Capital …. Not a buzzword, but a very misunderstood word just the same.  There are 18 definitions of it in my dictionary.  Ask any 10 economists and you would probably get 20 more definitions.

The best definition comes from Irving Fisher:

 

 “Capital [includes] all the wealth in existence, without exception of any kind .... and .. not the stock of goods comprising the wealth, but the value of those goods.”

 

The key to understanding capital is differentiating the value of a good from the physical good itself.   Bricks and mortar used to be it.  Now, Fisher’s value-based definition rules.

 

Are you wondering why your capital intensive business is losing money, despite growth, increasing demand, and even increasing market share?  Does the stock market think your whole business is an anachronism?  This may be the reason.  With technological change now faster-than-ever, the value of long life assets is changing much faster than the rate they physically wear out.

 

And it doesn’t only apply to high-tech assets like computers.  It applies to human capital.  It applies to low-tech things like houses and land.

 

In a competitive world, the earnings stream that underpins asset value is determined by the most productive other assets employed in the same market.  WARNING—Do not define the market too narrowly!  Cheaper communications are a substitute for all forms of travel and thus impact the value of land close to the city or close to the airport.  Computer games are a substitute for back-yard playing space.  Land prices change.  The style of dwelling changes.  Even low-tech traditional assets like housing are losing value because of these effects.

 

The technological revolution is causing a radical change in the way long life assets should be valued.  New rules apply.  If, despite your best endeavours, your asset value (read: return on assets) falls continually short of plan, then maybe you need to look at some new rules too.  Please give me a call!   ICR