Re: Fine work by our new Nobelist
royls_at_telus.net
Date: 10/16/04
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Date: Sat, 16 Oct 2004 23:23:02 GMT
On Sat, 16 Oct 2004 01:20:09 GMT, Igor <jjweatherby@houston.rr.com>
wrote:
>royls@telus.net wrote:
>> On Fri, 15 Oct 2004 19:23:21 GMT, Igor <jjweatherby@houston.rr.com>
>> wrote:
>>
>>>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.
>>
>> As long as one can manage the required suspension of disbelief....
>>
>>>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.
>>
>> More accurately, this formula states that the value of a company does
>> not depend in any way on how profitable it is or is expected to be,
>> but only on how much money it has spent, and the tax rates. So as
>> long as there is no tax on profits, $1G spent acquiring perfectly
>> useless intangibles is considered to make the company worth $1G.
>
>Wrong it is the valuation of assets not how much is currently spent.
OK, now you are lying about what I said. That's normal and expected.
You said the valuation was based on resource costs, not market value
and not current spending (look up about 15 lines. Yep. There it
is.). I repeated that accurately, and identified its inescapable
logical implications.
>Acquiring useless intangibles do not add to the intangible stock. They
>have to be innovations. Why would a company acquire useless intangibles
>on purpose it would lower profits with no returns. They are talking
>about stocks not flows. What the firm could sell for based on assets not
>how much is spent.
>
>
>>>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.
>>
>> So, because a company that always loses money pays no tax, it is
>> considered to be more valuable than a company that always makes money
>> and thus does pay tax. Check.
>
>Wrong note it says 1 - tax . This is the after tax value. Presscot
>clearly states that are sell prices. So if the capital is valued at 1k
>market then the proceeds after selling are (1- the tax rate) (market
>value). The problem is you misinterpert this as current expenditures not
>as a valuation of assets.
Noope. I did not at any time mention current expenditures.
>>>The valuation is the price of its
>>>tangible assets and intangible assets.
>>
>> IOW, the assumption is that corporate value does not depend on how
>> skillfully the company's assets are deployed, or how profitable they
>> are made, but only on how much they cost to acquire and how much any
>> returns are taxed.
>
>No how much the corporation could be sold for.
That is simply false. There is no mention of market value, only of
costs, tax rates and interest rates.
>The value is what you can
>sell the company for.
Where is that mentioned?
>The fundemental portion of that is how much are
>assets worth after taxation.
Then why is value calculated on the basis of resource costs, not
market value of 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.
>>
>> Productivity measured how?
>
>In this case it is a residual.
IOW, an outright fabrication.
>The after tax value of tangible assets is
>what is left over in profits after you take out the after tax returns to
>tangible capital.
Incoherent.
>In context of growth models which Presscot loosely bases the anaylsis on
>, it is total factor productivity that is used to measure the stock of
>knowledge.
Gobbledegook.
>>>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).
>>
>> This formula means that if output is declining, profits are higher,
>> and maximum profitability is achieved if all output is eliminated
>> altogether, as quickly as possible.
>
>Not necessarily.
Yes, liar, necessarily.
>Prescott derives this from a more complex equation.
Sure. One that is equally nonsensical.
>In steady state the growth of output is equal to the growth rate of
>knowledge.
That is literal nonsense: it lacks dimensional consistency, like a
claim that profitability is equal to how fast the CEO can run.
>Hence this is showing how the returns to knowledge capital
>depreciates. As others catch up you lose market share and profits. This
>is the growth rate for the economy not the firm. Yes in slower growth
>rate periods R&D gets higher return because you get a jump on
>competition.
Except that in the real world, the opposite is the case.
>I would suggest actually reading the paper before
>commenting.
Aren't you reporting its contents accurately?
>It did not make sense to you because you didn't look at the
>model or did not understand it.
It did not make sense to me because it does not make sense.
>>And in any case, profits are
>> defined principally by how much money the company has spent, not in
>> the conventional way by how much it has left over after subtracting
>> what it has spent from its revenues.
>
>No it is not the conventional expression of profits but it not how much
>money was spent either.
What is "resource cost" but how much money was spent?
>It is the returns on assets.
No. At no point is any actual return mentioned.
>>>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.
>>
>> Yes, and profits can only be negative if output is growing faster than
>> the interest rate!
