States to draw talent from the rest of the world may create shareholder
value in excess of the cost of hiring these workers.^30
It may be that in the very long run the market value of the tangible
and intangible capital must equal the cost of reproducing it. But book
value is a construct of the past; market value derives from prospective
earnings and looks to the future. These prospective earnings more accu-
rately establish the basis of stock valuation than the historical costs at
which the firms purchased these assets.Market Value Relative to the GDP and Other Ratios
The gross domestic product (GDP) is universally regarded as the best
measure of the overall output in the economy. It would be reasonable to
assume that the market value (MV) of firms should bear some normal
relation to the size of the economy. Figure 7-7 shows the ratio of the mar-
ket value of stocks to the GDP since 1900.CHAPTER 7 Stocks: Sources and Measures of Market Value 119
FIGURE 7–7
Market Value of Equities as Percent of Total GDP(^30) Of course, one can reply that for every firm that creates a more productive environment, there
is another firm that creates an unsuccessful one and ends up overpaying and wasting intellectual
resources.