Capital and Its Structure
1.  F. A. Hayek, Pure Theory of Capital (London, 1941), p. 3.
2.  R. M. Solow, Capital Theory and the Rate of Return (Amsterdam, 1963,) p. 16.
3.  Solomon Fabricant, "Towards Rational Accounting, in an Era of Unstable Money, 1936-1976," National Bureau of Economic Research, Report 16 (December 1976), p. 13.
Chapter 1, THE ORDER OF CAPITAL
4.  'But although, even in the analysis of a stationary equilibrium, the inclusion of the "quantity of capital" among the determinants of that equilibrium means that something which is the result of the equilibrating process, is treated as if it were a datum, this confusion was made relatively innocuous by the essential limitations of the static method, which while it describes the conditions of a state of equilibrium, does not explain how such a state is brought about.' F.A. von Hayek: Profits, Interest and Investment, pp. 83-4.
5.  Lectures on Political Economy, Vol. I, p. 202.
6.  Joan Robinson: The Rate of Interest, and other Essays, p. 54.
7.  A. P. Lerner: 'On the Marginal Product of Capital and the Marginal Efficiency of Investment', Journal of Political Economy, February 1953, see especially pp. 6-9.
8.  We do not wish to imply, of course, that other capital theories are not based on, or do not conform to, the definition of economic action and the praxeological axioms it entails. But all too often the link is rather tenuous.
There is a 'missing link' in most equilibrium theories; they all have to assume that, once the data are given, the problem of how equilibrium is reached has been solved. By contrast we shall concern ourselves with the 'path' which men have to follow in building up capital combinations and using them.
9.  Professor S. Herbert Frankel has for some time expounded a similar view. 'Capital...is, apart from the symbolism of accounting, always "concrete" in the sense that it is embedded in, and attuned to, the particular purposes and state of knowledge which led to its "creation". It is but temporarily incorporated in ever changing forms and patterns suited to the evanescent ends for which it is designed' (The Economic Impact on Under-developed Societies, 1953, p. 69).
10.  The Pure Theory of Capital, p. 54.
11.  Erik Lindahl: Studies in the Theory of Money and Capital (George Allen & Unwin Ltd.), pp. 38-9.
12.  In these discussions Professor Frankel has shown himself an undaunted critic of the quantitative notion of capital which most other writers on the subject accepted without question. In particular, he frequently warned his fellow-economists 'not to regard the calculations of the private entrepreneur in terms of established accounting symbolisms as in any sense an automatic or mechanical process' (S. H. Frankel, op. cit., p. 66).
13.  For examples see S. H. Frankel, op. cit., pp. 101-2.
Chapter 2, ON EXPECTATIONS
14.  Oscar Lange: Price Flexibility and Employment, p. 31
15.  G. L. Shackle: Expectations, Investment and Income, 1938, p. 64.
16.  L. M. Lachmann: 'A Note on the Elasticity of Expectations', Economica, November 1945, p. 249.
17.  G. L. Shackle: Expectations in Economics, 1949, p. 249.
18.  Cf. F. H. Knight: Risk, Uncertainty and Profit, Chapter VII, especially pp. 224-32, and L. v. Mises: Human Action, Chapter VI, especially pp. 106-15.
19.  G. L. Shackle: Expectations in Economics, 1949, p. 127.
20.  Ibid., p. 110.
21.  Ibid., pp. 109-10.
22.  'No business executive has to decide a hundred times in ten years whether or not to spend £1,000,000 on a new factory'—p. 115.
23.  Ibid., p. 111.
24.  G. L. Shackle: Expectations in Economics, 1949, p. 91. (His italics.)
25.  It is true that for the main purpose of this book, the elucidation of a morphological conception of capital, this may not seem strictly necessary. But, as will be seen in Chapter IV, it may be of help in making us understand the distinction between consistent and inconsistent capital change.
26.  See above, p. 24.
27.  Lange, op. cit., p. 30
28.  Ibid., p. 31.
29.  Cf. L. M. Lachmann: 'Commodity Stocks and Equilibrium', Review of Economic Studies, June 1996
Chapter 3, PROCESS ANALYSIS AND CAPITAL THEORY
30.  The criterion of success or failure, as we pointed out in the last chapter, has to be sought within the expectational framework of the plan
31.  By permission from Dynamic Equipment Policy, by George Terborgh. Copy-right 1949. McGraw-Hill Book Company, Inc., p. 17
32.  J. R. Hicks: Value and Capital, 1939.
33.  Erik Lindahl: Studies in the Theory of Money and Capital, 1939, in particular Part One, pp. 21-138
34.  Erik Lundberg: Studies in the Theory of Economic Expansion, Stockholm and London, 1937, especially Chapter IX
35.  This assumption will be abandoned in Chapter VI.
36.  Joan Robinson: The Rate of Interest and Other Essays, 1952, especially pp.77-80
37.  'In order that a complementary investment should be profitable, its cost must be less than the increase in the value of the old plant due to the complementary investment, that is, less than the value of the modernized or extended plant minus the value of the old plant. Thus, the more this latter value sinks, the more likely it is that complementary investment will pay' (Tord palander: 'On the Concepts and Methods of the "Stockholm School"', International Economic Papers, vol. 3, p. 32).
