Friday, June 29, 2007

capitial all becomes flow

In economics we talk about stocks and flows. No more so in terms of describing capital. Capital in the economic sense of providing the capacity to create goods and services. No more so is capital the life blood than in the worlds financial markets. I have listened to the Chairman of the Federal Reserve in USA talk about 'how efficient' the market is at allocating capital. Meaning, switching cash resources from e.g. energy into healthcare or selling Microsoft stock to invest in a venture capital fund etc. etc.

I am not sure I share is 'efficient' claims. Two fold reseaons. Only a minority of the worlds capital is directly traded on the words financial markets. Secondly, any market which requires a stock of capital has huge efficiencies to be gained. Ideally, we want a market with nil capital stock.

We still need capital, just that the capital will be 100% flow. This is what the financial markets want to achieve in theory but I don't believe they have the information flows or property laws or incentive systems to come anywhere close to realising this. A world of 100% flow of capital requires no financial markets. No need for third parties to make capital allocation choices, usually on aggregate for others, no need to incur a needless transaction cost on moving the capital and no speculative flows.

It's not that these processes won't continue to exist. They will it is just that the individuals directly impacting the flow of capital will be participating. It will be too costly to outsource these activities.

To be thought about: the transistion to 100% flow of capital, how financial markets will evolve and then disappear.

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