Economics Dictionary of Arguments

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Capitalization: In economics, capitalization refers to the total value of a company's outstanding shares, calculated by multiplying the share price by the number of shares. It can also refer to the process of converting income or future cash flows into present value using a discount rate. Capitalization helps assess a company's market value and investment potential. See also Calculation, Capital.
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Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments.

 
Author Concept Summary/Quotes Sources

Murray N. Rothbard on Capitalization - Dictionary of Arguments

Rothbard III 489
Capitalization/Rothbard: The principle of the determination of “capital values,” i.e., prices of “whole goods,” is known as capitalization, or the capitalizing of rents.
>Capital value/Rothbard
.
This principle applies to all goods, not simply capital goods, and we must not be misled by similarity of terminology. Thus, capitalization applies to durable consumers’ goods, such as houses, TV sets, etc. It also applies to all factors of production, including basic land. The rental price, or rent, of a factor of production is equal (…) to its discounted marginal value product. The capital value of a “whole factor” will be equal to the sum of its future rents, or the sum of its DMVPs. (discounted marginal value products).(1) This capital value will be the price for which the “whole good” will exchange on the market.
It is at this capital value that a unit of a “whole good” such as a house, a piano, a machine, an acre of land, etc., will sell on the market.
>Consumer goods/Rothbard, >Durable goods/Rothbard, >Land/Rothbard, >Goods/Rothbard.
There is clearly no sense to capitalization if there is no market, or price, for the “whole good.” The capital value is the appraised value set by the market on the basis of rents, durability, and the interest rate. The process of capitalization can encompass many units of a “whole good,” as well as one unit.
>Price/Rothbard.
Rothbard III 490
Problem: Many writers have fallen into the trap of assuming that they can, in a similar way, add up the entire capital value of the nation or world and arrive at a meaningful figure. Estimates of National Capital or World Capital, however, are completely meaningless. The world, or country, cannot sell all its capital on the market. Therefore, such statistical exercises are pointless. They are without possible reference to the very goal of capitalization: correct estimation of potential market price.
Rothbard III 491
The process of capitalization, because it permeates all sectors of the economy, and because it is flexible enough to include different types of assets - such as the total capital assets of a firm—is a very important one in the economy. Prices of shares of the ownership of this capital will be set at their proportionate fraction of the total capital value of the assets.
Price: In this way, given the MVPs (marginal value products), durability, and the rate of interest, all the prices on the capital market are determined, and these will be the prices in the ERE (Evenly Rotating Economy).
>Evenly Rotating Economy/Rothbard, >Price/Rothbard, >Factors of production/Rothbard, >Marginal product/Rothbard.
Rothbard III 492
RothbardVsFetter: If land can be capitalized, does this not mean that land and capital goods are “really the same thing” after all? The answer to the latter question is No.(2)
Rothbard: It is still emphatically true that the earnings of basic land factors are ultimate and irreducible, as are labor earnings, while capital goods have to be constantly produced and reproduced, and therefore their earnings are always reducible to the earnings of ground land, labor, and time.
Rothbard III 493
Basic land can be capitalized for one simple reason: it can be bought and sold “as a whole” on the market. (This cannot be done for labor, except under a system of slavery, which, of course, cannot occur on the purely free market.) Since this can be and is being done, the problem arises how the prices in these exchanges are determined. These prices are the capital values of ground land.
>Rent/Rothbard.

1. On capitalization, see Fetter, Economic Principles, pp. 262–84, 308–13; and Böhm-Bawerk, Positive Theory of Capital, pp. 339–57.
2. Fetter’s main error in capital theory was his belief that capitalization meant the scrapping of any distinction between capital goods and land.

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Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments
The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.

Rothbard II
Murray N. Rothbard
Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995

Rothbard III
Murray N. Rothbard
Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009

Rothbard IV
Murray N. Rothbard
The Essential von Mises Auburn, Alabama 1988

Rothbard V
Murray N. Rothbard
Power and Market: Government and the Economy Kansas City 1977


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