From: Dan Fabulich (dfabulich@warpmail.net)
Date: Mon Sep 16 2002 - 18:24:28 MDT
gts wrote:
> Dan Fabulich wrote:
>
> >>> For example, you can't eat a hammer, either. But a hammer gives
> >>> you a capacity that would wouldn't have without it; you can make
> >>> money with a hammer without selling it. There is a value
> >>> in *owning* the hammer, even though it's not a utility value.
>
>
> >> I'm sorry but that's not correct. The "capacity" of earning
> >> money from a hammer cannot be separated from its utility as a hammer,
>
> >> as you do above.
>
> > By "cannot be separated", I should presume you mean "ought not be
> > separated"
>
> I mean that you cannot logically separate the property of a hammer that
> allows its owner to earn a living from the property of a hammer known as
> its "utility." The carpenter buys the hammer for its utility. It helps
> him drive nails. People then pay for the utility of the products of his
> labor.
allow me to connect this with what you say later:
> Regarding your reference to utilitarians above, it should be noted that
> utilitarianism is a philosophy or principle of ethics. The definition of
> utility from that philosophy does not necessarily coincide with that
> used by economists.
I think you're wrong that "utility" is only used in the sense in which
cakes and hammers have it. I think that there's another use of the word
"utility" which is *at least* used by utilitarians and, I think, also by
economists, to refer to the sort of thing that a person gets from eating a
cake but not (typically) from using a hammer. [There are obvious
irrelevant exceptions in the case of the hammer; hammers CAN be fun.]
But I can already hear you cry: "No, no! That's not how the economists
use the word 'utility'." I still maintain that you're wrong about that,
but I understand that it's not how *you* use it. ;) One point which
should now be obvious is that one CAN use different definitions for
different words.
So let me wade into this pointless semantic argument try to figure out how
*you* use it, partly because you've been so resistent to discuss this in
the terms I've offered, but also because, I think, you've actually got it
wrong.
If you think you use "utility" in the only way economists use it, then
you'll think that I'm arguing against the standard economic use of the
word "utility." But, in fact, I'm arguing that it's really *you* against
the rest of us economists *and* utilitarians on this point.
Before I do so, we can ask: is there any point? Are you *just right*
about your claims about the language of economics?
> > Let's show why your language is obfuscatory...
>
> This is not my language, Dan. It is the language of the science of
> economics.
That's rather fast of you; it's a rather fast argument from "authority,"
in fact. Aside from the fact that such arguments are bad mojo by their
very nature, *it's your very authority on this point that I'm
questioning*. :)
"Utility" isn't often flung around in financial circles, and we both know
it; it's a term used almost exclusively by theorists. Would it be so
crazy to imagine that you were using it incorrectly?
I hope I've at least managed to insert reasonable doubt in your mind that
"utility" isn't used that way, certainly not all of the time. If, after
reading this post, you go crack open one of your old textbooks to quote
something at me, I'll have considered this point well-taken.
By your definition of utility, cakes and hammers have utility, but stocks
don't. Stocks don't, you say, because they aren't ever kept-and-used or
consumed-and-used, but only used-when-sold. [Never have I been more
acutely aware of how much simpler this argument might be in German. It's
a pity that I don't know the language.] Only things which are
kept-and-used [e.g. books and hammers] or consumed-and-used [e.g. gasoline
and cakes] have utility by this definition.
I think this is how your use of "utility" works. Do speak up if I'm
wrong.
In this case, you make an analogy to currency. Currency, you argue, is
neither kept-and-used or consumed-and-used, but only used-when-sold.
Thus ...
> Stock certificates have no utility. Dividends have no utility. Proceeds
> from the sale of shares have no utility. Cold currency has no utility.
> (These things could of course be converted into assets with utility at
> the discretion of their owners, at which point our discussion would then
> move away from the market for financial assets that interests us.)
