Robert P. Murphy on Capital
By David Henderson
However, the classical understanding of capital and its place in economic theory was muddled. Even though it was refined in light of the new marginal productivity theory of pricing, the increasing formalism of economics in the 20th century led many economists to lose the new insights.
This article outlines these developments and explains why many of today’s economists would benefit from a better understanding of the nature of capital. The issue is important not just for the basic theory of income distribution, but also for understanding complex topics such as business cycles.
These are two of the opening three paragraphs of one of the May Econlib Feature Articles. The article, by Robert P. Murphy, is titled “The Importance of Capital in Economic Theory.”
Framed in terms of macroeconomic aggregates, the Keynesians do seem to have a strong case against the RBC [real business cycle] theorists and other free-market economists who think the economy should be “left alone to sort things out” during a recession. If we use a model that represents the capital stock by a single number (call it “K”), then it’s hard to see why a boom period should lead to a “hangover” recessionary period. Yet if we adopt a richer model that includes the complexities of the heterogeneous capital structure, we can see that the “excesses” of a boom period really can have long-term negative effects. In this framework, it makes sense that after an asset bubble bursts, we would see unusually high unemployment and other “idle” resources, while the economy “recalculates,” to use Arnold Kling’s metaphor.
The whole thing is worth reading.