>
>No R&D returns may be negative but the return on tangible captial is the
>interest and can not be negative so it does not automatically imply
>negative proftis.
Yes, well, it's not hard to claim companies were undervalued when you
assume that all their investments in tangible capital were profitable.
>Negative profits would occur if your intangibles do
>not increase and the rest of the economy is outpacing your technology.
Whereas if you would only spend money on capital, you would be
guaranteed to be making profits and increasing the value of your
company. That's what I said.
>You would lose market share and your profits would drop.
Profits don't depend on market share. They depend on keeping expenses
lower than revenue. A good way to increase market share is to be
willing to sell at a loss. That sounds profitable, doesn't it?
>Which is exactly what this equation says.
I can see very well what the equation says. I am identifying the fact
that what it says is nonsensical.
>Profits would only be negative if the
>loss on the return to intangibles was greater than the return to
>tangible capital. It is ((1-tax T) (i) (tangibles)) + (1- tax I)(i-g)
>(intangibles) so as long as the return on tangibles is greater than the
>loss on intangibles profits increase.
Regardless of the fact that firms are spending all their money on
assets that do not add to productivity, and are selling their products
at a loss in order to gain market share and thus profitability....
>Note again the growth trend is
>economy wide not firm level.
Correct. Which still means that profits can _only_ be negative if
total output is growing faster than the interest rate. Exactly as I
said, and you denied.
>>>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.
>>
>> Yes. In particular, the negative output growth of 1930-32 shows that,
>> according to the formula, profits must have been soaring....
>
>No there is no indication of that.
Yes, of course there is. It is mathematically inescapable.
>It depends on what happened to
>intangible assets. These can decrease are stay constant.
Unless firms spend money on them.
>The low growth
>rates meant higher returns on intangibles.
Despite reduced profits...
>However, lower investment
>would mean higher deprication and the return on capital dropping.
More gibberish.
>It also depends on the interest rate.
Real interest rates were at historic highs all three of those years.
>> Are you sure you have reported the contents of this paper accurately?
>> It makes the fumbles Vienneau identifies look like Nobel-quality work.
>
>I reported it correctly you misinterperted what it said.
No, I stated its exact meaning.
>Your interpertation does not follow from the profit equation.
Yes, in fact, it does.
>Why don't you read the paper and see if it is correct instead of
>commenting on something you haven't read.
I'm assuming you are reporting its contents accurately. Aren't you?
>>>They actually
>>>had few intangible assets.
>>
>> ROTFL!!! Compared to what, their tangible assets?
>
>They had little of an assets. There was no new technology involved.
Lie. Almost every prospectus I saw talked about owning, buying or
creating new technology.
>In fact tangible assets such as servers most likely far outweighed
>intangible assets such as ideas that would work.
The formula you reported says nothing about ideas having to _work_.
It says their value depends on their cost and the tax rate. Period.
Nothing else. That is _very_much_ the point. He claims that firms
were undervalued in 1929 because he is _assuming_ that all their
investments up to that time were profitable.
>>>The dot.com crash can be actually thought of
>>>failed R&D.
>>
>> Nonsense. It was a failed (and absurd) business model.
>
>Which means failed R&D.
Prescott assumes R&D cannot fail.
>I use this term loosely.
Not loosely enough to make Prescott's claims true.
>Not as just the type of
>R&D manufacturing uses but also the creation of ideas. The creation of
>the business model was a failed innovation. They spent time and effort
>on making the model and it added to the stock of knowledge. Granted very
>little in that this idea does not work but there were lessons future
>innovators can learn from this. Loosely defined this is failed
>innovation and research effort.
Which Prescott claims adds to asset value.
>>>The problem with the dot.com is
>>>the people believed the value of intangible assets was much higher than
>>>what it really was.
>>
>> And what of the assumption described above, that intangibles are worth
>> whatever was paid for them?
>
>No. It is not.
Then tell me what "resource cost" means, if it doesn't mean whatever
was paid for the resource.
>It is the return on these assets or what market value of
>the assets which is not what was paid for them.
At no point is market value mentioned in the formula.
>It was what the market
>values the return on the assets as.
At no point are market value or return on assets mentioned.
>This was unmeasurable so it had to
>treated as residual.
IOW, it was assumed to exist, even if it didn't.
>AGAIN RTFM.
ROTFL.
-- Roy L
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