New Paper on Austrian Capital Theory
In my Hayek Lecture at last year’s Austrian Economics Scholars Conference I argued that Austrian capital theory is deserving of a comeback as an absolute integral part of Austrian economics. I argued that ACT directs attention to the essential importance of heterogeneity and I argued that notions of capital heterogeneity serves to bring the entrepreneur, transaction costs and institutions directly into our understanding of the growth process.
An essential part of ACT is, of course, the work of Eugen von Böhm-Bawerk. On the one hand, Böhm’s work is absolutely seminal, on the other hand, its too strong emphasis on aggregates and simplifying assumptions arguably side-tracked the development of ACT in some key ways. Needless to say, to mainstream economists ACT is Böhm-Bawerkian capital theory because it lends itself to formalization.
A recent example of formalizing Böhm’s theory is Renaud Fillieule’s “A comprehensive graphical exposition of the macroeconomic theory of Böhm-Bawerk.” Fillieule makes a strong case for Böhm’s theory as a precursor of Solowian growth theory and of macroeconomics in general. In contrast to many other commentators on ACT, he is familiar with modern Austrian work on the subject. A very elegant article and most definitely worth a read. Here is the abstract:
This paper offers a comprehensive graphical exposition of Böhm-Bawerk’s formalised macroeconomic theory. This graphical model is used here for the first time to study the effects of the changes in the explanatory variables (quantity of capital, number of workers and level of technical knowledge) on the dependent variables (interest rate, wage and period of production). This systematic application of the model shows that some of the conclusions drawn by Böhm-Bawerk are incorrect and need to be amended. A comparison with Solow’s model also shows that Böhm-Bawerk can legitimately be considered as one of the main originators of the standard contemporary approach in macroeconomics of equilibrium and growth.
Also posted at Organizations and Markets.