Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I was going to make a comment in the original diary on the fact that back when Adam Smith was writing the economy had a strongly agrarian base and so it was clear that land was one of three factors of production (and rent its price). A few decades later Ricardo was still using the export of wine from Portugal to England as part of his toy example illustrating comparative advantage. This is why modern textbooks still pay lip service to the three-factor model of production before dropping land to develop the marginalist theory.

But, by the end of the 19th century, at least in the advanced economies, the industrial sector and its supporting banking system had become the lion's share of the national product (if there had been any econometrists there to measure it by sector). So, it was a safe approximation to drop land and rent from the model. Also, because of the rise of the money economy, land was now more important not because of the rent it could command but because of the mortgage that could be put on it (backed by the rent - but the capitalization became more important than the income).

However, it doesn't appear to me that capital is as scarce since the 1980's as you make it sound. Maybe the oligarchs have been able to capture and redirect the money flows so that capital is scarce for the "real economy".

Anyway, currently we have a paradoxical situation where money is plentiful (trillions in cash have been injected into the banking system in the last 3 years) and interest rates are at historical lows, and yet credit is scarce and nobody's lending (and the solvent are not borrowing). So a simple supply-demand theory of money and interest is simply not applicable today if it ever was.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Fri Jul 16th, 2010 at 03:49:11 PM EST

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