Introduction

The above discussion clarifies, I hope, the nature of capital and some of the issues that surround its characterization. It will be remembered that the rate of discount featured in considering the capital value of any plan. This is sometimes also referred to in the literature as the rate of interest or the rate of profit. The question arises then as to the nature of interest as a phenomenon, and the relationship between interest and profit. As basic as this is, it remains a source of confusion in economics.

I have, to this point, explored aspects of the history of capital theory, and the nature of interest, profit, and rent. One should distinguish between capital goods and capital as an abstract category. The latter refers to the value to be attributed to a particular plan or set of production plans. The profits or losses to be attributed to a production plan are the result of changes (or the absence thereof) in the capital values attributed to it over time.

Introduction

Our considerations in Part II suggest the following conclusions from which we shall proceed in this part.

1. Capital theory historically involved misleading physical analogies. Examples are:

[I]n capitalist reality as distinguished from its textbook picture, [the] . . . kind of competition which counts [is] the competition from the new commodity, the new technology, the new source of supply, the new type of organization.

(Schumpeter 1947:84–85, italics added, quoted in Penrose 1995:114n.)

Introduction: Firms and Calculation

The discussion in the previous chapter suggests that firms derive their rationale from the fact that the organization of production matters for its results. By the same token, as the economy changes, and the production structure changes along with it, the advantages of different types of organization will also change.

Hayek (1945) did not emphasize an even more significant implication of his analysis, although he must have been aware of it. The specialized knowledge at the command of workers is not simply given, for the knowledge acquired depends on incentives. Centrally planned and other economies that do not make effective use of markets and prices raise coordination costs, and thereby reduce incentives for investments in specialized knowledge.

(Becker and Murphey 1993:306)

Introduction: The Implicit Tension

To create knowledge is not to fathom or command it or own it. All knowledge is born, and forever dwells, behind a veil that is never shed. After their birth, bodies of knowledge remain forever unfathomed and unfathomable. They remain forever pregnant with consequences that are unintended and cannot be anticipated.

(Bartley 1990:32)

Summary

A world in which all individual plans, in every relevant detail, are mutually consistent, is a world in which economic analysis is greatly simplified. It is a world devoid of essential change. All economic values have universal and unambiguous meaning. The capital stock, that set of productive instruments in combinations that give effect to universally perceived productive techniques, has an unambiguous value.

Ahiakpor, J. W. C. 1997. “Austrian capital theory: Help or hindrance?” Journal of the History of Economic Thought 19 no. 2: 261–285.

Alchian, A. and H. Demsetz. 1972. “Production, information costs, and economic organization”. American Economic Review 62 no. 5: 772–795.

Alchian, A. and S. Woodward. 1988. “The firm is dead; long live the firm: A review of Oliver Williamson’s The Economic Institutions of Capitalism”. Journal of Economic Literature 26 no. 1: 65–79.

A

action, 31–32

competitive vs. complementary, 32

dependence on rules, 42–43

predictability, 38–39, 42, 45

Ahiakpor, James W. C., 56, 243

Alchian, Armen, 158, 159, 243

Arthur, W. Brian, 40, 144, 243

asset specificity, 158–159

Austrian School, 23, 49, 64, 98

Austrian theory of the business cycle, 126

average period of production, 63–78