Capitalism made easy

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kmarinas86's picture
kmarinas86
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Capitalism made easy

The way capitalism works is that people invest money in a business now in hopes for future returns.

If we replaced the stock market with an easier system, I think that system would be one where the company actively sets the value of a stock. The value of the stock would simply be an exponential rate. For example, let's say a company has a initial public offering of 10,000 shares of $10 growing 3% a year. That 3% a year would be guaranteed by law. Now if someone wants to trade, then they would pay for the original amount of a $10 a share and get whatever rate there now is, which 3 years down the road could be 5% instead. The more likely a company is going to grow, then the more they need development capital and the more likely they are going to promise a higher return. These methods, I think, are far superior to the type of market activity now in existence.

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Re: Capitalism made easy
kmarinas86 wrote:

That 3% a year would be guaranteed by law.

 

How? On whose pocket?

 

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kmarinas86
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Re: Capitalism made easy

"How? On whose pocket?"

Who would trust a company that says it will pay 3% a year for x amount of shares but doesn't? The law here is that people will be less likely to invest in that company. Instead of illusions set by exuberant shareholders which jack up the share prices beyond that of what company can afford, the company should set the rate of return with financial integrity in mind. We must understand that everyone needs their bills to be paid. The law would be a fee on bad judgment, but the market of self interests already provides that! That's the law.

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kmarinas86
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Re: Capitalism made easy

Some one on YouTube responded: "No. That's wrong. The company should be valued based on it's earnings."

 

My response: It's obvious that if a company expects higher return on capital, then it can expect to attract investors to get capital to make those earnings happen. The company should set the rate because its can project the earnings (how much and why) better than most shareholders can. And of course shareholders on the board of directors can become involved and influence how the company sets the rate.

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Re: Capitalism made easy
Quote:

The way capitalism works is that people invest money in a business now in hopes for future returns.

If we replaced the stock market with an easier system, I think that system would be one where the company actively sets the value of a stock. The value of the stock would simply be an exponential rate. For example, let's say a company has a initial public offering of 10,000 shares of $10 growing 3% a year. That 3% a year would be guaranteed by law. Now if someone wants to trade, then they would pay for the original amount of a $10 a share and get whatever rate there now is, which 3 years down the road could be 5% instead. The more likely a company is going to grow, then the more they need development capital and the more likely they are going to promise a higher return. These methods, I think, are far superior to the type of market activity now in existence.

You can't possibly be serious?

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A. M.
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Re: Capitalism made easy

Are you aware of the exponential function?
How is any company going to guarantee an 3% "Exponential rate" as you say?

I'm mean this with absolutely no disrespect intended, but have you even watched the Crash Course?
Have you watched "The Most IMPORTANT video you'll ever see"?

Because you're throwing out a lot of arbitrary information that wouldn't really do anything to solve the real problems, which are:
1. Overpopulation
2. Fiat money creation on an international level.

Cheers!

Aaron

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kmarinas86
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Re: Capitalism made easy
Aaron Moyer wrote:

Are you aware of the exponential function?
How is any company going to guarantee an 3% "Exponential rate" as you say?

I'm mean this with absolutely no disrespect intended, but have you even watched the Crash Course?
Have you watched "The Most IMPORTANT video you'll ever see"?

Because you're throwing out a lot of arbitrary information that wouldn't really do anything to solve the real problems, which are:
1. Overpopulation
2. Fiat money creation on an international level.

Cheers!

Aaron

Well, you can remind those who want their investment to increase 3% a year to tell them that their expectations for exponential growth in invested in the market is unsustainable. If we do get rid of this feature of investment, why would any one ever invest in the stock market again? If there was no way to get even a little 3% a year from the market, business would have to rely on other sources of funding. If that is not debt or capital then it would have to be something like grant money or bootstrapping. If the exponential function is to be gone from the market, then stock market should not even exist. The stock market failed because it made promises that it couldn't afford. This was because prices of stock were based on the investor's demand and not the company's supply. The demand in the stock was greater than supply and so you have a lot of people approaching retirement with 401ks that are not really worth as much as people hope they are. If a burst of people pull their 401k out, the value per 401k drops drastically, because the money simply is not there in the first place.

