A widely held belief among investors is that a sustained period of benign inflation makes long-range business planning viable, potentially kickstarting the investment cycle. But the economy is coordinated by more than just stable prices.
Entrepreneurs and consumers are constantly forming expectations about the future - expectations of meeting their individual plans. Entrepreneurs build expectations about likely actions of fellow entrepreneurs. Research on managerial behaviour suggests that ostensible profitable opportunities remain unexploited because entrepreneurs expect other entrepreneurs to exploit, leaving none to make the first move - a classic coordination failure.
Coordination, not competition, moves the economy. Competition frameworks are templated classroom versions of markets. In reality, entrepreneurs are only eager about their own plans meeting fruition. But that requires a few necessary scaffolding such as predictable rules, impartial courts, enforceable contracts, low and non-retrospective taxation.
Therefore, while the industrial accountant green-lights projects, the successful coordination of plans needs more than just stable, computable prices and positive NPVs. In the current investing environment, such scaffoldings are yet to be strengthened. The probability of such sanguine conditions emerging in the future are weighed in by the capital markets. Until such conditions emerge, the question becomes which firms have the breadth and resources to coordinate internally while the external environment materializes.
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