I read an article on mises.org recently that claimed this. As I’m not very familiar with stocks, this blew my mind. I totally understand that in a healthy economy, goods would get cheaper and cheaper over time, as productivity increased.
Is the same valid for stock prices? They’re just prices, after all. Does this mean that all the value stocks gained since 1920 or whenever they were started is just due to inflation? Is there a graphics comparing the two or something?
Not necessarily. They may or may not. Most likely some will, and some won’t. Unlike, the prices of consumer goods, I don’t think there is a way to determine in definite, the overall trend of nominal prices over a given period of time for things like stocks, i.e., the capital value of factors of production. What is certain is that the trend of the value of these stocks in real terms will be positive.
The capital value of any factor of production is equal to the expected future rents (income) minus the expected discount rate (interest rate), over its expected lifetime, of course. As productivity increases, the natural discount rate will tend to fall and work to increase the nominal capital value of the factor. On the other hand, the income that the factor earns may also fall, and this will work in the other direction as to lower the nominal capital value of the factor.
It gets more tricky because the income of any factor, unlike the price of final goods, may not necessarily always fall due to increases in productivity because the drop in interest rate may fully absorb the drop in total net income as the structure becomes more future oriented and more productive. There is no praxeological way to determine this. We can just say in definite that if wages fall, prices of consumer goods will fall even further, thus the general trend of real wages is to increase. How a falling interest rate and incomes that may fall get factored into the value of capital, and get translated into prices of stocks and other instruments is difficult to predict.
NO.
The capital value of any factor of production is equal to the expected future rents (income) it can earn minus the expected discount rate (interest rate), over its lifetime of course. As productivity increases, the natural discount rate will tend to fall and work to increase the capital value of the factor. On the other hand, the income that the factor earns may also fall working on the capital value in the other direction.
It gets tricky because the income of any factor, unlike the price of final goods, may not necessarily fall due to increase in productivity because the drop in interest rate may fully get absorbed the drop in total net income as the structure becomes more future oriented and more productive.
NO.
The capital value of any factor of production is equal to the expected future rents (income) it can earn minus the expected discount rate (interest rate), over its lifetime of course. As productivity increases, the natural discount rate will tend to fall and work to increase the capital value of the factor. On the other hand, the income that the factor earns may also fall working on the capital value in the other direction.
It gets tricky because the income of any factor, unlike the price of final goods, may not necessiraly fall due to increase in productivity because the drop in interest rate may fully get absorbed the drop in total net income as the structure becomes more future oriented and more productive.
NO.
The capital value of any factor of production is equal to the expected future rents (income) it can earn minus the expected discount rate (interest rate), over its lifetime of course. As productivity increases, the natural discount rate will tend to fall and work to increase the capital value of the factor. On the other hand, the income that the factor earns may also fall working on the capital value in the other direction.
It gets tricky because the income of any factor, unlike the price of final goods, may not necessiraly fall due to increase in productivity because the drop in interest rate may fully get absorbed the drop in total net income as the structure becomes more future oriented and more productive.
Stock prices in a healthy economy would show the same long-term trend as all prices. There could be inflation or deflation over time, depending on the market circumstances. But the constant implication of stock shysters that the prices of “investments” tend to increase exponentially over time is absurdity. No investment increases in value exponentially… “compound interest” has nothing to do with a continual, exponential increase in prices and could never cause such a thing. Compound interest is simply the mathematical expression of the reailty of time preference. The price of time must naturally be exponential since if the ratio of present value to future value is a constant at all points in time between the present and the future, you have an exponential curve, that is, a compounded interest rate. The mistake comes from generalizing this curve.
Clayton -