To tackle fiat money creation on an international level, you will have find some way to make it where currencies are not speculated for profit. When imports are bought, money is exported and is effect out of circulation if not in the hands of those who will spend it on goods and services. To make up for the lost liquidity, the bandaid has been to print more money, and that devalues the currency. The only way to avoid this is to keep the liquidity of a dollar constant at all times to have a constant presence in circulation. This makes some degree of wealth redistribution necessary, but in the end a global retail currency would be needed to fix the problem of reduced liquidity.

As for overpopulation, evidence shows that by fixing the economic system to allow societies to progress in higher standards of living that much would be gained in terms of curbing overpopulation. As economies mature, it will be become politically easier than before to put a legal limit on how many children a couple can have.

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caroline_culbert
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Re: Capitalism made easy

Capital is anything beyond "breaking even".

Capital is profit.

That's easy, right?

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A. M.
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Re: Capitalism made easy

Kmarinas86,

Well... where to start. Can I assume you did not watch the crash course or Dr. Bartlett's explaination of the exponential function?

You said:

Quote:

Well, you can remind those who want their investment to increase 3% a year to tell them that their expectations for exponential growth in invested in the market is unsustainable

I don't really need to, because the people I choose to keep as company prefer their riches in life experience, family, agriculture and personal growth. Not some arbitrary amount of fiat capital being exchanged three thousand miles away by greedy men in business suits who spend hours on treadmills in lieu of a hard days work.

So when it comes to explaining why peoples investments are in the tank, and why they won't be getting "exponential growth", I just shake my head because I realize that they don't even understand the concept.

Quote:

To tackle fiat money creation on an international level, you will have find some way to make it where currencies are not speculated for profit.

Are you serious? Why wouldn't you speculate a currency that has abosolutely no intrensic value?
It's almost mandatory that you do - because the paper itself doesn't exactly have any attractive features as a medium of exchange. If it's "value" is not "speculated on", it has no value.

It's far simplier to use the Austrian School of thought and have a currency backed by tangible goods.

Quote:

When imports are bought, money is exported and is effect out of circulation if not in the hands of those who will spend it on goods and services. To make up for the lost liquidity, the bandaid has been to print more money, and that devalues the currency

What does it matter if the money itself has no value?
These are problems with the fiat money system, not capitalism. Capitalism has it's own set of flaws that neednt be confused with the Fiat money system.

Quote:

The only way to avoid this is to keep the liquidity of a dollar constant at all times to have a constant presence in circulation. This makes some degree of wealth redistribution necessary, but in the end a global retail currency would be needed to fix the problem of reduced liquidity.

The "Only" way?
Quantify that. What knowledge or experience are you drawing upon here?

Quote:

As for overpopulation evidences shows that by fixing the economic system to allow societies to progress in higher standards of living much will be gained in terms of curbing overpopulation. As economies mature, it will be become politically easier than before to put a legal limit on how many children a couple can have.

You're failing to see the exponential function again. Not to mention, you're underminding individual liberty, suggesting the government take an active role in civic birth control, and all the while basing it on the pretense that a "mature economy" with sooth those things into effect.

How exactly will a mature economy make it "politically easier" to put a "legal limit on how many children a couple can have"?

If anything, we can see empirically and historically that "mature economies" have a higher standard of living, and overconsume, not to mention have a higher rate of birth, and lower risk of death.

You're logic needs review. Before you do anything else, do yourself this one, big favor, and watch these:
http://www.peakprosperity.com/crashcourse

Cheers!

