when they are capitalized and discounted to present value. The hype can be above or below unity.
How do they determine the "actual" value? The actual value of an asset depends on the expectations, plans and strategies for the future, as well as the applied discount rate. Now, the future can be guessed at, studied or planned for, but the discount rate is (in part) an explicitly political parameter that has no objectively true value.
And there is another advantage of separating the intangible assets from the physical assets: If you want to model the cascading collapse during a financial panic, explicit bezzles are more illustrative and mathematically convenient (or at least I think so) than dealing with multipliers on asset values.
Additionally, it is possible to be an economic actor with no tangible assets - a company that deals entirely in financial assets and rents its buildings and equipment would have no physical portfolio to apply the multiplier to. Yet presumably it has a positive bezzle - if it did not, we could not expect it to remain a going concern, per the discussion of corporate raiding above.
How do they determine the "actual" value?
I would like to quickly note, while I ponder:
3) The equation is zero-sum because the bezzle is a residual - unlike the other entities, it is impossible to compute from first principles, so it is taken to be whatever is needed to balance the books. Additionally, this is a static equation - the dynamic equations are in the cash flow and production/consumption functions. But I'll have to work a bit more on those to re-cast them in an analytically productive form.
and they are in a business that actually has had a long-term future.
Fixed. :)
Whether Micro$oft's business model has a future is another question entirely. And it should be evident from the history of stock markets that considerable discomfort awaits those who believe that the future of a company's market value has been revealed to them :-P
If I was throwing investment money around I'd be spending it on robotics, private space access, interface design and biotech.
The core OS part is pretty much an irrelevance on PCs now, and doesn't have the feudal power that it had now that many people use the OS as a gateway to the web.
MS tried and failed to control that gateway, but Bill G was too slow to understand why it mattered, and without its monopoly MS is failing at almost everything it touches.
MS will carry on, zombie-like, for at least another decade, but it's closer to GM than it might think it is.
When I can keep a class spreadsheet in the cloud and get at it from anywhere using a browser without really caring which operating system is running underneath, and we see programmers programming to various browsers and browser plug-ins, the termites have got to the load bearing beams.
Meanwhile, GM can build pluggable battery electric share cars and pluggable battery electric short haul container haulers and continue in their same basic business model for decades. I'd rather hold Ford stock long-term than GM stock, but I'd rather hold GM stock than Chrysler ... as the industry downsizes, the number of transnational firms with substantial US manufacturing will decline. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
[Lyapunov] showed that a sufficient condition for local stability was that the real parts of the eigenvalues for [a Jacobean] matrix be negative. It was a small step from this theorem to understanding that such an eigengvalue possessing a zero real part indicated a point where a system could shift from stability to instability, in short a bifurcation point.
Mathematics of Discontinuity
Thus the quantification of a firm using DEB is nothing more than a snapshot of the firm at a particular moment in time having unreliable predictive value over time.
And the unpredictability stems directly from "the cash flow and production/consumption" since they are the dynamic mathematical parts of the DEB equation. She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
:-) She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
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