So, now we get to ask ourselves: are stocks just like currency? If so, as
we know, nearly-valueless paper can stand in for currency. Indeed,
*chewed gum certificates could stand in for currency*.
So there are two questions we could ask. The first question is: how are
chewed gum certificates different from currency? And the second question
is, how (if at all) are stocks different from currency?
Why is there an active market for currency but not chewed gum
certificates? Part of the answer is government fiat. But before fiat,
there were other bartered commodities that were apparently only
used-when-sold. Gold is the most obvious example, though its worth as a
status symbol and as a key ingredient for jewelry might suggest it has a
non-trivial kept-and-used utility.
Let's set aside the first question for the moment and consider only the
second question: How are stocks different from currency? One way in which
stocks differ from currency is in appreciation of value. Old gold is no
better than new gold, and old fiat currency does not accumulate value the
way that stocks do. (Instead, inflation makes individual dollars less and
less valuable as time goes on.) Why?
The answer is this: stocks appreciate in value because they are can not
only be used-when-sold, but can also be kept-and-used. What are they
kept-and-used for? Collecting a firm's profits, ordinarily through
dividends.
Of course, it's very difficult to agree on what a firm's profits will be
and whether the firm should re-invest its profits. Thus, a liquid market
for stocks makes it easier to reach unanimity. Those who want to reinvest
can keep the stock, or buy it if they don't have it; those who want the
amount of cash they expect to get can sell it to someone who does.
But the whole point of this liquid market for stocks is to get access to
that capacity to collect a firm's profits. Even if they are hardly ever
kept-and-used, the fact that they *could* be kept-and-used is what
explains why stock prices are tied to a firm's financial performance.
If stocks *were* just like currency, then we would expect neither to
appreciate in value (even if we could speculate on them).
I said that I'd come back to the question of currency and chewed gum.
Well, here's the answer: nothing that is actually sold is only
used-when-sold. Even currency. The utility of gold *cannot* be
overlooked in the context of a barter system: people trade gold so that
they can have gold. In the case of fiat currency, people *must* acquire
the fiat coin to pay taxes, and in turn are required by the government to
accept repayment of debts in the fiat coin. So, in the case of fiat, the
currency must be used to abide by the law and keep yourself out of jail.
So, how do we wrap this up in utility? You claim that currency has no
utility (it is neither kept-and-used nor consumed-and-used), and neither
do stocks. You are wrong about stocks; they can be kept-and-used to
collect firm profits, and this *explains* why capital appreciation
happens. You may be right about currency, (depending on whether you
consider "giving it to the gov't to avoid jail time" a consumption use,)
but if you are, then it's only because the gov't has required it to be
used in this way. You would not be right if you said that about gold, or
certificates backed by gold.
Tying it all back into the earlier conversation, if I ask "What's the
utility of stocks, that makes their value appreciate so?" the answer isn't
"firm's profits and capital appreciation", because the capital
appreciation is the explanandum, not the explanans. The answer, now, is
just "collecting profits." The ability to do this is the use of stocks.
> Your mistake here is in equating the simple *ownership* of a hammer to
> the *use* of a hammer. It is only through the *use* (utility) of a
> hammer that a carpenter earns his living. The passive ownership of a
> hammer does not give one access to the products of carpentry.
No, no. It's not my mistake; it's exactly my point. You can use stocks
to do something (besides selling them). If you couldn't use them for
anything, no one would want to buy them; they would not appreciate in
value, like currency and chewed gum certificates.
> The carpenter might just as well borrow his neighbor's hammer to do his
> work. His income would be the same.
He could also borrow a stock and make money, if he could collect dividends
with it successfully. If the stock were 100% control of the firm, then
the analogy between hammers and stock would be exact: he could borrow the
firm's stock, collect its profits for a year, then return the firm to its
owner.
If he didn't use the stock, if he didn't collect the firm profits, he'd
get nothing, just like the hammer.
