Prescott on the Cambridge Capital Controversy

"I will argue that much of the failure of monetary economics to progress over the last 25 years is the failure to construct models that provide guidance on how the national accounts should be extended to include production of 'financial services'. In the 1960s there was the famous Cambridge capital controversy. This controversy bears on the issue 'What is money?' The Cambridge capital controversy was a silly one, as pointed out so clearly by Arrow (1989). Arrow, being a general equilibrium theorist, pointed out that there are multiple types of capital goods and with multiple capital goods only under very special conditions is there an aggregate capital stock. I emphasize that this does not mean that a model with a single capital good, which is matched to the value of some capital good statistic, is not useful in drawing scientific inference. I use such models along with other national accounts statistics to draw quantitative inference concerning a variety of phenomena, including business cycle fluctuations, secular movements in output and hours worked in the market sector, depressions and prosperities, and even in the behavior of stock prices. Rather, it means that for some purposes this single capital stock abstraction is not a good one for drawing inference." -- Edward Prescott (2005). "Comments on 'Inflation, Output, and Welfare' by Ricardo Lagos and Guillaume Rocheteau", International Economic Review, V. 46, N. 2 (May): 523-531