over-investment
Title: over-investment [was: RE: [PEN-L:30892] Re: PK's the man with the plan] - Original Message - From: Devine, James [Pen-l alumnus Brad deLong used to deny the possibility of over-investment, even though it's the subject of my Ph.D. dissertation! (UC-Berkeley Econ., 1981.) does he still do so?] Ian: I don't think so; he made some comments regarding the issue on his blog a week or two ago.. Can you find them? Brad's original argument, if I remember it correctly, against the Austrian and Schumpeterian versions of over-investment theory and in favor of a version of Keynesianism. The Austrian theory has usually been interpreted as saying that the policy response to a recession like those of 2001 or 1929-33 in the U.S. should be let nature take its course: eventually, the recession will purge the economy of the imbalances accumulated during the boom phase of the cycle, allowing recovery. In this view, active fiscal and/or monetary policy simply encourages the imbalances to persist or get worse. I haven't read all of what Brad says about this, but my (admittedly superficial) impression is that he doesn't analyze the Austrian or Schumpeterian perspectives in depth. Instead, he assumes that the current economics-profession orthodoxy is correct, which implies that over-investment theory is wrong. More importantly, he seems to generalize from a critique of the Austrian and Schumpeterian over-investment/recessionary purgation theories to reject _all_ theories that have this emphasis, including the Marxian and Keynes-Marxian ones. Of course, I may be missing one of his articles on this subject, so I may be misrepresenting his views. Daniel Davies writes: I believe that the politically correct point of view on this topic among the relevant crowd is that the economy as a whole cannot have over-investment, but that individual industries can. Quite how this squares with an aggregative view of capital I cannot say, but then I am not a theologian ... this seems to be a dynamic version of Say's Law: if there's over-investment in one sector, there must be under-investment in another. This is as valid as Say's Law was (or even less so). BTW, the standard textbook flexible accelerator model allows for over-investment. It says that net investment reflects the difference between the desired (aggregate) stock of capital goods and the actually-existing stock. If the desired stock is actually less than the actually-existing stock, then all of the standard stories of monetary policy or corporate take breaks stimulating investment fly out the window. Despite low interest rates, why invest if companies already have more than enough fixed capital? We have to wait for depreciation and the like to get the actually-existing stock back below the desired stock in order to get back to more normal investment behavior. My own view of the business cycle is a combination of over-investment theory and Keynes. In some eras, capitalism over-shoots relative to supply constraints (as in the late 1960s) so that there are cost constraints on the profit rate. In other eras, such as our current one, capitalism over-shoots relative to what's justified by consumer demand -- or consumers have to get into excessive debt to allow investment to continue. Either way, imbalances are created that keep the economy from snapping back and from responding quickly to monetary policy. Monetary policy may simply encourage unwise debt accumulation or continuation of an over-investment process or short-circuiting of the purgation process. The Keynesian component arises because over-investment can cross an invisible line that's not known until the owl of Minerva has flown the coop (i.e. until after the fact). The economy can spin into an underconsumption trap and/or Fisherian debt-deflation. In this situation, only fiscal policy can work. JD
Re: over-investment
Brad's critique of liquidationism -- The Austrian-Schumpeterian view of overinvestment -- is quite nice, but it does not preclude the possibility of overinvestment. If his view is what Jim says, that overinvestment can occur in individual industries but not in economy as a whole, then his theory would amount to a repetition of what David Ricardo said a few years ago. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: over-investment
In a message dated 10/4/02 9:15:08 AM Pacific Daylight Time, [EMAIL PROTECTED] writes: My own view of the business "cycle" is a combination of over-investment theory and Keynes. In some eras, capitalism over-shoots relative to supply constraints (as in the late 1960s) so that there are cost constraints on the profit rate. In other eras, such as our current one, capitalism over-shoots relative to what's justified by consumer demand -- or consumers have to get into excessive debt to allow investment to continue. Either way, imbalances are created that keep the economy from "snapping back" and from responding quickly to monetary policy. Monetary policy may simply encourage unwise debt accumulation or continuation of an over-investment process or short-circuiting of the purgation process. The commodity form is under attack. This is not a classical "general crisis of capital" but something different, contingent of a phase of history in transition to a new mode of production. There is no cure on the basis of monetary policy. Melvin P.
