Ron -
...But to come out and claim that capital improvements in IT are faked or consist of "cooked numbers" is tantamount to declaring that building railroads or superhighways were white elephants which added nothing to productivity. The key to growing the economy in a reduced money supply state, is to increase the velocity of monetary transactions. You can either have bigger transactions that require months to complete, or grow your economy on the basis of lots of little ones which occur rapidly or facilitate more rapid completion of larger economic transactions.
If Boeing followed your hedonic interpretation of their 3D CAD aviation design software, and online maintenance library, they would have to expense this as a cost, rather than as an asset that continues to grant them increased productivity and reduction of future expenses. ...
I think you have made a number of very good points, but are overlooking what is the primary focus of a stock market investor, stock investment rates of return.
Every advance in productivity, production methods or new technology improves the overall standard of living. However, it is important to understand exactly what impact these advances have. For any given advance in productivity, its benefits include some or all of the following : increased producer profits, increased wages for labor, increased returns for other factors of production, or lower final consumer prices. The actual mix of benefits achieved is primarily determined by the intensity of competition in each of a number of markets, including but not limited to : capital, labor, factor and consumer markets.
For the stock market investor, his returns on investment will be determined by his price paid, the corporate profits earned and projected, and the value that the market assigns to those projected profits. The problem is that a given advance in productivity or technology that a given company may incorporate does NOT guarantee an increase in profits, especially if the company's competitors have access to the same advances. In this case it is often true that the majority of the benefits flow to the consumer in the form of lower prices driven by the intense competition between producers. In this case the advances must be seen not only as an expense, but as a real cost of survival in a competitive marketplace.
As an example, consider the semiconductor manufacturers who are continually forced to invest in new plants and equipment or go out of business. It is almost an accident when any commodity semiconductor maker is actually profitable for more than a few months at a time. On the other hand, it is the suppliers of the advanced semiconductor manufacturing equipment who are the ones who often collect the profits, (along with the final semiconductor customers who get lower prices), and even they are highly dependent on the health of their customer-hosts upon whom they effectively live as parasites.
To summarize, the mere fact of a continuing high level of productivity and technological advances does NOT provide a firm support for manufacturing profits and thereby, stock prices. To the extent that investors believe otherwise, they will bid stocks to unjustified levels, and this is further exaggerated if the growth and productivity numbers themselves are inflated.
Regards, Don |
