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Quotation of the Day…

… is from pages 39-40 of Eamonn Butler’s superb 2018 monograph, An Introduction to Capitalism:

But in reality, capital is very diverse. It exists only in specific capital goods, all of which are different: from hammers and sickles to cars and trucks, cotton mills and car plants, computers and printers, cash registers and freezer cabinets, loans and bonds, and many more. Exactly what kind of capital goods are used, how they are used, and how they network with other capital goods, all have profound effects on economic outcomes.

Failing to understand this leads to serious mistakes. For example, it is nonsense to talk about ‘the’ return on capital, as the French economist Thomas Piketty (1971-) does in his 2013 book Capital in the Twenty-First Century. The different capital goods that comprise capital each come with different amounts of risk and potential reward, and have different owners who have different levels of skill in managing them, and who apply them to different purposes. There are also numerous different ways in which different kinds of capital can be lost, stolen, dissipated, consumed, taxed or regulated away – some more easily than others – all of which eat into the potential return of the various capital goods in various ways and to various degrees. Not only that, but the mix of capital goods that are in use is constantly changing: today we use cars and computers where once we used horse buggies and slide rules. So there is no permanent, uniform profile of a nation’s capital with a permanent, uniform ‘rate of return’.

DBx: Pictured above is a chocolate-covered pickle. I use this example when I discuss with my students the diversity – the heterogeneity – of inputs, including capital goods and services. Talking and writing of “inputs” and of “capital” as if these are blobs of homogeneous stuff risks being blinded to the importance of a never-ending process that ensures that these diverse inputs are combined in ways that yield outputs of the highest possible value rather than outputs of low, no, or negative value. Information about both the relative intensities of consumer desires for different consumer goods, and the relative scarcity of each different input that might be useful in production, is necessary to ensure that inputs are combined in ways that are productive rather than unproductive.

As Eamonn suggests above, all talk of ‘automatic’ or ‘natural’ returns to capital is silly. And yet, as we saw just after Piketty’s book was published a few years ago, lots of people fall for this silly talk and treat it as if it is not only sensible, but scientific. It is neither.