[I]t’s a mistake … to think of equity capital as part of the “pool of capital available to the economy,” as if there were a simple fixed quantity of “capital” in the world…. What precisely the aggregate value of the stock market represents is far from clear – and that’s why it is in some sense not particularly surprising when this value drops by 40% over the course of a year.

What comes to my mind when I hear “pool of capital” is the K of economist’s models working to constrain our ability to think about what capital is.

Equity capital is something that we think we understand – until we think about it a little longer. It often incorporates the value of many intangible assets that may be alienable only as part and parcel of the whole business and/or fragile in the sense that they may be easily destroyed by bad managerial decisions (e.g. goodwill).

Furthermore it is axiomatic that equity capital is inflated when asset prices are too high and it evaporates when they fall. (Steve Waldman has expounded on these issues much more thoroughly and penetratingly than I do here.) In order to have a meaningful “pool of [equity] capital,” it’s necessary to have some kind of stability in asset prices – but this is precisely what we don’t have in our current system.

In addition, the focus on equity capital [distracts from] the important role played by … working capital…. Many real goods come into existence only because of … working capital. While only a fraction of the output financed by working capital is converted … into equity capital, … it [may] play a more important role in the … production process than equity capital…. I get the impression that most people don’t consider working capital to be an important component of the “pool of capital available to the economy,” but [they’re dumb / wrong].

Carolyn Sissoko

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s