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Wednesday, 7 May 2014

The Importance of Capital in Economic Theory

By Robert P. Murphy

One of the central features of the market economy is capital. Indeed, the system of free enterprise and private property is often denoted by the term capitalism. Economists, in turn, have always included the concept of capital in their theories and models, going back to the birth of economics as a separate discipline. It is only fitting that, as this article is published, Thomas Piketty's tome, Capital in the Twenty-First Century, is the #1 bestseller among all books on Amazon.

However, the classical understanding of capital and its place in economic theory was muddled. Even though it was refined in light of the new marginal productivity theory of pricing, the increasing formalism of economics in the 20th century led many economists to lose the new insights.

This article outlines these developments and explains why many of today's economists would benefit from a better understanding of the nature of capital. The issue is important not just for the basic theory of income distribution, but also for understanding complex topics such as business cycles.

Read the article here.