Full text: Capital Gains in Economic Theory and National Accounting

be quite sufficient to make a clear decision. The short term holder on the other 
hand is predominantly interested in the future price of the share, and a fairly 
near future at that. The long term holder will be less prone to flights of 
imagination and his influence will tend to set a limit - up and down - to the 
price the share might have. His influence will tend to be stabilising (see 
Keynes )although this is heavily qualified by the fact that he ultimately has no 
safe knowledge of the future dividend but only makes a more or less informed 
guess. .The short term holder is not much interested in the "inner value" of the 
share but rather in the opinions of others about it. As Keynes has so 
brilliantly described his expectations are based on the expectations of others 
and his influence is therefore basically destabilising ( General Theory p. ) . 
That his influence is of decisive importance on the actual movements of stock 
prices is shown by experience. 
The instability takes the form of cycles. When optimistic expectations lead to 
an increase in asset value this tends to be extrapolated and the value continues 
to increase. If this is not justified ex post by a corresponding increase in the 
"inner value" of the share then the ratio of the actual dividend to the value 
will decline until at a certain point it becomes too low for investors who 
refuse to believe in a further increase of the asset value. Once the increase in 
asset values stops and the total return on the share is confined to the dividend 
there has needs to be a decline in asset values as a consequence of the low 
return.The market then collapses. Such a self-destructive boom may also be 
engendered by cyclical changes in the rate of interest. A decline in the rate of 
interest will drive up the value of shares - note that the short term holders or 
speculators finance their holdings in good part by credit - and a boom will be 
set in motion just as in the case of a surge of optimistic expectations. In both 
cases there is a non sustaineable increase in asset prices. The mechanism 
ressembles that of the trade cycle where there is a non sustaineable increase in 
the rate of growth. Naturally the two -the financial cycle and the trade cycle 
influence one another. 
The boom which is the necessary condition for capital gains is brought about by 
the expectation of it. Since this involves substantial demand for credit before 
the capital gains are created it can be expected that the boom will tend to 
raise interest rates. It might be thought that this will be compensated once the 
capital gains materialise, but this will certainly not be the case if the

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