Sam Zell is a legendary real estate tycoon. I once spoke at a meeting following Sam, and I was impressed with 1) his wisdom, and 2) his use of language that I couldn’t get away with. He has a great little econ lesson in a the form of a song here. (Hat tip to Greg Mankiw.)
Listen to the song first. Now let me add my comments. The world does seem awash in liquidity, with the high savings rate of the emerging countries as a major cause. But I think that the world is also getting more efficient in the use of capital, in terms of dollars worth of output per dollar of capital employed. The old way to produce value was to build a brick and mortar factory. The new way is to buy a few servers. Companies can achieve a lot with relatively little capital. The blog Running with Startups has been talking about the benefits of bootstrapping (using internal cash flow to grow) over venture capital. So at the same time that the supply of capital is strong, the demand for capital is weak. Keynes was concerned that demand for capital might be weak because of pessimism, but this weakness in demand reflects efficiency. It’s a good thing–but it’s different.
Business Strategy Implications: It’s a good time for capital-intensive activities. After decades of trying to conserve the use of capital, businesses should realize that today capital is cheap. It still doesn’t make sense to have assets that don’t earn their keep, but recognize that the world is a lot different now than it was 20 years ago.