Unmixing the metaphors of Austrian capital theory


A complement of metaphors inherited from the classical era has held back progress in Austrian capital theory (ACT). In particular, the attachment to circulating capital as the paradigmatic capital good, largely motivated by the business cycle theory, has locked ACT into a nonoperational point-output model of production. This paper draws out a distinct flow-output approach from work by Lachmann, Lewin, and Cachanosky, contrasts its associated metaphors and paradigms with those of the canonical Hayek-Garrison model, and argues that the former has the potential to bolster both the analytical coherence and the empirical relevance of ACT that it has so far found elusive. By focusing on the investment project rather than the capital good as the object of planmaking, the flow-output approach affirms the core appeal of ACT – a heterogeneous capital structure and a market process approach – by declaring independence from the business cycle theory.

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  1. 1.

    See especially Hayek (1941: 47), where he argues that continuity with Ricardo and Mill is a point in favor of Austrian capital theory and against contemporary Anglo-American capital theory. Hayek (1931, 1933) also express debt to Ricardo’s conceptualization of monetary and capital problems. Gordon (1973) argues that the Ricardo-Mill wage fund construct was essentially dead by the end of the nineteenth century until Böhm-Bawerk ([1891] 1930) revived it in a modified ‘subsistence fund’ form and moved it to the realm of capital theory rather than wage analysis. That very division, of course, is a Ricardian legacy as well.

  2. 2.

    Other uses in economics, such as ‘social capital’, are more analogies than proper instances of capital, as they do not generally have either a rental or a sale value.

  3. 3.

    Hayek (1941) is most notable in this respect for attempting to assimilate in this direction in full view of the difficulties of doing so.

  4. 4.

    Hayek (1936) at various points both asserts that capital can only be sensibly measured in value terms and not physical, and criticizes Knight’s use of value units to homogenize capital into a fund. Yeager (1976) retains the “attractive quasi-homogeneity” of capital by retreating to pure theory and defining it quasi-tautologically as the thing (whatever that may be) which embodies waiting as a factor of production. It is not clear that this is more operationalizable than the standard Ricardian setup, or even that it suggests a paradigmatic capital good, though Yeager does seem attached to the circulating capital metaphor.

  5. 5.

    The translator of Hayek (1929) from its original German brings attention to his rendering of Kapitalintensität (an obvious cognate to “capital intensity” in English, though Hayek (1939: 17) thought this rendering “somewhat too literal”) as “roundaboutness” (Ibid.: 234). This does not match Böhm-Bawerk’s ([1891] 1930) terminology, for whom “roundabout production” was translated from Productionsumwegen (“detours in production”). Hayek did, however, use “roundabout processes” in his English work (e.g. 1931).

  6. 6.

    The Cambridge (UK) antagonists to the debate, on the other hand, saw the basic incompatibility between marginalism and the Ricardian income-determination project more clearly, but preferred to preserve the latter by rejecting the former. See Cohen and Harcourt (2003).

  7. 7.

    Ironically, O’Driscoll & Rizzo (1985), the most influential book explicitly advancing Lachmann’s research agenda, contains in its chapter on business cycles (ch. 8) a markedly Hayekian and pre-Lachmannite exposition of ABCT which would later be developed into Garrison (2001). Ebeling (2015), similarly, even states that Lachmann “remain[ed] true to the Böhm-Bawerkian emphasis on capital goods as intermediate goods within time-structures of production”, despite the fact that the lack of this emphasis is precisely what separates Lachmann from preceding Austrian capital theorists.

  8. 8.

    Hayek (1936) in arguing against Knight’s conception of capital as intrinsically perpetual emphasizes that capital maintenance is not routine; that capital equipment is not necessarily replaced with identical items, and that active decisions are involved at each step. This seems like an overstatement. For our purposes, we can say that planned replacement with an identical item is a routine extension of the original plan, and replacement with different equipment would be a relevant time-consuming change to the capital structure in our sense.

  9. 9.

    Interestingly, Hayek (1936, fn. 33) suggests avoiding the use of the term ‘capital’ altogether.

  10. 10.

    Analytically, jointness in production poses the same capital-theoretic problems as the durability of capital. The effect of both is to make it impossible to attribute particular units of output to units of input.

  11. 11.

    Wagner’s (2010) process-focused and non-equilibrium ‘neo-Mengerian’ approach to economics, for example, appears quite comfortable with this sort of simultaneity:

    Suppose that 95% of enterprises are operating within their execution phases, leaving 5 % of enterprises at nodal positions where they are either creating or revising plans. This kind of situation would generate observations that would fit with the reasonably predictive properties of models of static equilibrium. An established furniture manufacturer that also owned its forests would confront the world in pretty much simultaneous fashion. During any year, or other time span, it would be planting trees, harvesting trees, buying and repairing equipment, and making furniture, all of it appearing to be simultaneous.. .. The source of the motion [in an economy]. .. is the 5 % of enterprises not in stasis at any particular instant that are eroding the static reposes of the other enterprises.

  12. 12.

    Cachanosky and Lewin (2016) argue that investments of long duration “do not correlate coherently” with what were understood by previous Austrian authors as higher-order stages of production. Salter and Luther (2016) argue that, in the context of a rational expectations model, whether the boom occurs in higher-order industries or somewhere else has little relevance to the Austrian story. Luther and Cohen (2014, 2016) discuss some of the difficulties in operationalizing the stages of production concept for empirical work.

  13. 13.

    Even such a small set of failures could, in principle, trigger a recession if these failures snowball by forcing financial firms to contract their issues of broad monies and financial assets (see Harwick 2019a). This can cause a decline in real money balances, slow spending until prices fall, and a rise in interest rates due to a scarcity of liquidity. This transmission mechanism is significantly different than the standard ABCT story, however: it would place the primary emphasis on what Hayek (1933) and later writers have largely dismissed as “secondary” deflation (though Horwitz 2000 does place somewhat more importance on it). Very different practical conclusions for stabilization policy follow.

  14. 14.

    Given the role of real business cycle theory in reviving the neoclassical production function following the Cambridge capital controversies (Cohen and Harcourt 2003), a richer capital-theoretic approach has the potential to elucidate the plausibility of its causal claims, as opposed to its statistical fit.


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Harwick, C. Unmixing the metaphors of Austrian capital theory. Rev Austrian Econ (2020). https://doi.org/10.1007/s11138-020-00515-8

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  • Capital theory
  • Business cycle
  • History of thought

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  • E14
  • E22
  • E32