Aaron

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Farmer Brown
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Re: Capitalism made easy

kmarinas,

With all due respect, you have no idea what you're talking about.  I do not even understand what you're saying.  I suggest you do some basic studying, not just with the Crash Course, but also with a site like www.investopedia.com

 

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kmarinas86
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Re: Capitalism made easy
Aaron Moyer wrote:

Kmarinas86,

Well... where to start. Can I assume you did not watch the crash course or Dr. Bartlett's explaination of the exponential function?

You said:

Quote:

Well, you can remind those who want their investment to increase 3% a year to tell them that their expectations for exponential growth in invested in the market is unsustainable

I don't really need to, because the people I choose to keep as company prefer their riches in life experience, family, agriculture and personal growth. Not some arbitrary amount of fiat capital being exchanged three thousand miles away by greedy men in business suits who spend hours on treadmills in lieu of a hard days work.

That's cool, more people should be like that! I am entirely jaded with the stock market. It is centuries old lion that is far past its prime. It's completely unnecessary in the best of situations.

Quote:

So when it comes to explaining why peoples investments are in the tank, and why they won't be getting "exponential growth", I just shake my head because I realize that they don't even understand the concept.

You're completely vaild on this point.

Quote:
Quote:

To tackle fiat money creation on an international level, you will have find some way to make it where currencies are not speculated for profit.

Are you serious? Why wouldn't you speculate a currency that has abosolutely no intrensic value?
It's almost mandatory that you do - because the paper itself doesn't exactly have any attractive features as a medium of exchange. If it's "value" is not "speculated on", it has no value.

I was refering to speculation between currencies at the international level.

In keeping with your comment I can say with certainty that what you speak of is exactly what I have done. As for the falling value of a dollar, speculating "against" it with hard assets can be done to hedge against inflation. To speculate (your definition), I would simply trade dollars for assets in general. I would spend most of the money I have. In reflectance of my past spending behavior, this is exactly what I have done. My financial net worth currently wobbles within $300 of $0.

Quote:

It's far simplier to use the Austrian School of thought and have a currency backed by tangible goods.

I know it is, but the Austrian School of thought understands the problems better than they understand what solutions can ultimately bear fruition. Ron Paul in particular has excellent sense of justice and injustice in this world, and I commend him for that. However, it will take more than a support for revolution to dissect the foriegn monkey wrenches (and creatures of Washington) causing our economy to fail under scrutiny. Our economy needs new arithmetic without comprising liquidity, and most fiscially conservative and well meaning plans to replace the credit system don't meet those needs of liquidity, although they are still technically much more stable and efficient than our present system.

Quote:
Quote:

When imports are bought, money is exported and is effect out of circulation if not in the hands of those who will spend it on goods and services. To make up for the lost liquidity, the bandaid has been to print more money, and that devalues the currency

What does it matter if the money itself has no value?

Then we would not use any money, or (in your definition), hold less of it. But for the time being, we still need a common medium of exchange. The money will be spent at some rate or another, as long as we are dependent on it.

Quote:

These are problems with the fiat money system, not capitalism. Capitalism has it's own set of flaws that neednt be confused with the Fiat money system.

That is true. We created a second topic here while furthering our discussion.

Quote:
Quote:

The only way to avoid this is to keep the liquidity of a dollar constant at all times to have a constant presence in circulation. This makes some degree of wealth redistribution necessary, but in the end a global retail currency would be needed to fix the problem of reduced liquidity.

The "Only" way?
Quantify that. What knowledge or experience are you drawing upon here?

Mechanical experience. People's spending habits change as their accounts rise and fall. This is dependent on the type of account. Accounts are tools which make certain economic affecting behaviors easier to perform. I like to think of the economic web cash flow as a sort of race track were the cars represent dollars in an economy. Now, if wealth is concentrating towards the few, we are talking about a large fraction of all cars parking in a given pitstop and a decrease in the number cars elsewhere. If there were multiple pitstops on the race track, then each pitstop could represent all the accounts where a single person stores thier money. When more and more cars on the race track park inside the rich individual's pitstop, that means a drop in cars actually performing outside as a result. If we substitute the rich person with the company who offers goods such as houses taking many decades to pay for, then you are talking about a lot of dollars which get parked there compared to the rate of cars leaving the pitstop of the buyer. This creates a response delay encouraging the credit system to flood the race track with even more cars. The home buyer ends up losing more cars/money than the home builder gained in the first place despite the presence of more of them!  Inflation kills....

