Capital Theory - Peter Lewin
Carl Menger the discoverer of subjective value
Menger showed that value is forward-looking.
The value of the inputs is derived from the value of the outputs.
The value that consumers put on products determines the value of the inputs that are used to produce those products.
These values are manifested as market prices.
Production is a sequential process in which goods of higher order (capital goods) become transformed into goods of lower order (consumption goods).
Capital goods are varied in nature but can be classified by where they fit, along a time continuum, into the production process.
Time is inseparable from the concept of capital.
Rewards to saving result only if more time-consuming methods of production are adopted.
Example: intervention in the development of the fruits of nature.
The earlier a producer intervenes, the greater are the opportunities to tailor the production process to suit his own purposes.
At any point in time there is a capital structure characterized by capital goods of various orders.
As long as prices remain constant, the capital structure will remain constant.
How resources are used depends directly on the link between what consumers want and how production is organized.
Changes in the demand for one consumption good causes changes in the evaluation of particular capital goods and in employment.
Human error is included in this analysis, but it is not destabilizing as it is for Keynes.
The correctness of the valuation of higher order goods depends completely on entrepreneurial abilities.
Böhm-Bawerk
Roundabout methods of production: those production techniques embodying more time being more productive.
Böhm-Bawerk explored the relationship between capital and interest.
He was interested in the very existence of interest.
Three independent reasons for the existence of a positive interest rate:
Higher productivity of roundabout methods of production.
His production process is viewed as a series of concentric circles, with time progressing outward from the center.
Outermost ring: value attained by consumption goods.
Center: origin of the production process.
Ring interpretations:
The area can represent the amount of the different kinds of capital (maturity classes) that exist.
The initial outputs of the production process can be seen as radiating outward through the maturity classes until they emerge at the outermost rings as consumer goods.
Real saving is achieved at the expense of the lower maturity classes (outer rings) and saving makes possible the expansion and creation of higher maturity classes (inner rings).
An increase in capital involves a change in the time structure of production in some way.
He tried capturing the relationship between maturity levels as the average period of production
Measuring the amount of time on average that it takes to produce a product.
Cementing the heterogeneous elements of the capital structure into a single measurable stock.
This broke with Menger's forward-looking vision and was later criticized because of it.
This calculation is only possible in a world where unexpected change is absent, where all production techniques are known.
John Bates Clark criticized him.
The time element cannot be ignored.
Production and consumption are synchronized and occur together all the time.
Example: woodlot, constantly cutting and replanting.
Capital should be thought of as a permanent fund yielding a flow of income.
Modern developments: Hayek, Kirzner, Lachmann
Later developments in Austrian capital theory came in the Austrian business cycle and the Austrian market process.
Hayek wrote on the way the capital structure was altered by ill-conceived monetary policies and thus affected employment.
He developed his triangle.
But he remained wedded to aspects of Bohm-Bawerk's period of production and time structure.
Kirzner showed how a commitment to subjective value notions precludes a meaningful aggregate measure of the capital stock.
Capital stock: the total quantity of capital goods seen as a single, measurable whole (like a “stock” of resources).
He also points to the capital structure as the result of a dynamic, entrepreneurially driven market process.
Lachmann discarded any attempts to measure the capital stock.
He tried reinterpreting roundabout production
He characterized economic development in terms of the increasing complexity of the capital structure, as evidenced by the increasing number of production stages.
A production plan involves the combining of individual capital goods and labor resources in order to produce particular outputs
These capital goods stand in complementary relationship to one another within the plan.
Understanding capital in terms of plan provides two benefits
The plans provide reference points for interpreting any given capital structure
When plains fail completely, or succeed beyond expectations, they will be revised and the capital structure will be changed.
A plan revision entails the substitution of some resources for other
capital goods have multiple specificity (a limited range of competing uses)