Re: over-investment
over-investment - Original Message - From: Devine, James Can you find them? == Give me a few and I'll fish 'em out. The Keynesian component arises because over-investment can cross an invisible line that's not known until the owl of Minerva has flown the coop (i.e. until after the fact). The economy can spin into an underconsumption trap and/or Fisherian debt-deflation. In this situation, only fiscal policy can work. JD === Well it's that time of year to be watching the earmarking process in Congress again..Bush has already gotten his military fiscalism package but I doubt that's going to be sufficient. washingtonpost.com Investors See Green in Government IT Sector Government Contractors Take Advantage of Tech Bust To Actively Court Wall Street By Cynthia L. Webb washingtonpost.com Staff Writer Friday, October 4, 2002; 12:00 AM Dendy Young, chairman and chief executive of GTSI Corp., used to have a tough time getting the investment community to notice his company. A year ago it was frankly difficult to get in and see people, said Young, whose Chantilly-based company resells computer software and hardware to local, state and federal government agencies. I would try and take trips to New York and I would get one or two appointments set up and it would be difficult to get others. But as the broader technology sector continues to flail, GTSI Corp. [GTSI] and other firms in the government contracting space are winning newfound respect from investors seeking out companies with real customers and cash flow. Nowadays if I go to New York, I'm making five six calls a day, Young said. Market analysts are taking note of the expected flood of information technology spending by the federal government. According to FSI, an IT market research firm in McLean, roughly $52.5 billion of President Bush's proposed fiscal year 2003 budget is slated for IT-related systems and services. That is an increase from $44.9 billion pegged in the budget submitted for fiscal year 2002. Higher government spending on technology was prompted in part by the Sept. 11 terrorist attacks. A good deal of that money is expected to be spent on cybersecurity efforts and high-tech weapons and the systems that make them work. Moreover, the government's war on terrorism is requiring bureaucrats to link diverse computer systems -- from the CIA and Defense Department to the Customs Service and newly formed Transportation Security Administration -- to better share information and mine data. Investment experts know the government will turn to private firms to carry out many of these tasks. And with so much work potentially available to the sector, the stock performances and bottom lines of defense and IT services firms servicing the government have shown promise. Case in point: Two years ago, GTSI's shares were trading in the $3 range. A year ago, the stock was trading at below $6.50 and it has climbed to the $8 to $9 range recently. GTSI logged nearly $784 million in revenue last year -- almost a 16 percent hike from 2000. The company has been profitable year-over-year since 1998, and it has seen its employee roster grow from 574 workers in 2000 to 671 today. The government sector was not a golden child to Wall Street for a number of years, said Marylourdes Petty, who heads GTSI's investor relations. Founded in 1983, GTSI went public in 1991, but its name is just now getting more traction. [S]uddenly we are the golden children, Petty said. It doesn't hurt, however, that GTSI has ramped up its investor and public relations efforts. Three years ago, the company didn't even have an investor relation's department. The company started making a concerted effort to woo big investors about two years ago, Young said. His schedule is now filled with meetings to pitch investment clubs, the National Stockbroker's Association and analysts. Even larger players in government contracting circles have put a premium on courting Wall Street. American Management Systems Inc. [AMSY] of Fairfax, for example, has increased its focus on investor relations as part of the information technology consulting company's recent management changes, said spokeswoman Anne Burt. Outreach is more active in both directions between the investment community and contractors, said Doug Coffey, vice president of communications of Arlington-based United Defense [UDI], a producer of combat equipment and precision munitions. We are certainly answering more of their questions and there are more calls coming in, Coffey said. IPOs Evidence of Sector's Strength Since last December, five Washington-area IT services companies have gone public, according to New York-based IPO.com. United Defense went public in December 2001, the only IPO in the industry last year, followed quickly this year by Anteon International Corp. [ANT], SRA International Inc. [SRX], Veridian Corp. [VNX] and ManTech International Corp. [MANT] Outside the region
Re: Re: over-investment
- Original Message - From: Ian Murray [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Friday, October 04, 2002 12:19 PM Subject: [PEN-L:30906] Re: over-investment over-investment - Original Message - From: Devine, James Can you find them? == Give me a few and I'll fish 'em out. http://www.j-bradford-delong.net/movable_type/archives/000802.html
