Inventory is a substitute for knowledge. Since you don’t always know just how much
inventory you are actually going to need and since inventory costs money, a business
enterprise must try to limit how much inventory it has on hand.
Those businesses, which have the greatest amount of knowledge and come closest to the
optimal size of inventory, will have their profit prospects enhanced.
Just as prices in general affect the allocation of resources from one place to another at a
given time, so returns on investment affect the allocation of resources from one time
period to another. A high rate of return provides incentives for people to save and invest
more than they would at a lower rate of return. – A higher rate of return encourages
people to consume less in the present so that they may consume more in the future. It
allocates resources over time.
The present value of an asset is in fact nothing more than its anticipated future returns,
added up and discounted for the fact that they are delayed.
Conversely, if the city announces that it is going to begin building a sewage treatment
plant next year, on a piece of land next to your home, the value of your home will decline
immediately, before the adjoining land has been touched.
The present value of an asset reflects its futures benefits or detriments, so that anything,
which is expected to enhance or reduce those benefits or detriments will immediately
affect the price at which the asset can be sold today.
It makes sense for a 90 year old man to begin planting fruit trees that will take 20 years
before they reach their maturity, because his land will immediately be worth more as a
result of those trees. He can sell the land six months later and go live in the Bahamas if
he wishes. Part of the value of his wealth today consists of the value of food that has not
yet been grown – and which will be eaten by children who have not yet been born.
Whatever the merits or demerits of various political proposal, what must be kept in mind when evaluating them is that the good fortunes and misfortunes of different sectors of the economy may be closely related as cause and effect - and that preventing bad effects may prevent good effects. It was not accidental that Smith Corona was losing millions of dollars on its typewriters while Dell was making millions on its computers. It was not accidental that Safeway surged to the top of the grocery business while A&P fell from its peak to virtual oblivion. The efficient allocation of scarce resources, which have alternative uses, means that some must lose their ability to use those resources in order that others can gain the ability to use them Typewriters were no longer what the public wanted after they had the option to achieve the same end result and more with computers. Scarcity implies that resources must be taken from some places, in order to go to other places.
Comments
Post a Comment