Capital and Its Structure
By Ludwig M. Lachmann
For a long time now the theory of capital has been under a cloud. Twenty years ago, when Professor Knight launched his attack on the capital theories of Boehm-Bawerk and Wicksell, there opened a controversy which continued for years on both sides of the Atlantic. Today very little is heard of all this. The centre of interest has shifted to other fields.In practice of course problems concerning capital have by no means lost their interest. There can be few economists who do not use the word ‘capital’ almost every day of their working lives. But apart from some notable exceptions, economists have ceased to ask fundamental questions about capital. It is pertinent to enquire why this has happened. It would seem that there are three major reasons to account for this curious neglect…. [From the text]
First Pub. Date
Kansas City: Sheed Andrews and McMeel, Inc.
First published 1956 by Bell and Sons, Ltd., on behalf of the London School of Economics and Political Science 2nd edition.
The text of this edition is copyright ©1977, The Institute for Humane Studies.
For a long time now the theory of capital has been under a cloud. Twenty years ago, when Professor Knight launched his attack on the capital theories of Boehm-Bawerk and Wicksell, there opened a controversy which continued for years on both sides of the Atlantic. Today very little is heard of all this. The centre of interest has shifted to other fields.
In practice of course problems concerning capital have by no means lost their interest. There can be few economists who do not use the word ‘capital’ almost every day of their working lives. But apart from some notable exceptions, economists have ceased to ask fundamental questions about capital. It is pertinent to enquire why this has happened. It would seem that there are three major reasons to account for this curious neglect.
In the first place, many economists have evidently come to believe that we do not require the conceptual framework of a theory of capital in order to discuss problems germane to capital, or at least those problems in which practical interest has of late been greatest, such as investment. In other words, the view appears to have gained ground that a theory of capital is not really necessary. This, as I shall attempt to show in this book, is an erroneous view. It is hardly possible to discuss the causes and consequences of a change in a stock without some knowledge of the nature and composition of this stock; or, it is only possible to do so if we are prepared to abstract from all those features of the situation which really matter. In the discussion of capital problems, as of any other problems, we cannot dispense with a coherent frame of reference.
A second reason for the present-day neglect of the theory of capital has probably to be sought in the contemporary preoccupation with quantitative precision of statement and argument. Most contemporary economics is presented in a quantitative garb. This is not the place to enquire into the reasons for this predilection. To some extent of course economists, in spending so much effort on quantifying the terms in
which they present their theories, wittingly or unwittingly merely reflect the spirit of our age.
But why should such quantification be more problematical in the theory of capital than it is in other fields of economic study? In most business transactions capital is treated as a quantity. In every balance sheet we find a capital account.
The fact remains, however, that in spite of protracted efforts it has proved impossible to find a quantitative expression for capital which would satisfy the rigorous requirements of economic thought. Most economists agree today that, except under equilibrium conditions, a ‘quantity of capital’ is not a meaningful concept. In this book an attempt is made to follow up some implications of this conclusion. But the fact that the concept of capital has for so long proved refractory to all attempts at quantification is almost certainly one of the reasons for the lack of interest, and hence of progress, in the theory of capital.
A third reason, closely related to the one just mentioned, appears to lie in the rather peculiar nature of the relationship between capital and knowledge. The various uses made of any durable capital good reflect the accumulated experience and knowledge gained, in workshop and market, by those who operate it. But modern economic theory cannot easily cope with change that is not quantitative change; and knowledge is as refractory to quantification as capital is. The acquisition and diffusion of knowledge certainly take place in time, but neither is, in any meaningful sense of the word, a ‘function’ of time. Modern economists, uneasily aware of the problem, have tried to avoid it by assuming a ‘given state of knowledge’. But such an assumption, if taken literally, would obviously prevent us from considering economic change of any kind. For instance, as Mrs. Robinson has pointed out, ‘a “change in methods of production in a given state of knowledge” is, strictly speaking, a contradiction in terms’. With very durable capital goods the assumption becomes quite untenable. Our railways after all are not run by people with the technical knowledge of 125 years ago.
