Chapter
VIII of Information
and Investment
is The Need for Adaptability. It includes a very extensive discussion
of liquidity.
The
author assumes an entrepreneur will adopt the investment plan which
offers the highest mathematical expectation of income, irrespective
of the degree of dispersion which the possible values of income may
show. I know from personal experience in risk management this isn’t wholly true, but I
don’t regard it as very wrong.
Ideally,
an investment plan is designed to offer positive profits under all
possible scenarios likely to develop. In practice, however, such
perfectly adaptability is out of reach. So long as the investor holds
his resources in the form of money, he remains free to choose to
engage in a variety of activities, the range of which is limited by
technical, legal, and financial restraints. Whenever he decides to
commit his resources in a form other than money, the scope of future
activities is to some extent curtailed. However, the committing of
resources in that way is the only hope the entrepreneur has for a
substantial return. The more capital-intensive is the process, the
greater is the fixed cost, and the greater will be the per unit cost of
output if the total volume of production has to adapted to a lower
level of demand.
Adaptability
is enhanced by the power to make net expenditures from a source of
readily available purchasing power. This has two dimensions –
amount and speed. This is the heart of liquidity.
Of course, money is the most liquid asset. Further resources are
trade credit granted by suppliers and credit from a bank or other
lender. Urgent sales of assets typically mean getting less money in
return than patiently waiting.
An
actual liquidity position at a particular time may be accounted for
not in terms of intentions but as the unplanned result of recent
transactions – of unexpected variations in costs or receipts. Cash
balances in this sense are ex
post,
not ex
ante
in terms of a ‘transactions motive.’
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