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Capital Theory and the Process of Inter-Temporal Coordination: The Austrian Contribution to the Theory of Economic Growth

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Abstract

Appreciation of the necessity of the inter-temporal coordination of heterogeneous capital goods is the chief contribution of Austrian economics to the theory of economic growth. Austrian theory illustrates why an institutional environment of freely formed prices predicated on private property is essential for economic growth. This leads Austrians to have a unique take on Solow growth theory, the financing gap model, national economic planning, and aggregative development measures.

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Notes

  1. For more on how capital theory serves as the bridge between the “micro” and the “macro” in Austrian economics, see Garrison (1984), Garrison and Bellante (1988) and Horwitz (2000).

  2. Following Rothbard (2009 [1962]: 483–88; 496–500) and Hayek (2009 [1941]: 50–65), we can define “land” as consisting of all the nature-given, material factors of production as well as the previously produced factors that are physically permanent and need no maintenance or replacement. Capital goods, on the other hand, consist of the previously produced, physically impermanent resources and thus need maintenance and eventual replacement. Stated differently, they eventually wear out.

  3. This increased utility can consist of a greater quantity of the goods produced by the shorter processes already adopted or of goods that yield greater utility and are thus more highly valued but are impossible to produce using shorter processes.

  4. For a more detailed analysis of the trade-offs involved in any lengthening of the structure of production in both a Robinson Crusoe setting as well as in a modern economy, see Böhm Bawerk (1959a: 102–118), Mises (1998 [1949]: 476–499) and Rothbard (2009 [1962]: p. 47–70 and 390–409).

  5. On the time market and its relationship to the production structure, see Rothbard (2009 [1962]: 367–452) and Böhm Bawerk (1959a: book IV).

  6. The phrase “production process” here refers to the entire process culminating in a consumer good. On the market, this process is seldom undertaken by a single entrepreneur, unless the entire production process of a consumer good is completely vertically integrated. Instead, each such process is sub-divided into many sub-processes, each of which is carried out by one entrepreneur. It follows that the “two zero points” are calculated from the revenues derived from the sale of the consumer good that ultimately flows from this process and the costs incurred on all the resources utilized from start to finish in its production.

  7. For more on the categorization of goods into various orders and the concept of stages of production, see Menger (2007 [1871]: 52–77, Böhm Bawerk (1959a: 169) and Rothbard (2009 [1962]: 8–10).

  8. For a detailed exposition of how a lowering of the rate of social time preference leads to a lengthening of the production structure and therefore economic growth, see Hayek (1967 [1931]), Garrison (2001: 57–83) and Rothbard (2009 [1962]: 517–527).

  9. The classic exposition of capital heterogeneity and its implications is Lachmann (1956). For a more recent treatment of the same see Lewin (2011).

  10. In this regard, the conclusions of the Austrian theory of growth differ from those of the famous Solow model (Solow 1956).

  11. For an excellent exposition of how the Austrian theory of growth provides the necessary theoretical lens for understanding the historical growth process, see Shenoy (2007, 2010).

  12. See Berggren (2003) for a somewhat dated survey of this literature and www.freetheworld.org for a website with many of the more recent papers using the index.

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Authors and Affiliations

  1. Manuel Johnson Center for Political Economy, Troy University, Troy, AL, USA

    G. P. Manish

  2. The Free Market Institute, Texas Tech University, Lubbock, TX, USA

    Benjamin Powell

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Manish, G.P., Powell, B. Capital Theory and the Process of Inter-Temporal Coordination: The Austrian Contribution to the Theory of Economic Growth. Atl Econ J 42, 133–142 (2014). https://doi.org/10.1007/s11293-014-9404-8

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