Sunday, January 2, 2011

Of Saxaphones and Heterogeneous Capital

While attending one of my college's annual Christmas concerts, I was reminded once again of one of the most underrated contributions to economics by the Misesian economic tradition--the idea that capital is heterogeneous. The first half of the Christmas concert was performed by the Grove City College Saxophone Quartet. The musicians were all quite capable and earnest in their music making, but it quickly became apparent that there was a clear difference between the success of the up-tempo jazzier pieces and that of the more lyric pieces.  Saxophones are great at swinging and bopping, but they are simply not designed for communicating sustained pathos. They are not equally serviceable for both lines of musical production. What is true in woodwind instruments it true for most other capital goods as well.

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.

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