HOUSE_OVERSIGHT_010951.jpg

have played dumb and quit ahead. But that would have left out half the story and all the other surprises. | confessed that the surprises are the features | can’t resist. If they are fun for me, | can accept the challenge of making them fun for the reader. Anyway, | already opened that can of worms by showing that I don’t accept the Y =]+C equation even though others do. I gave an idea why, and can sketch my reason out a little farther. It begins with something I call the total return rule or total return truism. The truism is that creation of value equals growth of value plus cash flow, where cash flow means value taken out less value inserted from outside. I don’t think anyone doubts this truism, which is fundamental everywhere every day in the investment world. | will prove it anyhow, just for good measure, in the next chapter. It is probably the reason that the Y = C +] equation is readily accepted. Net investment | is meant to show physical capital growth. It could look to be the growth in value, if we don’t consider human capital, and consumption C could look to be the value taken out. But a second look is needed. The logic doesn’t work unless we consider all value including human capital. Some consumption is invested in human capital, and only the rest exits the whole economy in satisfying tastes. Then the equation would still be true if the invested part of consumption equaled human capital growth. The reason why it doesn’t starts with what we already know about human capital. Petty in 1664 had hit on the idea of this as time-discounted future lifetime pay. Adam Smith in 1776 saw it equivalently as accumulated past investment in nurture and schooling. The Americans Irving Fisher and Frank Knight revived both ideas in the early 20 century. The tempo picked up after World War IJ at the University of Chicago. Jacob Mincer rederived Fisher’s present value equation in 1958, and modeled investment in human capital through job training. Nobelists Theodore Schultz and Gary Becker soon joined in. New insights included the realization that human capital grows from the self-invested work of learning, as well as the outside Chapter 2: Fast Forward 1/06/16 11 HOUSE_OVERSIGHT_010951