Re: Edward Prescott, Idiot
royls_at_telus.net
Date: 10/31/04
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Date: Sun, 31 Oct 2004 18:20:24 GMT
On Sat, 30 Oct 2004 07:06:15 GMT, Igor <jjweatherby@houston.rr.com>
wrote:
>royls@telus.net wrote:
>
>> On Fri, 29 Oct 2004 01:39:29 GMT, Igor <jjweatherby@houston.rr.com>
>> wrote:
>>
>>>royls@telus.net wrote:
>>>
>>>>On Wed, 27 Oct 2004 20:33:56 GMT, Igor <jjweatherby@houston.rr.com>
>>>>wrote:
>>>>
>>>>>If you believe that mud pies have the
>>>>>same cost as apple pies because labor is paid is the same and they are
>>>>>made on the same land then anything seems idiotic.
>>>>
>>>><sigh> I can spend $1K to make apple pies, or mud pies. That makes
>>>>their resource costs identical. Their values are not identical. You
>>>>(and Prescott) stand refuted.
>>>
>>>No it does not make them the same.
>>
>> Yes, it does. $1K = $1K. I am not sure how you prevent yourself from
>> knowing such facts, but it is clear that you manage to do it somehow.
>
>1K of machines is not equal to one 1K of mud.
The resource cost is the same.
>You get a lot fewer
>machines and they are more productive.
The formula Prescott used says _nothing_ about productivity. It says
value comes from cost, whether there is any production or not.
Period.
>That is what real measures are
>used to isolate the effects of inflation. This puts the analysis is
>units not dollars. You forget that the price deflators on these goods
>will be different. So 1K of spending to buy a computer a year will not
>have the same real valuation of 1k spent on a truck last year.
Gibberish.
>>>How do you think that capital should
>>>be empirically measured.
>>
>> Depends on the purpose. In any case, book value is not the same as
>> ability to generate profits.
>
>Nice way to dodge the question. So you have no alternative to how the
>measure the stock we wish to get a return on.
Oh, _that's_ easy enough to measure: whatever was spent. But wishes
do not create value.
>>>That
>>>means you adjust for inflation to get a measure in real units. How do
>>>you suggest to do that other than add up investment( what was paid for
>>>the capital) and subtract depreciation.
>>
>> Market value would be better.
>
>How do you determine that if the goods are not being sold.
Honestly.
>A year old
>machine with wear and tear is not going to sell for the same price as a
>brand new machine.
Bingo. And pretending it will (even depreciated by the interest rate)
is just stupid.
>> Having paid $1K for something does not
>> make it worth $1K,
>
>Yes it does if you are using an objective value.
No, it doesn't if you are using an objective value, as the mud pies
_prove_.
>If the good sales for
>1K it is worth 1K.
Wrong. It _was_ worth $1K.
>Unless you are coming for a labor theory of value or
>some other archaic obfusicated theory of value which says sale price is
>not equal to the value.
_Current_ price is equal to the value. Not deflated purchase price.
>> and most certainly does not mean it will generate
>> equivalent profits.
>
>Why not?
Because people are fallible.
>The willingness to pay for the good is based on the
>producitivity the capital brings.
Nope. It's based on the _hoped_for_ return. Not the _actual_ return.
>Willingnes to sell is based on cost.
Nope. Expected return.
>The market will agree on a price that says Cost = Value or Price =
>expected discounted return on the good. Price determines the amount
>paid. Therefore resource cost, a fancy way of saying what was paid for
>it, will reflect the value to buyer and the cost to the seller.
Only at the time of the exchange.
>> Market value at least indicates a collective
>> judgment of the profit stream an asset can be expected to yield.
>
>How do you calculate this.
Not a priori, that's for sure.
>If you spent 1K buying the goods on the
>market then how can say that was not market value.
It _was_. That doesn't mean it _is_.
>Are you seriously
>saying that would try to estimate the resell price on every single piece
>of equiptment a firm given age, wear and tear, etc to estimate a stock.
>I hate to tell but that DATA DOES NOT EXIST.
Right. So Prescott just made some up.
>>>So how do you propose it
>>>should be measured?
>>
>> The problem with trying to measure capital for economic purposes is
>> that it is not homogenous, and different kinds of capital are not
>> commensurable except by converting them to money. So if you want to
>> estimate the value of capital, market liquidation value is probably
>> the closest you can get.
>
>How do you obtain that data when no firm keeps it?
By comparing actual liquidation proceeds of bankrupt firms with the
kind of notional accounting-entry asset values Prescott used.
>Book value may not be
>the best way. In fact it is rarely used.
I agree book value also has its problems.
-- Roy L
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