No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Sixteen: Valuing the Future - Concepts in Capital & Finance 395 as well; an entrepreneur may succeed so well in creating a consumer market that other entrepreneurs may adjust their production plans to try and compete in that market as well (consider Samsung’s response to the wildly successful iPhone). Another reason that plans are adjusted is because when valuations change, their next best use may become a better option. Most capital assets are multi-specific—they have other potential uses besides their primary plan or scrap value. So if the expected value in the current use drops below its opportunity cost (what the asset could have produced in its next best use), the capital asset will be redeployed. An overarching reality of capital is that it is heterogeneous , not homogeneous—capital is usually limited in how it can be used. If capital were homogeneous, we could simply interchange capital assets between plans at no cost. While most capital is heterogeneous and specific to its intended use, that does not mean that it does not have alternative uses. Let me give a personal example. While in the Air Force, my units were part of a team that used former Intercontinental Ballistic Missiles (ICBMs) to launch small satellites into orbit. The U.S. government paid the Orbital Sciences Corporation to modify these rockets for a space launch mission instead of its ballistic mission for nuclear weapons. When the former peacekeeper missiles were brought online for a space launch application, the nation achieved a very cost effective solution for small satellites. (You can watch a space launch of one of these former nuclear equipped missiles here. ) While very heterogeneous (we couldn’t reuse these missiles for many things) they did have alternative uses. Most capital assets will have uses beyond scrap value, so as time progresses and plans necessarily are frustrated, some assets will be redeployed to their next best alternative. A final reason plans necessarily change is that entrepreneurial plans are incomplete; some parts of every plan are based on knowledge that cannot be gained until the market process unfolds. As time progresses, new knowledge is gained that will allow additional “pieces of the puzzle” to be fit in. Some portions of new information may necessitate changing original plans to more effectively coordinate actions with others. Since entrepreneurial capital is often complementary to other capital, coordination in a broader production plan is only possible as the actions of other market participants are unveiled. PRESENT VALUE Let’s review the concept of interest we learned about in chapter 12. Let’s say you have $100 today. How much would that be worth one year from now? What about two years? Because of the universal nature of time preference, $100 today is worth more than $100 a year from now. As Jesus said in the parable of the talents, the worthless slave could have at least earned interest by putting his master’s money in the bank. So if the interest rate is 5%, over the course of one year $100 could grow to $105, and after a second year, Heterogeneous capital: Capital is said to be heterogeneous to the extent that capital assets differ in economic function and therefore have limited applications; i.e., they are not easily substituted.