[lbo-talk] An Orgy of Speculation?

[michael perelman]

Let me paraphrase Hicks's point to tell you why the rubbish makes
sense in terms of economics.  In terms of accounting, which Hicks
calls backward looking, you are correct.  He expected profit was based
on a five-year life expectancy, which turned out to be three.  In
effect, profits in the second year still would be calculated in terms
of the five-year lifecycle.  The problem is you cannot know the moral
depreciation until after the fact, so profits are calculated on past
patterns – the five-year lifecycle.  Hicks's point is that the
economic value of the computer is the future profitability, which is
unknown.  In short, economists have no way of calculating
depreciation.

On Sat, Mar 5, 2011 at 10:56 PM, Jordan Hayes <jmhayes at j-o-r-d-a-n.com> wrote:
> michael perelman writes:
>
>> Economic depreciation takes
>> into account new technology, changing demand, ....
>
> Rubbish.  Those things can accelerate depreciation, but you paid what you
> paid when you paid.  Peter's math is wrong because it only looks at the
> current year.  I don't know what you guys are trying to prove, but leave
> depreciation out of it.  In both cases -- economic and tax depreciation --
> you're trying to come up with an estimate for the lifetime of an asset; you
> will in most cases be wrong.  When you know the truth -- either you wore it
> out, or you withdrew it from use because it got replaced by something better
> -- you can then determine what it was actually worth.
>
> Up until then, you're just guessing.
>
> Example: you buy a $5k computer and think it will last for 5 years.  You
> apply straight-line depreciation to it of 20%/year, because hey: no one will
> swat you for guessing in this way.  In the 3rd year, a
> Quintuple-Hex-a-core-whizbang-III comes out and you have to have it. You
> toss your 5-year computer into the trash after three years.  Ergo: it was
> actually a 3 year computer, and if you want to know how productive it was,
> you can divide by 3 now instead of your earlier estimate of 5, which was
> wildly wrong.  3 years is still a guess, but it's a better guess than 5.
>  Maybe in the 2nd year you really got good at having this thing help you
> make some big bucks?  It's likely to not be linear.  *shrug*
>
> Blah, blah, blah: get to the point.
>
> /jordan
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-- 
Michael Perelman
Economics Department
California State University
Chico, CA
95929

530 898 5321
fax 530 898 5901
http://michaelperelman.wordpress.com