Geoscience Reference
In-Depth Information
be some uncertainty about the future (Knight
1934
). This implies that a general
dynamic economic equilibrium with uncertainty among decision makers requires
that
the rate of interest is kept above the rate of economic growth
. How much above
depends on the level and character of uncertainty.
5.6
Uncertainty and the Value of the Aggregate Stock
of Capital
Early capital theorists had in vain tried to develop a consistent method of aggre-
gation of the smallest units of durable goods into a consistent aggregate capital stock
(Hayek
1941
). Very often the starting point was the assumption that each little unit
of durable good would have to be valued at some given unit price. The unsolved (and
unsolvable) problem was how to determine the right micro level durable goods
prices to be used in the aggregation procedure.
Paradoxically, the problem of capital aggregation can be resolved, as soon as we
accept the necessary risk of all capital investments, organized into production units.
These risks are revealed in the pricing of firms in financial markets and especially in
the stock market. A firm, traded in the stock market, is essentially an already
aggregated value of all the different capital goods of the firm, including information
and knowledge capital in disembodied and embodied forms.
The theory of the stock market as a capital value determining machinery was
initially formulated by Markowitz (
1952
) and further developed by Modigliani and
Miller (M-M) (
1958
), Sharpe (
1964
), Lintner (
1965
), and Mossin (
1966
).
This modern financial market theory claims that the total equilibrium values of
capital of all traded firms is determined (as an average over some period of
observation) in the markets for securities and bonds, taking expected returns,
perceived risk (as a measure of uncertainty) and the real rate of interest into
consideration.
The generic claim is that the capital market is M-M-efficient, implying that the
total value of all capital allocation opportunities can be captured by the expected
return r(m) and the risk or standard deviation of returns (
(m)) for the market
portfolio of all traded instruments. The value of a firm
as an aggregate of material
and non-material capital
is determined in a similar way as a combination of
expected returns and risk.
The risk-free or deterministic capital value would give
ʲ
g.
Any other portfolio would imply a rate of returns (natural interest rate) higher than
the natural rate of growth.
From this follows the conclusion that the heterogeneous capital value,
aggregated by the firm and valued in the stock market, when divided by the scale
of production of the firm would generate the average durability of the capital,
invested in the firm.
ʲ
(0)
¼
0 with r(0)
¼
