{"id":3199,"date":"2008-12-04T09:57:10","date_gmt":"2008-12-04T09:57:10","guid":{"rendered":"http:\/\/scienceblogs.com\/principles\/2008\/12\/04\/a-beautiful-theory-impervious\/"},"modified":"2008-12-04T09:57:10","modified_gmt":"2008-12-04T09:57:10","slug":"a-beautiful-theory-impervious","status":"publish","type":"post","link":"http:\/\/chadorzel.com\/principles\/2008\/12\/04\/a-beautiful-theory-impervious\/","title":{"rendered":"A Beautiful Theory, Impervious to Ugly Facts"},"content":{"rendered":"

Via Matt Yglesias<\/a>, another example of why I have a hard time taking economists seriously<\/a>, talking about a measure of stock prices:<\/p>\n

\n

[T]he “Q” ratio [is] the value of the stock market relative to the replacement cost of net assets. The basic logic behind “Q” is that capitalism works. If the “Q” is above 1.0, then the market is valuing a company at more than it costs to reproduce it; stock prices should fall. If it is below 1.0, then stocks are undervalued because new businesses can’t be created at as cheap a price as they can be bought in the open market. In the short run, this ratio is volatile as shown below but it tends to be mean reverting, which is critical. As long as capitalism is a going concern, “Q” should mean revert to 1.0. If so, then oh, oh what a “Q”! Today’s Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation, as seen in Chart 1.<\/p>\n<\/blockquote>\n

This is accompanied by a graph that is, basically, the right half of this plot:<\/p>\n

\"i-0c600dc3d8c0eb7d68227b1d10865eac-Tobin's_Q_graph.png\"<\/p>\n

(There are a few more years added, showing a steady decline to a current value around 0.5. The longer graph was recommended as a more complete picture by one of Yglesias’s commenters.)<\/p>\n

You could interpret this graph a lot of ways, but “the historical natural mean is 1.0” is not one of them. The value has passed 1.0 exactly four times in the last century, and two of them clearly precede massive crashes (in the 1920’s, and today). You might claim that this is a function with a mean value around 0.6 or 0.7 and occasional large upward excursions, but attempting to claim that this is naturally near 1.0 is just farcical.<\/p>\n

This isn’t science. This is literary criticism with graphs.<\/p>\n","protected":false},"excerpt":{"rendered":"

Via Matt Yglesias, another example of why I have a hard time taking economists seriously, talking about a measure of stock prices: [T]he “Q” ratio [is] the value of the stock market relative to the replacement cost of net assets. The basic logic behind “Q” is that capitalism works. If the “Q” is above 1.0,… Continue reading A Beautiful Theory, Impervious to Ugly Facts<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"1","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[82],"tags":[],"class_list":["post-3199","post","type-post","status-publish","format-standard","hentry","category-socialscience","entry"],"_links":{"self":[{"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/posts\/3199","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/comments?post=3199"}],"version-history":[{"count":0,"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/posts\/3199\/revisions"}],"wp:attachment":[{"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/media?parent=3199"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/categories?post=3199"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/chadorzel.com\/principles\/wp-json\/wp\/v2\/tags?post=3199"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}