Last week we began examining the claims made by a prominent “distributist economist,” whom we have been calling “Tom Steele,” as communicated through his associate, “Joe Wide.” We discovered that a number of assertions advanced by Wide and Steele regarding Employee Stock Ownership Plans (ESOPs) simply did not fit the facts.
We are now prepared to look at Wide And Steele’s principal errors regarding standard financial analysis. Today we will look at their assumption regarding the certainty of future cash flows (Error One), and that there exists an objective, ideal price for everything — or anything (Error Two).
Error Number One
|No one knows future cash flows. It's only a guess, an opinion.|
Wide and Steele assume as a given that if a buyer makes a projection of future cash flows, the future cash flows will always be exactly that, no more, no less. Wide and Steele are demanding absolute certainty of the future, when nobody can even establish absolute certainty about the past or present — just listen to different accounts of the same event five minutes later.
Wide and Steele are wrong in their assumption because the level of certainty their assumption requires does not and cannot exist. A projection of future cash flows is an estimate. Future cash flows will be what they will be. The best we can do in the present is to make a more or less educated guess about the future. Up to a point, we’re gambling that things will stay more or less the same as they are today, unless we see something we think will happen and adjust for it. If the market changes, the government does something weird, aliens invade, or the sun explodes, all bets are off.
Error Number Two
Wide and Steele assume that the price set by the seller is exactly the same as the value to the buyer, or somebody is being cheated. This belief appears to derive from the notion that a thing is worth what it cost to produce or create, no more, no less.
|Is someone always cheated in a bargain? Is it always "win-lose"?|
The problem here is that if something has no utility to the buyer, the buyer will not, well, buy. The seller can easily say, “This factory cost me twenty million pazoozas to build, equip, and stock. Therefore the price is twenty million pazoozas.” The prospective buyer says, “That may be, but it only produces something worth ten million pazoozas, and that’s all I’ll pay.”
Is the buyer trying to cheat the seller by offering half what the factory is worth to the seller, or is the seller trying to cheat the buyer by asking twice what it is worth to the buyer?
And what if the buyer and the seller strike a bargain for fifteen million pazoozas, splitting the difference? Does the amount by which the seller presumably cheats the buyer, and the equal amount by which the buyer presumably cheats the seller cancel each other out, or does it double the presumed injustice?
In the real world, a seller is going to set the price as high as he can based on the value to him, and what he thinks a buyer will find acceptable. He is not trying to cheat the buyer. He is trying to get what something is worth to him. He makes a guess and sets a range for an acceptable price, with room to bargain.
|Is anyone being cheated here?|
A buyer makes a guess as well as to the utility of something to him. He, too, sets an upper and a lower limit as to something’s value to him. Typically, the buyer of capital will make as low an estimate as possible based on a worst case scenario as to how profitable he thinks the capital will be, and then work his head off to ensure that the best case scenario is the one that happens.
This is another instance where Wide’s and Steele’s demand for absolute certainty derails their analysis. In the real world of uncertainty, a fair bargain results when a seller and a buyer realize mutual advantages. A seller finds cash in hand more advantageous than remaining the owner of a factory, even when in his eyes the cash and the factory are equal in value, while a buyer finds being the owner of a factory more advantageous than having cash in hand, again even if he values both equally.
|"Money" is ALL things transferred in commerce.|
The fact is that in every fair bargain that ever took place, the buyer always sets the value . . . because each side is buying something, just as each side is selling something. The former owner of the factory is buying cash with his factory, while the new owner is buying the factory with his cash. “Money” is “all things transferred in commerce,” which means anything that can be accepted in settlement of a debt. The cash and the factory are both “money” because each side in the bargain settles his debt with them.
The bottom line? If both parties are satisfied, has anyone been cheated?
Wide and Steele would say yes, if the price charged is not exactly the one, real, ideal, objective value . . . something that simply does not exist. Wide and Steele assume that value — an idea formed in the minds of buyers and sellers — has an existence independent of the minds of the buyers and sellers who try to strike a bargain. They’re Platonists, in fact, thinking that “value” is something objectively determined and handed down from on high.
Unfortunately for Wide’s and Steele’s assumptions, the real world is Aristotelian. “Value” is purely subjective. It only approaches objectivity by the action of a free market when the aggregate actions of buyers and sellers give a more or less good idea of the general value of something. No one idea of value is going to match exactly anyone else’s idea of the value of something, any more than the mind-picture I have of “chair” is going to match your mind-picture of “chair.” (Have identical twins draw pictures of a chair without looking at each other’s drawing, and you will understand this.)#30#