[OPE-L:1962] Re: depreciation, profits and subjectivity

John R. Ernst (ernst@pipeline.com)
Thu, 25 Apr 1996 15:15:08 -0700

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Gil says

But Mike, if you _know_ this, then presumably "the market" does too,
and thus the capital's value is not subjective, contrary to
suggestion--no matter what the present delusions of the current


Michael responds:

I have to disagree with you here. Even if we assume that markets "know"
remember that knowledge of the value of a capital good requires the
of the present value of the future returns from the good], markets only
into the picture when the capital is put up for sale. Stocks and bonds are

continually sold on the market; capital goods rarely, and when they are
the markets are thin. Do you agree?

John adds:

Let me add a bit to this. What I do not understand is Gil's notion of
markets knowing things. Let's say you buy a machine -- how long will it
last? To be sure, you have your experience as well as that of the market
which you can study. Does this tell you how long it last? I don't
think so. Basically, you estimate and price accordingly. Your estimate
could be high or low or even right on target. The correct answer can only

be known ex post and not ex ante. My contention is that the machine will
last and be used as long as it is a more profitable investment than the
alternative of abandoning the machine with what ever value is left in it
and investing in a new or different alternative.