> > [I'll charge that even the economists call the latter "capital"
>
> To the carpenter, the hammer is "capital equipment," which should not be
> confused with "investment capital." The word "capital" means only that
> the item appears on the "assets" side of the balance sheet.
You think I'm getting confused here, but, instead, I'm calling attention
to What Exactly Is It that they have in common.
> > But I don't care if you disagree with me about what "capital"
> > means. It's purely semantic; the argument would have no substance.
>
> Excuse me, but "capital" is the entire substance of the stockmarket.
> This thread is about the very machinery of "capital"-ism. If you don't
> care about the meaning of the word then I must wonder why you've had so
> much to say here. :-)
Yup. Because the question is "what's the point?" and it doesn't matter
what you call the intermediaries. It deeply doesn't matter if I'm right
about the definition of utility as economists use it; all that matters is
the truth or falsehood of the claims within a single language/definition
scheme.
> You must begin to make an important distinction between capital
> equipment and investment capital if you hope to speak sensibly about the
> economics of the stock market:
>
> 1) Capital equipment (e.g., hammers) have utility value but lack
> investment value.
> 2) Conversely, financial assets (e.g., stocks) have investment value but
> lack utility value.
>
> Business owners, including carpenters, do not "invest" in hammers or in
> other forms of capital equipment. Capital equipment is depreciated each
> year on the books until it is worn out and amounts to nothing.
>
> People with poor understanding of economics sometimes speak of
> "investing in new machinery," (e.g., "Honey, I think it's time we invest
> in a new dishwasher.", or "Hey boss, I think it's time we invest in a
> new computer network.") However in the science of economics such
> expenditures are not categorized as investments. Even business-owners
> sometimes make this mistake; fortunately for them their accountants know
> better than to categorize such capital expenditures as investments on
> the balance sheet.
<sarcasm> Ah, how foolish of them for trying to do RO"I" on that new
computer network. They'll never get a Return On "Investment" on a new
computer network, because it's not really an investment at all! It's a
good thing nobody uses the word that way, or they might get confused by
these pointless ROI proposals. Off to the wastebin they go! </sarcasm>
The only problem here is your refusal to adopt alternate definitions, even
when they'd be useful. "Investment" is obviously the right word for what
happens when you plonk down $X today for a network that will save you more
than $X down the road. It might be wrong to put it in the "investments"
column on an accountant's sheet, but that doesn't mean that it's the wrong
word for what's going on, or that one shouldn't think of these kinds of
expenditures as investments.
These people who do ROI analysis aren't talking nonsense, as you imply
when you say that I'd need to use your definitions "if you hope to speak
sensibly". They're using the right language for the right job.
So should you!
> > Stocks have this characteristic X of allowing you to acquire
> > more goods if you own them, that is also had by hammers
>
> No. Again, owning a hammer does not give you the ability to acquire more
> goods. To access more goods you must *act* with a hammer to perform some
> work or action.
These claims aren't contradictory. The ability to act with a hammer to
perform work which produces goods IS the ability to acquire more goods.
> Contrast the above with stocks, where passive ownership results in
> dividends or interest or capital gains which can be traded directly for
> real goods and services. No work or action is required. The benefits
> come entirely through ownership.
If the stock has no dividends, and I borrow it for a while and then return
it, I get nothing for my energy. But that's just because I didn't *use*
the stock to collect profits. On the other hand, if I DID use the stock,
then, like the hammer, I get to reap the rewards.
> As you can see, to compare capital equipment to financial assets, as you
> do, is to compare apples to oranges.
As I hope *you* can see, both apples and oranges are sweet fruit,
providing certain valuable nutrients; both are insufficient for a balanced
diet.
Similarly, hammers and stocks have an interesting property in common,
whatever you may wish to call that property, which explains a great deal
about stocks. I wish you could see that more clearly.
-Dan
-unless you love someone-
-nothing else makes any sense-
e.e. cummings
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