In general, fluctations in the storage and release of dollars at a microeconomic level reduce the fraction of dollars actually performing thereby reducing liquidity. Thus there is a need to fix this situation by some how reducing the shocks in financial accounts. Only account tools that promote the revelance and reliability of cash flow can help achieve this. Bad account tools cannot resolve this problem. The arithmetic must change.

Quote:
Quote:

As for overpopulation evidences shows that by fixing the economic system to allow societies to progress in higher standards of living much will be gained in terms of curbing overpopulation. As economies mature, it will be become politically easier than before to put a legal limit on how many children a couple can have.

You're failing to see the exponential function again. Not to mention, you're underminding individual liberty, suggesting the government take an active role in civic birth control, and all the while basing it on the pretense that a "mature economy" with sooth those things into effect.How exactly will a mature economy make it "politically easier" to put a "legal limit on how many children a couple can have"

If anything, we can see empirically and historically that "mature economies" have a higher standard of living, and overconsume, not to mention have a higher rate of birth, and lower risk of death.

Because in spite of the higher rate of birth and lower risk of death people are having fewer children. If there was no immigration in this country, our population growth rate would certainly be less. Couples used have far more children than they do now. The effect that having few children has on reducing exponential growth is greater than increasing lifespan has on increasing the exponential growth. Actually, as life spans get longer, the birth rate will rise over the death rate. As far as the part to that contributed by increasing longevity, one can easily see that increasing longevity increases the long term population level only by a direct proportion. The high number of children per couple concentrated in areas with poor infrastructure is the very thing causing the most havoc on overpopulation. I believe it is against our rights to force this on people though. I say let the couple have 14 children if they want that many. The only way overpopulation should be fought, in the best of scenarios, would be by creating economic conditions that favor a culture with few children per adults (prosperity vs. growth), as is already the case with our aging population. As long as an economy can maintain a very high standard of living, then no government policy is necessary to physically restrain people to achieve zero population growth in the long term.

Quote:

You're logic needs review. Before you do anything else, do yourself this one, big favor, and watch these:
http://www.peakprosperity.com/crashcourse

Cheers!

Aaron

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kmarinas86
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Re: Capitalism made easy
caroline_culbert wrote:

Capital is anything beyond "breaking even".

Capital is profit.

That's easy, right?

Obviously this means funds are collected by the one obtaining the profit. Before the money supply grows, this would simply mean that money has switched hands. In greater detail, we can notice that if every business makes a profit, that means a shift of funds to corporate savings accounts from consumer savings accounts. Overtime, they would possess more and more of the funds, requiring that money and corresponding liquidity be transferred from consumers to producers - in net! If growth of consumers' deposits of money are outmatched by the growth of deposits of money owned by companies, they will borrow more money to pay for the increase production levels. Over time, irresponsible means and ways of consumer borrowing will become more and more evident. As borrowers default, the banks lose money and liquidity. At critical times, banks in our present day conventional system seek a lender of last resort - a central bank. This ultimatey forces us to print more money just to maintain the system of profits. That does not mean capitalism is bad in theory. It just means that in practice, it needs to be remedied by means of restoring liquidity by means superior to debt.

Capitalism is essential not only to growth but also prosperity and innovation. Abandoning it right now would be equivalent to "throwing the baby out of the bathwater".

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Re: Capitalism made easy

Basically, all we can do is watch as the titantic strikes ice and build a better ship after she sinks.

Cheers!

Aaron

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Re: Capitalism made easy
kmarinas86 wrote:
caroline_culbert wrote:

Capital is anything beyond "breaking even".

Capital is profit.

That's easy, right?

