We Have No Idea What Our Capital is Worth
That headline makes quite a statement. But it’s true. The stock of so-called “financial capital,” or wealth — all the financial assets out there, which are ultimately claims on real capital — represents only the most tenuous long-term approximation of what our real capital is worth.
Certainly true: the stock (total dollar value) of “financial capital” goes up (in fits, starts, and reverses) over the decades as real capital is accumulated. But beyond that rough, big-picture relationship, the total value of financial assets tells us very little about the total value of real assets.
1. The value of real capital is purely a function of its power to to deliver future consumables (through consumption of inventories and creation of new consumables — including, notably, “housing services”). To specify the value of our capital — designated, necessarily, in dollars — we must predict the value of its future output, designated, necessarily, in inflation-adjusted dollars — with all the necessary uncertainties of predicted “hedonic adjustment” that are involved in inflation and “real-value” projections. We must also predict how quickly that capital will be consumed — through use, decay, obsolescence, and yes, death and illness.
So even our estimates of the value (dollar or “real”) of tangible assets like office- and apartment-buildings are radically uncertain. Really: what will be the “value” of living in a typical American condo 20 years from now? To what extent will the market’s dollar denomination of that value (indicated, by, say, the going rent 20 years from now) be determined by shifts in rent-to-own ratios, household formation rates, mortgage interest rates, the strength of and optimism for the American economy, (changes in) America’s and China’s current-account balances, etc? We can somewhat arbitrarily predict discount rates, growth rates, etc. etc., but a tiny change in any one of those can radically alter our dollar-designated estimate of current real asset values.
2. Not all our real capital is “capitalized,” financialized. Not nearly. The national accounts provide rough tallies of the value of “fixed” capital — hardware, software, and structures — based on what was spent to create them and market revaluations after creation. And there have been important national accounting changes in recent years attempting to tally the value of intangible but very real assets like patents (very roughly: our knowledge), brands, and the like. But very little of our stock of plumbers’ or scientists’ knowledge and skill, for instance, is formally financialized, much less mothers’ knowledge and skill. (A notable exception: The rise in student-loan debt represents a rough capitalization, financialization, of some portion of those students’ acquired knowledge and future abilities to produce stuff.)
We possess those very real assets; they exist and are arguably the most valuable capital we have. The knowledge represented in patents has real, productive value. But there’s no way to measure or count most of those assets with any accuracy — or often, at all.
Now you could certainly say that the value of financial assets (including deeds) is the best estimate we have of the value of our real assets. And you could say even more accurately say that long-term changes in the stock of financial assets are the best indicators we have of changes in the accumulation of real assets.
But even that, you just can’t know. How much of the change in the stock of financial assets over any period represents, results from:
• Accumulation of real assets?
• More widespread financialization of real assets (read: indebting), assets which had never been financialized before?
• Investors’ greater or lesser optimism and projections of our future productive capacity — their changing beliefs about the true value of the real assets underlying financial-asset values?
You can, on the other hand, make very solid assertions about the accumulated stock of wealth measured in dollars at market values (generally: bonds/cash plus equity — company stock plus homeowners’ equity) — the outstanding claims on all those real assets, whatever the value of those real assets might be.
Which is why — I’ll say it again — Piketty should have called it Wealth in the 21st Century. Just sayin’.
Cross-posted at Angry Bear.