Re: over-investment
mutual funds. maggie coleman Jim Devine wrote: [was: Re: [PEN-L:12757] Re: Re: Re: Re: re: unemployment rate] The story below describes the kind of over-investment process that I theorized in my 1981 Ph.D. dissertation (another unpublished ms.) as does the over-investment in movie theaters in recent years. In my dissertation, I described not only the microeconomic cases of individual markets but also how the individual markets interact with -- and reinforce -- each other as part of a macroeconomic over-investment process. Does anyone know of any other industries besides telecom and movies that underwent over-investment during the late 1990s and 2000? a key issue is what limits exist that cause over-investment to eventually collapse. In the business cycles of the 1950s until the 1970s, there's some evidence that it was supply-side effects, including wages rising relative to productivity and raw materials prices rising. My impression is that the late-90s boom was more a matter of investment getting out of line with non-debt-driven consumer spending, as I hypothesize happened in the late 1920s. Labor costs rose in the late 1990s, but not enough to put a serious squeeze on profits. Michael Perelman wrote: Elstrom, Peter. 2001. Telecom Meltdown. Business Week (23 April): pp. 100-10. 105: The model for how to make a fortune in the new world of telecom was set by one oft-forgotten telephone company: MFS Communications Co. Led by James Q. Crowe, MFS laid telephone lines around major cities that would allow long-distance companies to bypass the Baby Bells. By the time the Reform Act passed in 1996, MFS had networks in most of the big cities in the U.S., and WorldCom agreed to buy the company for a staggering $14 billion, only slightly less than what SBC had paid for Baby Bell Pacific Telesis Group earlier that year. What WorldCom was paying for was not an operating business but strategic assets that would save it hundreds of millions of dollars it otherwise would have paid the Bells to deliver calls. The figure that stuck out for every would-be telecom entrepreneur was that WorldCom paid more than six times the value of the assets MFS had put in the ground. 105: The math was simple. You didn't need to build a business. You just needed to raise money, put telephone lines in the ground, and you could make a bundle. Some giant would pay you a multiple of every dollar you invested. The MFS model seemed to work for the next couple of years. In 1997, WorldCom bought another competitive upstart called Brooks Fiber for about $7 billion, or nine times the company's assets in the ground--the property, plant, and equipment. 105: When Net mania hit in the late 1990s and data traffic started doubling every few months, the telecom buildout became a free-for-all. Companies such as XO Communications (XOXO) and Focal Communications (FCOM) sprang up to build local telephone networks throughout the U.S. RSL Communications (RSLCF) and Viatel Inc. (VYTL) started building telecom systems in Europe. Global Crossing (GX), Flag Telecom (FTHL), and others started stringing fiber-optic cables through the world's oceans to carry the booming data and voice traffic. At the same time, megacarriers were investing heavily: WorldCom, for example, was building its own metropolitan phone networks from Stockholm to Madrid. All told, telecom players worldwide have raised $650 billion in debt and equity since 1996, according to Thomson Financial Securities Data. 105: In their rush, many execs built less-than-steady foundations for their companies. Rather than sell stock, they found the quickest way to get capital was to issue junk bonds. It was high-yield heroin, says Royce J. Holland, former president of MFS and now CEO of Allegiance Telecom Inc. (ALGX), which provides voice and data services to businesses. You didn't need to do a road show with investors. You just had a conference call and you could get a few hundred million bucks. While having debt equal to a company's equity value is reasonably healthy, telecom upstarts took on debt that was 5, 10, or even 20 times their equity. They figured the more they could invest, the higher the price a giant would pay for their company. 105-8 [sic]: Last year, the signs of trouble began. With so many networks being built on both sides of the Atlantic, prices started to tumble. Howard Jonas, CEO of international phone company IDT Corp. (IDT), estimates that an STM-1 -- a phone line that can carry 576 conversations at once -- between the U.S. and Britain costs $1.8 million today, down 85% frrom $12 million in 1999. Prices have gone through the floor, says Jonas. Why? The economics of telecom are very similar to those for the railroad industry: Once you sink the money into the ground, it costs almost nothing to provide the service. If there's a glut
over-investment
