Sunday, January 2, 2011
Of Saxaphones and Heterogeneous Capital
Capital is not a homogeneous blob of K, or as Peter Klein puts it in chapter 4 of his The Capitalist and the Entrepreneur, "shmoo." As such when thinking about how capital is allocated in an economy, we need to recognize that quantity of capital alone is not all that matters. Capital must be invested in the right places at the right time in the complex structure of production.The heterogeneity of captial is another reason that trying to resuscitate a recessionary economy via monetary inflation or fiscal stimulus is unwise and why focusing on maintaining stable nominal GDP spending is to focus on the wrong thing.