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See Cambridge capital controversy from Wikipedia.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 19th, 2011 at 10:41:24 AM EST
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Unfortunately, Wiki attributes the origin of neo-classical economics to conflicts with Marx. Gaffney showed that the real reaction was to Henry George and that George's critique was more dangerous to the interests that neo-classical economics was created to protect in that it justified the taxation of the value of land as the primary basis of income for the government. That would have seriously derailed one of the most profitable wealth accumulation strategies of the period since the US Civil War.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 19th, 2011 at 02:18:48 PM EST
[ Parent ]
No, the problem is more general than that.

Even if you can aggregate capital smoothly and without problems, it would still be wrong to say that there is lots and lots of capital sloshing around looking for gainful employment. The correct formulation is that there is lots of financial assets sloshing around, looking for capital to gainfully employ.

This formulation - quite independent of how you measure the volume and value of real capital - illustrates that the problem is a shortage rather than an excess of capital (including raw materials).

At the moment, we also happen to have a shortage of financial assets, due to the inability or unwillingness of policymakers to distinguish between physical capital (which must be paid for in sweat and raw materials) and financial assets (which can be created ex nihilo and consigned to oblivion essentially for free and in whatever volume required for the optimal functioning of the productive economy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 20th, 2011 at 05:28:55 AM EST
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The correct formulation is that there is lots of financial assets sloshing around, looking for capital to gainfully employ.

This formulation - quite independent of how you measure the volume and value of real capital - illustrates that the problem is a shortage rather than an excess of capital (including raw materials).

But the problem is not a shortage of capital to gainfully employ.

The problem is the outlandish definition of gainfully. And, if capital is scarce, it must be relative to an overabundance of financial claims.

Paradoxically, because there's an excess of money, not enough money is gainfully employed. Is there some sort of Giffer good effect here?

Because there is more money than hoarders know what to do with, the rate of return they obtain for actual investment is bid down to where they are not actually interested in investing, and the real economy starves for funding while financial assets slosh around charging double-digit returns which may be mythical or, if actually realised, basically just inflate the financial hoard making the problem worse.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Tue Dec 20th, 2011 at 06:16:46 AM EST
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