"Overtime, they would possess more and more of the funds..."

I don't think this is logical; that is, necessarily true.  Capital can be "lost" back into the economy (within other hands) as some may make unwise investment purchases, no?

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kmarinas86
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Re: Capitalism made easy
caroline_culbert wrote:
kmarinas86 wrote:
caroline_culbert wrote:

Capital is anything beyond "breaking even".

Capital is profit.

That's easy, right?

"Overtime, they would possess more and more of the funds..."

I don't think this is logical; that is, necessarily true.  Capital can be "lost" back into the economy (within other hands) as some may make unwise investment purchases, no?

Fair enough.

The capital accumulation is derived from "net" earnings plus contributions from shareholders, and perhaps some other stuff I don't know about. The point I was attempting to make has to do with the *tendency* for funds to accumulate in businesses with high profits. In the long run, this is what happens in practice.

Many people who are fiscially conservative (and rightfully so) advocate limited money supply growth, but if done both in excess and in conjuction with capital accumulation, limitations on the supply of money would reduce the consumer's nominal buying power even though the liquidity that companies obtain by profits allows for greater capital development.

Obviously, if the capital development bears a high level resilience, then real buying power may increase, as is the case with developing countries with high economic growth and net exports. The probability of this occuring increases for countries with sizeable trade surpluses. 

On the other hand, consumer borrowing and debt increases as a result of this underlying transfer of wealth and even more so when there is a trade deficit. If employment levels are slightly on the decline, in time, consumer borrowing will have a strong tendency to crowd out the credit markets, which reduces opportunities for business to maintain leverage they now possess. The reduction of business opportunity reduces employment growth and can cause more consumers to become unemployed, exacerbating the fungal growth consumer debt. Businesses that cannot maintain their leverage will become bankrupt and/or insolvent.  This result is a vicious circle that models a stage in our current financial crisis.

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Re: Capitalism made easy

The problem with saying that a company should grow 3% a year is that a capitalist system is based on voluntary production and consumption. The worth of a company, and its growth in value is dependent on how much it makes on the services and products it sells. If the company that is supposed to grow 3% a year has its annual sales falling 3% a year because consumers don't want the product, how can the 3% increase be justified? At the same time if another company has sales volume increasing by 6% a year, how can you limit its growth in net worth to 3% a year?

The key concept of capitalism is that the success of a business is based upon its productivity, on how well received its products and services are in the marketplace, and how well it controls costs to maximize profits. When a new company comes along with a new idea, investment flows to that company if the idea is well received. The investors expect a return on that investment. If the company fails to produce a profit it dies. It is not the owners, the stock market, the government or any other outside entity that causes the business to live or die, it is the viability of the products and services in the market place. The only exception is when the government or others take advantage of laws restricting and limiting trade to force the new company to fail.

There is no such thing as an 'excess profit'. Large profits tell investors where they should put their money, what they should invest in. Why would anyone invest in a company that has declining sales and shrinking market share? The profitability of a business and its market share are the determining factors in whether the business and its competitors receive investment. It is competitors going into the market that causes the prices of goods and services to decline. It is why we have a patent office so that competitors are prevented from stealing an idea, that permits the developer to reap the benefits of his idea before the market is thrown open to all comers. It encourages the competitors to develop their own ideas, to create their own business plan.

The worth of a stock in the marketplace is (supposed to be) a reflection of how well the company is performing, not a function of some arbitrary percentage of growth that the company is supposed to achieve. The stock market is the vehicle that we have to permit investors to move their capital from place to place in response to changing conditions. What we now have is a group of bankers and million or billionaires manipulating the prices of stocks because the government and the banking system are failing. They are not investing, they are manipulating.  For them, the worth of a business is not the criterion for investment, how much the price of the stock can be manipulated, up or down, because of lack of regulation is the goal.

