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.
NEW YORK UNIVERSITY
Department of Economics