Tracking Policy Forces that Drive Technology, Capital Formation & Growth















Saper Vedere
Growth Is the Answer
How We Think
Stuff Matters
Shift Happens
Intrinsic Value
Intrinsic Risk

The Rutledge Institute for Capital and Growth is a forum for the analysis and discussion of capital and growth, for the dissemination of research on the impact of government policies on capital and growth, for tracking the impact of policy changes on the economy and financial markets, and for developing strategies to help businesses and investors increase value and build wealth. 

When people asked Leonardo da Vinci the secret of his creative and inventing genius, he replied "Saper Vedere," to know how to see. Our objective is to help people see the link between government policy, capital formation, and growth, then help them see strategies for growing their businesses, increasing the value of their investments, and improving their economic lives.


Thirty years of traveling the world have convinced me that growth is the answer. Economic growth is the only reliable engine for lifting people out of poverty and improving their lives. Access to capital, along with the people's focused productive energies, are the principal drivers of growth.

Capital comes in many forms; modern equipment, efficient factories, new technologies, high-speed communications networks, and improved education. All represent the stored energy of previous generations of investors, innovators, entrepreneurs, and workers. All make workers more productive, increase output, and provide the resources for people to achieve their economic, personal, and social goals. Incentives for creating capital and for the productive use of energy are the keys to increased growth.


As a young economist I taught graduate and undergraduate students in macroeconomics, monetary theory, international trade and finance, and econometrics. Like other academics, I taught students how to build and manipulate all the textbook models of economic behavior. I did so for three reasons. The models were mathematically elegant, which made them both beautiful and easy to teach. Publishing journal articles about them was the key to advancement in the profession. And, having never set foot in the real world, it was all I knew how to do.

Later I ventured into the real world where I learned the models were not always up to the task of helping policy makers, business managers, and investors understand change. While keeping my healthy respect for the limitations of economic models, my colleagues and I developed a framework of our own to guide our thinking. That framework-which is, of course, a permanent work in progress--underlies all of our work.

The first pillar of our thinking is also the simplest: Stuff Matters. No macroeconomic analysis is complete without accounting for people's multi-trillion dollar holdings of Stuff. Stuff describes the items on our balance sheets, including tangible assets (land, office buildings, collectibles, used cars, and other claims on future services), financial assets (stocks, bonds, bank accounts, and other claims on future cash flow), and all forms of liabilities (credit card debt, mortgages, and the obligation to service and repay the national debt).

Analyzing the income statement alone, i.e., GDP and its components, is just not good enough. That's because there is so much stuff out there. This year US GDP will be just over $11 trillion, compared with total assets (not including more than 700 million acres of government-owned land) worth more than $120 trillion at market value.

Stuff matters because the values of the individual items on our balance sheets determine our net worth, and our solvency, collateralize our obligations, and influence our behavior. Those values are set in markets based on the relative risks and after-tax returns of different assets and liabilities. Government policies that result in abrupt changes in relative risks and returns induce massive responses from private investors. These responses are the most important channels of economic and financial change.

Government policies influence our lives in many ways. Their biggest and longest-lasting impacts on the economy happen when they drive a wedge between the returns on some assets relative to others. These balance sheet effects dominate all other events in driving economic change.

In the late 1970's, for example, rising inflation added an artificial capital gains component to the return on tangible assets, while rising income tax rates artificially depressed the after-tax returns on financial assets. The resulting shift of investor demands drove a boom in hard asset prices and destroyed three-quarters of the real value of the stock market.

As a second example, the 1981 Reagan policies of falling inflation and falling tax rates reversed this shift by boosting financial asset returns relative to returns on tangible assets. This led to a decade of restructuring in US industry, and to an eighteen year bull market in bonds and stocks which triggered a huge wave of investing in the 1990's.

As a third example, the 1996 Telecom Act artificially subsidized the returns of some communications companies--cable operators and CLECs (Competitive Local Exchange Carriers, such as MCI and AT&T)-at the expense of the regional Bell operating companies. The resulting wedge driven between their respective returns on capital led to massive overinvestment in the former, and to a multi- trillion dollar loss of market value for the latter, and contributed to both the stock market bubble of the late 1990's and the severe recession since then.

Shift happens internationally too. The opening of China to foreign investors has exposed the gap between Chinese returns and ours. The result has been a massive flow of capital out of the US , the EU, and Japan and into China , millions of unemployed manufacturing workers, and growing trade tensions.


Our valuation approach is simple. Investors own securities for one reason-to get paid. Stocks and bonds are simply claims on the future cash flow generated by the underlying assets. The present value of those future free cash flow streams is the Intrinsic Value of the securities.

Intrinsic Value estimates will only be as good as the estimates of the value drivers for the underlying business--sales, price, cost, margins, tax rates, capital requirements, and cost of capital-behind the calculations. These value drivers are strongly influenced by government policies.

From time to time the interactions of buyers and sellers in the asset markets result in market prices which we find to be significantly above or below the Intrinsic Value of the securities. That's when stocks or bonds are over-valued or under-valued. Investors who consistently buy securities when they are undervalued, and/or sell securities when they are over-valued, will earn a higher-than-market return.

For a more detailed discussion, see Tracking Value


Risk does not mean volatility; risk means losing your money. That happens when a business fails to deliver the operating performance embodied in the price an investor paid to acquire it. We call this Intrinsic Risk, and we measure it by explicitly estimating the probability the Value Drivers that underlie a market price fail to deliver the implied free cash flow stream.


In physics, when two objects are brought into contact heat flows from the hotter to the colder object until the temperatures are equal, after which point there is no further change. This is known as the First Law of Thermodynamics-the most inviolable law in science.

Thermodynamics explains the weather, where temperature and pressure differentials cause storms. They explain chemical reactions, which are thermodynamic cooling processes. And they explain economics, where price, wage, or return differentials lead to the arbitrage behavior that moves prices and changes the allocation of resources. Our Shift Happens methodology is nothing more than a restatement of the First Law of Thermodynamics in the language of economics and portfolio analysis.

Thermodynamics deals with systems, not with particles. Recent work demonstrating the formal equivalence of far-from-equilibrium physics and irreversible (entropy producing) thermodynamic processes has led to a fuller understanding of the situations in which systems fail to adjust smoothly to change. These situations of system failure (blackouts) help us understand recessions, depressions, currency collapse, credit-market failure, and other discontinuous events in economics. Ironically, Irving Fisher, Knut Wicksell, and John Maynard Keynes studied these topics a century ago.

For a more detailed discussion, see Supply-Side Thermodynamics