As I have noted from time to time I am a fan of all Canadian economists, at least all that I know. And especially Nick Row who comes up with some of the best and most thoughtful ideas, and he is still undoubtedly the best economist on the planet. Now he has an interesting discussion on whether God over-invested in land. Now I view this a bit differently but first Rowe:
Question. "What is the economic difference between capital and land?" If you answered: "People made capital and God made land", you are wrong.
Economists have known that answer is wrong since 1871, when we
discovered that bygones are forever bygones, and switched to the
forward-looking marginalist theory of value. In 1871 we stopped saying
that the value of goods is determined by what they cost to produce in
the past. Instead we said the value of goods is determined by their
marginal utility in the present and expected future. (OK, there are two
blades of the Marshallian scissors, demand and supply, but both blades
are made of the same stuff (Mark Blaug?), because marginal costs are
really opportunity costs, and are the foregone marginal utility of the
other goods we could make with the same resources.)
It doesn't matter whether people or God made stuff in the past, and
what it cost to produce it. The only things that matter are: the
present; and present expectations about the future. If archaeologists
discovered that Prince Edward Island was an artificial island, rather
than a geological formation, it shouldn't matter at all for the
allocation of resources going forward. (OK, some geologists would have
extra work to do, to revise their theories.)
Now I have never been to PEI but we have family a bit south in Nova Scotia, Breir Island, out there in the GM.
Now as an investor, I guess that is a good description now that I am almost 70 since no one wants an old guy really running a company, unless you are a Murdoch, and besides I do not want to do it anyway, I almost every day have to give an answer to "what is it worth?" and place personal capital at risk.
So how do I do it. Simple, discounted cash flow. I look at future cash flows, discount them and then that is what it is worth. Does it work? Sometimes. I looked at real estate once, 1987, before it crashed, in fact just before t crashed, and I used a 10% pa increase in value.Well I was underwater for a while, no Government bail outs then, just ride the curve.
Now I looked at other investments in similar manners for the next decades, namely DCF and NPV. There is always the question of good projections, discount factors and terminal values. Never really got it prefect but did get it better.
So what to me is the difference between capital and land. As a DCF freak it is as follows:
1. Land has value based on the demand at some future time and the discount factor. What will someone pay for it at a later date. Land is one of those things that are in limited supply, and some land more limited than others. Location is the key phrase we always hear and yes that is a good part of the value. Will it look better to others at some future time, and better by an amount that exceeds the discount?
2. Capital, well cash qua cash does not increase, in fact holding just dollars depreciates over time in its ability to buy some milk was $3.00 a gallon a year ago and now it is $4.80, gasoline the same. Despite Krugmann we do have inflation. Perhaps he never went shopping, they never do down there in Princeton. Thus unlike real property capital is worth what it is worth when you have it, and like a new car it just is worth less when you hold onto it.
But Nick continues:
And firms find their capital stocks seem to be far too small, so they do
a lot of investing to get them back up to normal. And households find
they are crammed into houses that are smaller than they need be, because
there are a lot of houses sitting empty, but they soon sort that one
out. And are driving old cars, and wearing old underwear, and so start
investing in a lot of new stuff.
I missed the point here. But wearing old underwear sounds quite common, as is crammed into houses. I forget who may have said it, George Carlin I believe, but the reason we get new and bigger houses is because we get more "stuff". "Stuff" is the driver of getting more "stuff". Perhaps there is some irrational subliminal driver to getting "stuff" that is really at the root of all this, not any rational theory of economics.
For the proof of that I look at the chipmunk. You see we have dozens and even more in New Hampshire. The chipmunk has one primary goal in life, find food and bring it back to the nest. They have those pouches on the sides of their mouths to accumulate food, not consume it, accumulate it. Chipmunks accumulates tens of times more than they consume in their lifetime. What is the food worth? I leave that question to Rowe.
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