Michael P. wrote: Movie theaters are an interesting example. The new ones had better features, so the old ones had to rennovate. The new ones expected to be able to capture the market, which everyone had overestimated. -- Screens need silver lining Due to an excess of theatres, many cinema chains are being threatened with bankruptcy Norma Cohen, Financial Times, Jun 01 2001 00:00:00 Kevin Nunnink, chairman of property consultancy Integra Realty Resources, thought it incredible that the cinema industry went on a five-to seven-year building binge. It's almost incredible that nobody ever thought through the implications, he said Given the swingeing losses caused by over-lending to real estate in the late 1980's, surely financiers would have been cautious about this property type as well. Evidently not, the data suggest. Currently, there are 15 US cinema chains seeking protection from creditors under the US bankruptcy code - including eight of the 10 largest operators - while others are teetering on the brink. So far, an estimated 4,600 of the US's 37,100 theatres have been closed and far more are slated to go. In Europe, where many US cinema operators have tried to establish a beach head, the problems are far less severe. Nevertheless, there are signs that Europe is not immune. Screen Digest, a magazine that tracks the film industry, notes that as of last September, the UK had become the highest earning cinema market in Europe. However, the strong growth in cinema openings has undermined sales per screen, with the average falling below £50,000 in 2000 for the first time since 1984. Tom Chandos, a non-executive director at Cine-UK and a non-executive at shopping centres specialists Capital Regional - host to a number of cinema operators - says that expansion of cinemas in the UK has been aided by the way they affect the economics of shopping centres. If you can get night-time footfall, he says, it can transform the economics for food operators. With food operators in situ, shoppers view the centre as more of a leisure destination rather than a mere convenience centre. And cinemas, combined with the right food offering, allow shopping centres to work 18 hours out of every day, rather than just 12. However, too many retail operators have had the same idea at the same time, and because UK planners tend to view state-of-the-art cinemas as a kind of social service provision, planning permission for new schemes with cinemas has been relatively easier to come by, Mr Chandos says. However, Mr Chandos says the overbuilding is nowhere near that of the US where the industry is in turmoil. In the US, that industry has hit the buffers some time ago, he notes. The bankruptcy filings are the aftershocks. But it is the bankruptcy filings that are finally dumping the woes of the cinema industry into the laps of landlords. For with bankruptcy comes the opportunity for cinema operators to extract themselves from unprofitable leases, leaving landlords with large, empty space at regional malls that cannot easily be converted to other uses. So pressing is the issue of cinema operators, that a panel was devoted to a discussion of how mall operators are coping in the present environment. Nuclear winter, was how one participant characterised the state of the US's cinema theatre industry, telling his audience that conditions are likely to remain that way for several years to come. What has happened in the US, in short, is that movie theatre chains have been on a loan-induced development spree that has helped the number of screens grow by 58 per cent. And while movie-going has risen, it has not risen nearly enough to accommodate all that extra capacity. At the heart of the problem lies the modern megaplex, the movie theatre large enough to accommodate 15, 20 or even 30 screens at a time. And it does so in auditoriums with state-of-the-art seating, sound systems and environmental control. Mr Nunnink says that lenders are partly to blame for the overbuilding in the nation's cinema industry. Recalling the discussion panel on cinema operators, Mr Nunnink says that one participant asked the audience - packed with leading developers and financiers - how many had ever asked for, or been asked for, a feasibility study for the opening of a new site. Not one person had, he recalls. Lenders, he said, provided loans against the balance sheet of the theatre operators, and did not consider the specifics of whether the new site was viable. Anecdotal evidence, he says, suggests that lenders are now shutting the barn door with a vengeance. Mall operators seeking to finance their purchases are given little or no credit for the income generated by the cinema on the site, he says. A mall yielding 11 per cent, for example, will have the percentage of space occupied by the cinema treated as though the yield were 15 per cent - meaning its capital value is reduced - and that is for a healthy cinema. For malls
Re: over-investment
