Re: Fine work by our new Nobelist

From: Igor (jjweatherby_at_houston.rr.com)
Date: 10/15/04 

Date: Fri, 15 Oct 2004 19:23:21 GMT

sinister wrote:

> I assume you mean like intellectual "property rights".
>
> I'm not sure what Prescott and his coauthor were referring to. Maybe they
> estimated the value of such assets by some indirect method.
>

Reading the paper before making comments would help here.

The fundamental value is clearly defined as equal to ( 1 - tax on
distributions) (resource cost of tangible capital) + (1 - tax on
profits) (resource cost on intangible capital). This is a statement on
returns. The tax rates effect prices on capital the distribution rate is
used because the return to capital is taxed not the buying of capital.
Corporate profit taxes are used because they effect the price of
intangible assets. Investment in intangibles are an expense and reduce
corporate profits meaning less tax. The valuation is the price of its
tangible assets and intangible assets.

Intangibles are R&D and the productivity gained for R&D. In effect a
stock of knowledge which can be represented by total factor
productivity. Intangible assets are not explained well. I assume it is
because Presscot wrongly assumes that readers will be familar with the
literature on endogenous techinal change and growth.

The valuation of intangibles is estimated from profits. Profits are
equal to (the interest rate) (tangible capital) + (the interest rate-
growth trend of output) (intanglible capital). The derivation of this
given. The point is if you know the interest rate, the growth rate of
output, and the value of tangible capital, and profits you can solve the
equation for intangible assets.

The Fisher statement dealt only with price and earnings ratio. The paper
supports low price to earning ratios in 1929. The estimates show that
fundemental values of corporations were much higher than actual after
tax earnings. In this section they use market capitialization to compare
to Fisher because that is what Fisher used.

>
>>Same thing the dot.coms were selling. If
>
>
> Certainly the dot.coms were marketing themselves based on some sort of
> intangible assets. But it's not clear that those "assets" were truly
> connected to rent collection.

The intangible assets were not what dot.coms market under. They actually
had few intangible assets. The dot.com crash can be actually thought of
failed R&D. They had a wrong idea that the internet would have cost
advantages and reach enough new customers to be more profitable than
stores. These were retail stores. What they found is that warehosing
technology was not better than the current warehouse store technology
and they had the extra cost of shipping. In short they couldn't get
below Walmart or Office depot's price enough to make the dot.coms
competitive. Often when faced with the same price at say Walmart then
adding shipping on top of the price, people went to Walmart and avoided
shipping and waiting for the product. The problem with the dot.com is
the people believed the value of intangible assets was much higher than
what it really was.

You find now dot.coms are niche markets where physical stores may not be
available in some areas due to low demand or have replaced catalog
orders for corporations.

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