38.  F. A. Hayek: Individualism and Economic Order, p. 94.
Chapter 4, THE MEANING OF CAPITAL STRUCTURE
39.  Cf. Carl Menger: Principles of Economics (transl. by James Dingwall and Bert F. Hoselitz), 1950, p. 155; and F. A. Hayek: Pure Theory of Capital, 1941, pp. 63-4.
40.  This is not to say that assets such as shares and bonds lie entirely beyond the scope of the theory of capital. But, as will be seen in Chapter VI, they are relevant for our purposes only in so far as their ownership does, or does not, influence the forces which determine where decision-making power, the power to make and revise production plans, lies.
41.  J. R. Hicks: Value and Capital, 1939, p. 44.
42.  L. M. Lachmann: 'Complementarity and Substitution in the Theory of Capital', Economica, May 1947, p. 110.
43.  F. A. Hayek: Pure Theory of Capital, 1941, pp. 18-19.
44.  F. A. Hayek, op. cit., p. 18.
45.  Ibid., p. 26.
46.  These, of course, are the cases in which the significance of price movements has to be judged with the help of supplementary criteria, like the time factor and the size and variations of stocks. Cf. above, pp. 31-2.
47.  P. M. Sweezy: 'Demand under Conditions of Oligopoly', Journal of Political Economy, August 1939, pp. 568-73.
48.  T. de Scitovszky: 'Prices under Monopoly and Competition', Journal of Political Economy, October 1941.
49.  P. Streeten: 'Reserve Capacity and the Kinked Demand Curve', Review of Econ. Studies, Vol. XVIII, No.2, pp. 103-14.
50.  The argument which follows in the text draws heavily upon certain ideas set forth by R. G. Hawtrey: The Economic Problem,pp. 19-23 and 34-43, and N. Kaldor: 'The Economic Aspects of Advertising', Review of Econ. Studies, Vol. XVIII, No. 1, pp. 16-18. Neither of these two authors must be held responsible for what we say in the text.
51.  See above, p. 33.
52.  J. R. Hicks: Value and Capital, pp. 135-40, and J. K. Eastham: An Introduction to Economic Analysis, 1950, pp. 162-4.
53.  J. M. Keynes: General Theory of Employment, p. 159.
54.  Ibid., p. 135.
55.  Ibid., p. 151, n. 1.
56.  Mrs.Robinson says that 'Keynes creates confusion by calling ordinary shares "real assets", and describing the purchase of shares on the Stock Exchange as an act of investment' (The Rate of Interest, p. 7, n. 1). We doubt whether the charge of confusion can be sustained. By using the words 'corresponding type of capital' in the passage quoted above Keynes appears to have drawn the relevant distinction.
57.  Ibid., p. 154.
58.  J. M. Keynes: General Theory of Employment, p. 155.
59.  Ibid., p. 156.
Chapter 5, CAPITAL STRUCTURE AND ECONOMIC PROGRESS
60.  Studies in the Theory of Money and Capital, pp. 288-91.
61.  The reader will not fail to notice that in the text we make an attempt to reconcile what we may call the 'neo-Wicksellian' theory of interest with the argument of Chapter 17 in Keynes' General Theory on 'The Essential Properties of Interest and Money', pp. 222-44. See also A. P. Lermer: 'The Essential Properties of Interest and Money', Essays in Economic Analysis, pp. 354-85.
62.  'Dr. Hayek on Money and Capital', Economic Journal, March 1932, p. 49. 'If money did not exist and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any moment as many "natural" rates of interest as there are commodities, though they would not be "equilibrium" rates. The "arbitrary" action of the banks is by no means a necessary condition for the divergence.'
Evidently Mr. Sraffa failed to see how in a barter economy intertemporal arbitrage would tend to bring the various 'natural' rates into conformity, thus tending towards establishing the 'equilibrium' rate.
63.  Ibid., p. 51
64.  Lindahl, op. cit., p. 291.
65.  This fact has obvious implications for the distribution of incomes. In a dynamic world it is not possible to say that the accumulation of capital will cause the 'share of capital' to fall relatively to the 'shares' of other factors of production. In such circumstances the 'share of capital' also becomes a meaningless notion. What really happens is that some capital owners lose income while others gain. In a 'capitalistic' economy there are thus always capital owners, but, like the inhabitants of a hotel, they are never for long the same people. In a world of unexpected change economic forces generate a redistribution of wealth far more pervasive and ineluctable than anything welfare economists could conceive!