Date: Tue, 05 Jun 2001 09:04:41 -0700 From: Jim Devine [EMAIL PROTECTED] a key issue is what limits exist that cause over-investment to eventually collapse. Jim, here's a poli-econ answer from this neighbourhood. The case of Zimbabwe, a land-locked and historically ISI-oriented little economy, includes extreme bouts of overinvestment, dating back a century or so, in a highly-protected Dep't 2 (and to some extent Dep't 1 due to very heavy, capital-intensive mining operations). I did a PhD on the ebb and flow of overaccumulated capital (1900s, 1920s, 1950s, 1970s, 1990s) into spatial and temporal fixes like the built environment, financial speculation and so on. (David Harvey was my supervisor.) The Zim case showed me a) a very meaningful proxy for overaccumulation in the productive sectors was the ratio of inventories (stocks) to output (once that ratio-signal rose to 150% of normal, it virtually guaranteed an investment strike); b) the displacement of overaccumulation into other investment outlets created all sorts of tensions that really only got resolved through the actions of various political blocs and the state (using, for example, extremely sophisticated kinds of fin-capital/trade regulation and directed investment); and c) even the heaviest-handed financial regulation couldn't prevent periodic (Kuznetsian) real estate and financial crashes, in approximately 15-30 year cycles. Once political blocs -- mainly associated with different fractions of capital -- realigned as a result of the economic tensions, the deadwood was invariably cleared away and a new round of accumulation could begin. The story is complicated by scale politics (Zimbabwe's periodic insertion and delinking from int'l circuits of K) but the data are pretty consistent and the political story holds up fairly well, I'd argue, even over traumatic incidents like the 1900s mineral-speculation crash, the 1930s Depression-related ISI upturn, the 1950s FDI boom, the mid-1960s Rhodesian Unilateral Declaration of Independence, the 1970s guerrilla war, the 1980s alleged turn to socialism, the 1990s neoliberal reversion, and the post-1997 zigzagging associated with the nationalist rulers' exhaustion and desperation. So I talk in this thesis about uneven development of sector, space and scale, and how each gets amplified by rising financial circuitry in relation to productive circuitry... Does that make sense? Similar story in SA but of course much more complicated...
Re: Re: over-investment
yes, this makes sense. Of course, over-investment in a dependent country such as Zimbabwe would be manifested differently than in the U.S. (though the latter is slowly becoming a dependent country itself). At 09:09 AM 6/6/01 +, you wrote: Date: Tue, 05 Jun 2001 09:04:41 -0700 From: Jim Devine [EMAIL PROTECTED] a key issue is what limits exist that cause over-investment to eventually collapse. Jim, here's a poli-econ answer from this neighbourhood. The case of Zimbabwe, a land-locked and historically ISI-oriented little economy, includes extreme bouts of overinvestment, dating back a century or so, in a highly-protected Dep't 2 (and to some extent Dep't 1 due to very heavy, capital-intensive mining operations). I did a PhD on the ebb and flow of overaccumulated capital (1900s, 1920s, 1950s, 1970s, 1990s) into spatial and temporal fixes like the built environment, financial speculation and so on. (David Harvey was my supervisor.) The Zim case showed me a) a very meaningful proxy for overaccumulation in the productive sectors was the ratio of inventories (stocks) to output (once that ratio-signal rose to 150% of normal, it virtually guaranteed an investment strike); b) the displacement of overaccumulation into other investment outlets created all sorts of tensions that really only got resolved through the actions of various political blocs and the state (using, for example, extremely sophisticated kinds of fin-capital/trade regulation and directed investment); and c) even the heaviest-handed financial regulation couldn't prevent periodic (Kuznetsian) real estate and financial crashes, in approximately 15-30 year cycles. Once political blocs -- mainly associated with different fractions of capital -- realigned as a result of the economic tensions, the deadwood was invariably cleared away and a new round of accumulation could begin. The story is complicated by scale politics (Zimbabwe's periodic insertion and delinking from int'l circuits of K) but the data are pretty consistent and the political story holds up fairly well, I'd argue, even over traumatic incidents like the 1900s mineral-speculation crash, the 1930s Depression-related ISI upturn, the 1950s FDI boom, the mid-1960s Rhodesian Unilateral Declaration of Independence, the 1970s guerrilla war, the 1980s alleged turn to socialism, the 1990s neoliberal reversion, and the post-1997 zigzagging associated with the nationalist rulers' exhaustion and desperation. So I talk in this thesis about uneven development of sector, space and scale, and how each gets amplified by rising financial circuitry in relation to productive circuitry... Does that make sense? Similar story in SA but of course much more complicated... Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
over-investment
