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
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| 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.
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| 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.
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| "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#