The SEC and other regulating agencies are not investigating this manipulation, instead, they have been encouraging it. The function of government is not to conduct business, it is to regulate markets to keep fraud from being used to modify the way that legitimate businesses are permitted to operate so as not to impede them. Members of regulating bodies should be experienced in the area that they have regulatory power, and every time they take some action, they should have to publish the reasons why such regulation was necessary. The regulators will have to be able to demonstrate their competence, ethics, and fairness. Their decisions should also have an appeal process that ultimately leads to settlement in the courts when necessary.

One of the things that the populace needs to understand is that the employees of a business have no right to any portion of the profits of the business just because they work there. The profits belong to the owners of the business not the employees. If the employees want to share profits, let them buy stock so that they also share the risk the business runs as well. NO individual employee is critical to the operation of a business, save for individual knowledge and performance, one employee is pretty much the same as another. Employees come and go, the business stays as do the owners and stockholders. Employees agree to work for the business in exchange for a specified rate of pay. Their only investment in the business is the service they perform in exchange for that pay, and their interest in doing well is the preservation of the business so that they can continue to be employed. The business is more important than the people who work for it, without the business, the employees are unemployed.

Business entities come and go. After all, the companies that produced buggy whips in the 1800s went out of business after the introduction of the automobile due to lack of demand. There may still be a buggy whip company around catering the what little demand is left, but the money in the buggy whip companies went into the automobile companies when it became plain where the profits were. Even then, not all automobile manufacturers survived, just the ones with what were perceived as having the best product and the best management and production. The same with bookkeeping machines and computers, candles and electric lights, spears and rifles. New products replace old and new businesses replace old. It is all about change, it always will be.

pwoody

 

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pwoody82
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Re: Capitalism made easy

Capital is the net worth of a business expressed the unit appropriate medium of exchange, in the case of the US, in dollars. It is the summation of all the assets less the liabilities. If the liabilities exceed assets, the business has negative net worth, or capital (Much like the US Government). The original investment in a business, is the amount of money placed in it at the outset, its beginning capitalization. Setting up a new business also involves such things as licenses, permits and so on. Once those are paid for and are in place, capitalization is reduced by these expenses.

If the business buys capital equipment, tools, equipment, property and so on, they are entered as assets on the balance sheet and capital is not reduced because physical assets replace the money. Capital may be reduced later as the tools and equipment loose value, because things wear out or are consumed. So the value of the assets declines and so does capital. A truck looses value with age, so capital is consumed in depreciation. Capital items that loose value with time and use (depreciation), in wages to officers and employees of the business, in bookkeeping and so on are expenses or reductions in capital. If the business then, has no revenue or income, it eventually consumes nearly all its capital. (The value of land, for example never goes to zero).

 

If the business buys supplies to produce a product, or if it provides a service, or both, the income from the products and services increases capital. To be viable, the income must exceed the expenses. One thing that is often misunderstood on the balance sheet of a business is the term 'retained earnings'. Uninformed individuals view retained earnings as a pile of cash in the bank somewhere for the last year of operations, and since the figure is often quite large in comparison to the initial investment in the business, it is often referred to as 'excess profits'. The fact of the matter is that retained earnings are merely a statement of the additional capital (net worth) of the business over and above the initial investment since the business began operations. It may be partially in cash, but it is usually in the form of inventory, additional tools and equipment, new property, supplies and so on. An old business without retained earnings is a business without growth, and is probably a poor investment.

 

Public Service Company of New Mexico, whom I worked for years ago, has a balance sheet with which I was familiar. At the time, it had been in business for thirty years or so, and so it's retained earnings were in the millions of dollars, reflecting that over the thirty years Albuquerque had more than doubled in population and so the size of its power distribution network had also more than doubled. It did not have a lot more cash on hand, but it had millions of dollars in increased generation, distribution, property and so on. Yet, assuming no additional stock was issued, the value of the corporation in terms of capital per share had vastly increased. It had mostly grown by reinvesting its profits in the things that it needed. It may have issued additional stock, borrowed money and so on, but even taking that into account it had sizable retained earnings or growth.
pwoody

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