[was: Re: [PEN-L:12757] Re: Re: Re: Re: re: unemployment rate] The story below describes the kind of over-investment process that I theorized in my 1981 Ph.D. dissertation (another unpublished ms.) as does the over-investment in movie theaters in recent years. In my dissertation, I described not only the microeconomic cases of individual markets but also how the individual markets interact with -- and reinforce -- each other as part of a macroeconomic over-investment process. Does anyone know of any other industries besides telecom and movies that underwent over-investment during the late 1990s and 2000? a key issue is what limits exist that cause over-investment to eventually collapse. In the business cycles of the 1950s until the 1970s, there's some evidence that it was supply-side effects, including wages rising relative to productivity and raw materials prices rising. My impression is that the late-90s boom was more a matter of investment getting out of line with non-debt-driven consumer spending, as I hypothesize happened in the late 1920s. Labor costs rose in the late 1990s, but not enough to put a serious squeeze on profits. Michael Perelman wrote: Elstrom, Peter. 2001. Telecom Meltdown. Business Week (23 April): pp. 100-10. 105: The model for how to make a fortune in the new world of telecom was set by one oft-forgotten telephone company: MFS Communications Co. Led by James Q. Crowe, MFS laid telephone lines around major cities that would allow long-distance companies to bypass the Baby Bells. By the time the Reform Act passed in 1996, MFS had networks in most of the big cities in the U.S., and WorldCom agreed to buy the company for a staggering $14 billion, only slightly less than what SBC had paid for Baby Bell Pacific Telesis Group earlier that year. What WorldCom was paying for was not an operating business but strategic assets that would save it hundreds of millions of dollars it otherwise would have paid the Bells to deliver calls. The figure that stuck out for every would-be telecom entrepreneur was that WorldCom paid more than six times the value of the assets MFS had put in the ground. 105: The math was simple. You didn't need to build a business. You just needed to raise money, put telephone lines in the ground, and you could make a bundle. Some giant would pay you a multiple of every dollar you invested. The MFS model seemed to work for the next couple of years. In 1997, WorldCom bought another competitive upstart called Brooks Fiber for about $7 billion, or nine times the company's assets in the ground--the property, plant, and equipment. 105: When Net mania hit in the late 1990s and data traffic started doubling every few months, the telecom buildout became a free-for-all. Companies such as XO Communications (XOXO) and Focal Communications (FCOM) sprang up to build local telephone networks throughout the U.S. RSL Communications (RSLCF) and Viatel Inc. (VYTL) started building telecom systems in Europe. Global Crossing (GX), Flag Telecom (FTHL), and others started stringing fiber-optic cables through the world's oceans to carry the booming data and voice traffic. At the same time, megacarriers were investing heavily: WorldCom, for example, was building its own metropolitan phone networks from Stockholm to Madrid. All told, telecom players worldwide have raised $650 billion in debt and equity since 1996, according to Thomson Financial Securities Data. 105: In their rush, many execs built less-than-steady foundations for their companies. Rather than sell stock, they found the quickest way to get capital was to issue junk bonds. It was high-yield heroin, says Royce J. Holland, former president of MFS and now CEO of Allegiance Telecom Inc. (ALGX), which provides voice and data services to businesses. You didn't need to do a road show with investors. You just had a conference call and you could get a few hundred million bucks. While having debt equal to a company's equity value is reasonably healthy, telecom upstarts took on debt that was 5, 10, or even 20 times their equity. They figured the more they could invest, the higher the price a giant would pay for their company. 105-8 [sic]: Last year, the signs of trouble began. With so many networks being built on both sides of the Atlantic, prices started to tumble. Howard Jonas, CEO of international phone company IDT Corp. (IDT), estimates that an STM-1 -- a phone line that can carry 576 conversations at once -- between the U.S. and Britain costs $1.8 million today, down 85% frrom $12 million in 1999. Prices have gone through the floor, says Jonas. Why? The economics of telecom are very similar to those for the railroad industry: Once you sink the money into the ground, it costs almost nothing to provide the service. If there's a glut, it's going to be brutal, says the University of Chicago's
Re: over-investment
Movie theaters are an interesting example. The new ones had better features, so the old ones had to rennovate. The new ones expected to be able to capture the market, which everyone had overestimated. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: Re: Re: over-investment
that doesn't change anything: the competitive capitalist investment process inevitably produces crises. The companies have to provide attractive theaters, movies that people want to see, etc., if they want people to spend money at the concession stands (where they paid captive audience monopoly prices). -- Jim Devine I wasn't trying to score a theoretical point. Just trying to provide some interesting empirical background. I am heavily into facts. Louis Proyect Marxism mailing list: http://www.marxmail.org/
over-investment
