Land speculation and the top end of stock market do behave in a collectible way, with prices important and income less so.
Both exhibit positive feedback, rather than the negative feedback of the price mechanism. As do beer cans, and antiques, and baseball cards and van Gogh "Irises".
Yet, none of it matters to the economy and to us except the collectible characteristics of land.
I guess the stately homes are good examples of collecting if there has been such rigidity over a thousand years.
Harry
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Keith wrote:
Hi Harry,
At 09:16 24/01/02 -0800, you wrote:
(HP)
<<<<
You'll recall my discussion of a collectible market - the one that isn't
controlled by the price mechanism. (The price mechanism is the engine of
the free market, constantly bringing changes in supply/demand back to an
equilibrium.)
In a collectible market, when the price goes up, there is no rush to market
to supply the demand and return to equilibrium. In fact when the price goes
up, it encourages collectors to stay away from the market, which phenomenon
raises their determination to keep away from the market in expectation of
further increases.
In a collectible market income doesn't matter. Price is everything.
I pointed out that the land market is a collectible market - a major reason
for the land component being between 50% and 70& of the cost of housing.
However, the top end of the stock market also acts like a collectible
market, which is why we have a price/earnings ratio that's out of kilter,
causing some concern to market analysts.
>>>>
Yes, I agree. However, I wouldn't put share prices and land prices in quite
the same sort of collectible basket. At least, not in England anyway
where, by a variety of policies and legal devices (e.g. leaving one's
stately mansion "to the nation" -- but carrying on living in it!), the
overall pattern of land ownership has hardly changed in the last 1,000 years.
(HP)
<<<<
What happens in the market has little effect on the economy, though what
happens in the economy usually has considerable effect on the market.
One recalls what happened to the economy in the 80's during "the worst
stock market crash since the depression". The answer was nothing.
Whatever the ups and downs of the stock market, they don't matter (except
to the participants). The crucial question must be -- are the goods still
leaving the factories, or are they slowing and stopping?
>>>>
Yes, I agree again. Share prices are mainly an effect of the economy, not
the cause (at least, not an important one). I wasn't suggesting that there
is a "law" that says that p/e ratios must inherently revert to an average
of about 14 (or 7% return on capital). But, as I see it, a 7% return
corresponds to a 2-3% growth in productivity (that is, allowing for
taxation and intermediate financial inefficiencies) which seems to be the
maximum that is possible overall in any economy. Although, during a boom,
share prices are pushed up considerably by speculation and expectation of
very large profits, a growing proportion of stock market investment comes
from pension funds. These longer-term expectations are much more modest
than speculators'.
<<<<
I could add more to this but let me simply say that mostly the people who
"run" the economy haven't a clue why the economy behaves the way it does.
They really don't know why the economy has been in "boom" and they don't
know why the boom has faltered.
I will say that it has nothing to with the stock market, nothing basically
to do with the currencies or the banks (these react to an existing economic
condition) - but everything to do with why production slows and stops.
>>>>
As mentioned in my other posting today (reply to private FWer message) a
great deal of the present recession is a result of stock overhang (in this
case, optic fibre cable -- and also memory chips) which is more reminiscent
of the recessions immediately after WWII (and indeed, trade recessions of
the 19th century). But I don't have figures to justify this.
When Greenspan was talking of "exuberance" last year he was referring to
share speculation, but more fundamentally he should have referred to
investment exuberance -- both within the new high-tech industries, but also
within the "traditonal" industries of steel- and car-making where there is
still a considerable amount of surplus production capacity.
So when you say that politicians and economists haven't a clue as to how
the economy behaves, I would suggest that it's because they don't pay
enough attention to the actual physical over-investment that occurs during
boom times. This is not directly measurable at the time it is happening
(except by detailed and exhaustive surveys of the whole manufacturing
economy) and only shows up later. But even if it were immediately
measurable, it's doubtful that the corporations concerned would
individually modify their behaviour anyway for fear of losing market share
-- the "tragedy of the commons" and all that.
Keith Hudson
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Harry Pollard
Henry George School of LA
Box 655
Tujunga CA 91042
Tel: (818) 352-4141
Fax: (818) 353-2242
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