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October 20, 2008
Austrian Capital Theory in Action
Don Boudreaux
Mario Rizzo, one of my former professors at NYU, sent this excellent letter recently to the New York Times:
To the editor:
As much as I admire Casey Mulligan's work in general and agree with him on many things, I am quite taken aback by his piece "An Economy You Can Bank On" of October 9th.
First, the idea of an aggregate "marginal product of capital" is an example of a concept in search of a real-world counterpart. If it were to mean anything useful it would have to be some kind of coherent sum of the productiveness of the capital of individual firms. Decades of discussion among economists failed to produce any way to do this consistent with the facts of reality.
Second, society does not have a capital stock as if it were lump of some homogeneous substance. Capital is a structure of various goods used in specific combinations to produce other goods. Today the capital structure is discoordinated. Too many resources have gone into housing, for example. An aggregate measure that ignores this cannot convey an adequate picture of the real economy.
Third, Professor Mulligan has come dangerously close to saying that money, or perhaps credit, is simply a veil. He says if there are potential borrowers and potential lenders out there, they will find some way to get together. As both J. M. Keynes and F. A. Hayek argued, money is not neutral. It has real effects. It guides production and consumption decisions. We live in a monetary economy that depends on signals from interest rates, financial asset prices, among others.
I wish Professor Mulligan were right, I would sleep better; but he isn't.
Sincerely,
Mario Rizzo
NEW YORK UNIVERSITY
Department of Economics
Posted by Don Boudreaux in Current Affairs, Monetary Policy | Permalink
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Comments
The idea in his second point - crudely, "There is no capital, only capitals" - is thought provoking, but is it an insight or a mere quip?
Does he propose elsewhere some test that could be applied to verify that too many resources have gone into a particular kind of capital? Although I share his belief that there are "too many" resources in housing, I lack a basis for that belief that would withstand elenctic.
Does he have a test which could be applied before the resources have been misallocated? With such a test, Wham-O could have decided to bank the profits from the first wave of Hula Hoops instead of reinvesting them in Hula Hoop machinery.
Such a test would be of broad applicability. A great many entities, public and private, would benefit from being able to determine before the fact that a proposed resource allocation would be excessive.
Posted by: T L Holaday | Oct 20, 2008 10:04:28 AM
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