I don’t quite understand the relevance of the stocks/flows distinction. Since capital is “economic potential energy”, isn’t the stock merely a discounted sum of flows? I.e net present value
Discussion
ooo that’s a super fun question. so the main different is the dimensionality: economics stocks have the dimension of $, whereas flows have the dimension $/t.
this is academic in some senses, but the point I am getting at in the piece is to properly understand *time and causation*. the flows can only happen because they are created by stocks, and you need the stocks first. once you have them, the flows play out over time, and allow you to replenish the stocks.
this is the gist of the “economic potential energy” metaphor: the stocks can be transformed into something more useful or even consumable, but it takes purposeful action and time to get there.
in terms of valuation, yeah it’s probably best to use NPV, but I’d argue it’s better still to just admit you don’t know. if you bake in “uncertainty” as another foundational concept, you realise you can’t possibly know what these future flows are going to be.
rounding off your question, though, this presents a super interesting contrast in terms of the dimensionality: if the argument is you want to sum up a bunch of flows, then yes, that forces the stock to be “worth” an amount with dimension $/t. but then that kinda has to be the case because you aren’t actually *getting* this value now. it doesn’t exist in any tangible form. you are getting it over the period of time you discount over. whereas if you say “I don’t know” (as I recommend) you mark it at book value ($) and move on.
Fascinating, i think i understand now. But correct me if I’m missing something.
The stock of capital goods as “economic potential energy” may be *priced* in terms of future discounted flows - if you knew them for certain - but since you don’t, you go by book value as the best possible appraisal. This of course needs a sound money to be in place so that the competitive bidding process can accurately reflect this potential, the idea being that through a weeding-out, tâttonement process, rational expectations ought to prevail. However, although *value* is derived/imputed from the future, those future flows only come about *physically* through a causal transformation of the capital goods. Thus causally, it is best to think of the stocks primarily existing (physically) and being transformed into consumable value through entrepreneurial action, while also needing to be replenished by the same.
Fascinating, i think i understand now. But correct me if I’m missing something.
The stock of capital goods as “economic potential energy” may be *priced* in terms of future discounted flows - if you knew them for certain - but since you don’t, you go by book value as the best possible appraisal. This of course needs a sound money to be in place so that the competitive bidding process can accurately reflect this potential, the idea being that through a weeding-out, tâttonement process, rational expectations ought to prevail. However, although *value* is derived/imputed from the future, those future flows only come about *physically* through a causal transformation of the capital goods. Thus causally, it is best to think of the stocks primarily existing (physically) and being transformed into consumable value through entrepreneurial action, while also needing to be replenished by the same.
Fascinating, i think i understand now. But correct me if I’m missing something.
The stock of capital goods as “economic potential energy” may be *priced* in terms of future discounted flows - if you knew them for certain - but since you don’t, you go by book value as the best possible appraisal. This of course needs a sound money to be in place so that the competitive bidding process can accurately reflect this potential, the idea being that through a weeding-out, tâttonement process, rational expectations ought to prevail. However, although *value* is derived/imputed from the future, those future flows only come about *physically* through a causal transformation of the capital goods. Thus causally, it is best to think of the stocks primarily existing (physically) and being transformed into consumable value through entrepreneurial action, while also needing to be replenished by the same.
looks good to me!