February 4th, 2010, 3:19 pm
QuoteOriginally posted by: torontosimpleguyQuoteOriginally posted by: Traden4Alphatorontosimpleguy, [...]We all seem to be circling around the same core issue of the vast discrepancy between the academic conception of capital [...] versus the empirical reality [...]Nope, I have a theoretical issue with M&M.They equated debt and equity in their results. I said it was theoretically wrong. Debt has an exponential nature whereas equity (or retained earnings in that sense) can't have exponential nature in the long run. Otherwise earnings will overgrow all money existing in the world (and showed that fact with a simple mathematical example).Indeed! And yet equity also has an exponential nature. Don't equity investors expect exponential returns on their investment n the same way that debt investors do? In fact, in exchange for having no contractual claims on the assets of the corporation, don't equity investors expect a notably higher rate of exponential returns?The same process bounds the exponential nature of expected returns on both debt and equity -- bankruptcy. Moreover, causal connections in macroeconomics means that the same factors that induce shortfalls in operating results (leading to bankruptcy) will also induce low valuations of assets and illiquidity (exacerbating the probability of bankruptcy and degrading recovery in the event of bankruptcy).To me, the real paradox is the non-zero long-term rate of growth of the aggregate economy (both in total and per capita) in contrast to zero long-term rate of growth of any particular entity (the birth-death cycle that creates zero total return on any given investment). It's almost as if there is a diffusion process by which the growth of an entity spreads into the broader economy more strongly than does the demise of that entity. That is, the economy grows in proportion to the growth of an individual company. And yet the economy does no shrink in the same proportion with the shrinkage of an individual company. This paradox seems to be tied to the near-monotonic accumulation of knowledge. A new firm creates new knowledge, generates profits on that knowledge, and generates broader economic growth. But when the company dies, some significant fraction of the generated knowledge is retained, not lost, with the loss of the company. To me, this illustrates one the great failings of accounting (and, by extension MMT), which focuses too much on tangible assets. Yes, tangible assets may be easy to measure (this the drunk-looking-for-his-keys-under-the-light-post problem), but assets represent a declining fraction of both the wealth and wealth-generating power of both firms and countries.