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

Chapter Sixteen: Valuing the Future - Concepts in Capital & Finance 413 IT’S A WRAP! Capital isn’t capital unless it is embedded in the plans of entrepreneurs. The former Soviet Union had many capital assets, but they didn’t have capital. In market economies, heterogeneous capital must be used in a way that is consistent to some degree with the plans of others. The market process helps to provide continued information as new knowledge unfolds in the form of prices and profits and losses; this information drives entrepreneurial capital valuation. In this chapter we learned that while capital valuations are subjective, we have very useful mathematical formulas that help us in making relative subjective value comparisons: every financial asset should be valued fundamentally according to the net present value of its discounted future cash flows. Valuation was found to depend on the amount of income generated by an asset (its cash flows) discounted by a risk-adjusted interest rate. The best entrepreneurs will more accurately assess both cash flows and discount rate in response to overall consumer demand and market conditions.