This afternoon, on US National Public Radio, there was an interesting story about the process of over-investment in movie screens in the US. The movie theater chains were all competing to introduce multiplexes into the many local markets. They introduced such innovations as drink holders and stacked seating so that no-one could block anyone's view, threatening to drive established theaters out of business. Many of the latter were in turn forced to invest in similar improvements (in fear of going under). In the end, there are many too many movie screens available (given the market) and the rate of profit fell. I'm interpolating on the latter, since NPR didn't provide statistics, but such large chains as Loewe's Cineplex have declared bankruptcy. It looks as if one third of the screens in the US will have to be shut down -- a major shake-out -- to allow the achievement of normal profits. Anyway, this seems like a classic example of a Marxian story of over-accumulation on a microeconomic (industry) level. I'm sure that the desperate movie chains, now that they've fouled their own nest, will try to get their employees to suffer the cost. Or they'll continue the trend toward importing popcorn from Indonesia (or at least that's the way it tastes) or follow Yahoo! into the porn trade. -- Jim Devine - This message was sent using Panda Mail. Check your regular email account away from home free! http://bstar.net/panda/
Re: over-investment
This afternoon, on US National Public Radio, there was an interesting story about the process of over-investment in movie screens in the US. The movie theater chains were all competing to introduce multiplexes into the many local markets. They introduced such innovations as drink holders and stacked seating so that no-one could block anyone's view, threatening to drive established theaters out of business. -- Jim Devine Keep in mind that the profits of the movie industry come almost exclusively from concession rather than ticket sales. For a fascinating study of Hollywood economics, see Wall Street Journal reporter Julie Salamon's "Devil's Candy" about the Brian DiPalma fiasco "Bonfire of the Vanities". Louis Proyect Marxism mailing list: http://www.marxmail.org/
Re: Re: over-investment
I wrote:This afternoon, on US National Public Radio, there was an interesting story about the process of over-investment in movie screens in the US. The movie theater chains were all competing to introduce multiplexes into the many local markets. They introduced such innovations as drink holders and stacked seating so that no-one could block anyone's view, threatening to drive established theaters out of business. Louis writes: Keep in mind that the profits of the movie industry come almost exclusively from concession rather than ticket sales. that doesn't change anything: the competitive capitalist investment process inevitably produces crises. The companies have to provide attractive theaters, movies that people want to see, etc., if they want people to spend money at the concession stands (where they paid captive audience monopoly prices). -- Jim Devine - This message was sent using Panda Mail. Check your regular email account away from home free! http://bstar.net/panda/
over-investment
[was: Re: [PEN-L:7101] Re: Predicting 9 of the last 3 recessions] It's notable that Zarnowitz's theory and empirical observations -- which (except for that "natural" bit) are consistent with not only a lot of the pre-Keynesian mainstream and "Austrian" theory summarized in Gottfried Haberler's survey but also some versions of Marxian crisis theory -- conflict with the assertions of pen-l's Brad deLong, who rejects the phenomenon of over-investment. It would be interesting to hear Brad's critique of Zarnowitz. Victor Zarnowitz, a longtime student of the business cycle, said much of the problem was that forecasters had become prisoners of an economic ideology that assumed too much rationality on the part of the economic players or factors. . Thus, they spend too much time looking for recession indicators in official economic data, which often arrive too late to be of any use in forecasting, and not enough at the anecdotal evidence around them. . Mr. Zarnowitz starts from the assumption that there are natural ups and downs to the economy, dictated by the ability of businesses to find good things in which to invest. . At the end of a recession and at the beginning of a new expansion, there are plenty of low-risk, high-payoff opportunities and a rush of new investments, sparking a cycle of higher profits and greater investment that feeds on itself and pushes the economy higher. . At some point, however, the supply of "good" investments diminishes, Mr. Zarnowitz said. Businesses and investors then become overconfident and start paying too much for assets, assuming risks that are too great and taking on too much debt. . [Starting with about the same model of the U.S. economy as Mr. Zarnowitz lays out, Mr. [Edward] Leamer last year went looking for conditions that appeared to be uniquely present at the end of expansions. . In each case, he found that investment spending was growing faster than profit. ...] . Finally, a tipping point is reached, and overconfidence gives way to an equally excessive pessimism, leading the economy to unwind quickly. . After a recession cleanses the economy of its excesses and imbalances, growth resumes. . On casual observation, this theory of investment booms and busts squares nicely with the run-up in the stock market that preceded the 1973 recession and the real-estate boom and bust before the 1990-91 recession. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