66.  Exkurs I, 4th ed., p. 3. Our translation.
67.  See the discussion with Taussig, Exkurs I, pp. 13 as.
68.  This, of course, may take place within the same factory. The reader will not fail to notice that we are using the word here in a sense different from that employed in discussions of economic organization. All that matters to us is that the flow of materials successively comes into contact with, and is being processed by, an increasing number of distinct types of equipment.
69.  In the real world, to be sure, we often find vertical integration of stages of production. As a rule this is either a manifestation of oligopoly or of technical progress, or of both. As they lie outside the framework of Boehm-Bawerk's model we need not consider them here.
Chapter 6, CAPITAL STRUCTURE AND ASSET STRUCTURE
70.  The fundamental difference between labour and capital as 'factors of production' is of course that in a free society only the services of labour can be hired while as regards capital we usually have a choice of hiring services or buying their source, either outright or embodied in titles to control. The chief justification for a theory of capital of the type here presented lies in the fact that in the buying and selling of capital resources there arise certain economic problems, like capital gains and losses. In a world in which all material resources were inalienable, for instance entailed on the state, but where their services could be freely hired, there would be no more scope for such a theory of capital than there is today for a theory of labour. Problems of capital use and maintenance would of course continue to exist, but offer little scope for a theory on the scale required for a market economy.
71.  Cf. H. Makower and J. Marschak: 'Assets, Prices and Monetary Theory', Economica, August 1938, and K.E. Boulding: 'A Liquidity Preference Theory of Market Prices', Economica, May 1944.
72.  A degree of risk does not attach to a given investment project as such, but always depends on the control structure. There are many projects which a young and heavily indebted firm would not dare to touch, but which an old firm with low debt and ample reserves can afford to take in its stride. In this fact lies an important obstacle, often overlooked, to effective competition, at least in the short run.
73.  This is not to deny that in practice there is often something to be said for stabilizing the rate of dividend and 'ploughing back' profits in good years. All we wish to say is that in general the successful functioning of a market economy requires the widest possible diffusion of knowledge. It is of course always possible that people will draw wrong conclusions from facts correctly stated, but this is no reason for withholding information from them. The justification offered for hiding profits is often that shareholders, if they knew the true profits, would make irresponsible claims and thus jeopardize future earnings. This may be so, but the other half of the argument rests on an assumption of managerial infallibility and omniscience not often borne out by the facts.
74.  A reconstruction of a company often takes place when the directors know already that the situation is improving, but preference shareholders and creditors do not. The directors therefore are prepared to offer terms to them that the creditors do not know enough to refuse.
75.  See F. A. Hayek: Profits, Interest and Investment, 1939, pp. 119-20.
Chapter 7, CAPITAL IN THE TRADE CYCLE
76.  J. R. Hicks: A Contribution to the Theory of the Trade Cycle, 1950, p. 108.
77.  See, for instance, pp. 13n, 36.
78.  Ibid., p. 8.
79.  E. Lundberg: 'Om Ekonomiska Expansionens Stabilitet', Ekonomisk Tidskrift, September 1950.
80.  Ibid., p. 128.
81.  Ibid., p. 132.
82.  J. S. Duesenberry: 'Hicks on the Trade Cycle', Quarterly Journal of Economics, May 1950.
83.  The Manchester School of Economic and Social Studies, May 1952.
84.  Table II, col. 11, p. 117.
85.  What is said in the text applies to industrial raw materials only. Food production is a different matter. The 'terms of trade' for food do not appear to follow a cyclical pattern.
86.  Of course we do not mean to deny that in the evolution of the economy of Western Europe the Swiss railways provided an indispensable link. But for a time the link was bigger than it need have been.
87.  See, for instance, N. Kaldor: 'The Relation of Economic Growth and Cyclical Fluctuations', Economic Journal, March 1954.
88.  Cf. 'Business Cycles', International Economic Papers, Vol. 3, pp. 75-171.
89.  Human Action, 1949, Chapter XX.
90.  Profits, Interest and Investment, 1939.
91.  See also L. M. Lachmann: 'A Reconsideration of the Austrian Theory of Industrial Fluctuations', Economica, May 1940.
92.  Joan Robinson: 'The Model of an Expanding Economy', Economic Journal, March 1952, pp. 47-8 (by permission of the Royal Economic Society).
93.  While this is hardly the place to discuss the imperfection of the capital market in general, it must be clear, from what was said in the previous chapter about the interrelationship between plan structure and portfolio structure, that the willingness of the capital market to lend to, or acquire shares in, individual enterprises will to some extent depend on their past record. The degree of imperfection of the capital market is thus largely not a datum but a result of the market process.
94.  'One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion'—L. von Mises: Human Action, pp. 575-6.