The theory of capital is a dynamic theory, not merely because many capital goods are durable, but because the changes in use
which these durable capital goods undergo during their lifetime reflect the acquisition and transmission of knowledge.
Our own approach in this book follows another trend of modern economic thought, not towards the ‘objective’ and quantifiable, but towards the subjective interpretation of phenomena. Of late many economists have exercised their ingenuity in fashioning their science in accordance with the rigid canons of Logical Empiricism. Even the theory of value has been made to conform to the strict rules of the behaviourists: nowadays we are not supposed to know anything about human preferences until these have been ‘revealed’ to us. But few of these efforts have been successful. The fact remains that the two greatest achievements of our science within the last hundred years, subjective value and the introduction of expectations, became possible only when it was realized that the causes of certain phenomena do not lie in the ‘facts of the situation’ but in the appraisal of such a situation by active minds.
The generic concept of capital without which economists cannot do their work has no measurable counterpart among material objects; it reflects the entrepreneurial appraisal of such objects. Beer barrels and blast furnaces, harbour installations and hotel-room furniture are capital not by virtue of their physical properties but by virtue of their economic functions. Something is capital because the market, the consensus of entrepreneurial minds, regards it as capable of yielding an income. This does not mean that the phenomena of capital cannot be comprehended by clear and unambiguous concepts. The stock of capital used by society does not present a picture of chaos. Its arrangement is not arbitrary. There is some order in it. This book is devoted to the exploration of the problems of the order of capital.
The chief object of this book is thus to rekindle interest in the fundamental problems of capital rather than to present a closed system of generalizations about them; to outline a new approach and to show that it can be applied, with some promise of success, to a number of such problems ranging from the productivity of capital to the demise of the ‘strong boom’; to point out the implications of certain economic facts which have been long neglected; and, above all, to emphasize the
transmission of knowledge, the interaction of minds, as the ultimate agent of all economic processes.
I am painfully aware of the fact that this book leaves many vital questions unanswered. It could hardly be otherwise. But it is my hope that others will follow and make their contributions to the theory of capital. There can be few fields of economic enquiry today which promise a richer harvest than the systematic study of the modes of use of our material resources.
It is not impossible that at some time in the future the concept of capital structure, the order in which the various capital resources are arranged in the economic system, will be given a quantitative expression; after all, any order can be expressed in numbers. For many reasons such a development would be most welcome. But this book has been written to meet the present situation in which we badly need a generic concept of capital, but in which all attempts to express it in quantitative terms have thus far been unsuccessful.
My greatest debt of gratitude is to Professor F. A. Hayek whose ideas on capital have helped to shape my own thought more than those of any other thinker. To Professor F. W. Paish who, during his stay at this University in 1952 as a Visiting Trust Fund Lecturer, undaunted by a heavily loaded time-table, read several chapters in draft form, I am indebted for much sagacious comment and advice. In writing the final version of Chapter VI I have drawn heavily on his unrivalled knowledge of the intricacies of modern business finance. But needless to say, the responsibility for what I say is entirely mine.
I owe more than I can express in words to my friends in the University of the Witwatersrand for their steady help and encouragement, in particular to Mr. L. H. Samuels and Mr. T. van Waasdijk, who patiently read draft after draft, and from whose helpful comment and suggestions I have derived much unearned profit.
I also wish to express my gratitude to the Research Committee of this University who by their generous financial assistance have considerably eased my task.
Lastly, I have to thank the Royal Economic Society, the editor and publishers of the
Manchester School of Economic andSocial Studies, Messrs. George Allen & Unwin, the McGraw-Hill Book Company, Inc., and Messrs. Routledge & Kegan Paul for permission to quote passages from works published by them. I also wish to acknowledge my gratitude to the authors of these passages.
University of the Witwatersrand
Pure Theory of Capital (London, 1941), p. 3.
Capital Theory and the Rate of Return (Amsterdam, 1963,) p. 16.
National Bureau of Economic Research, Report 16 (December 1976), p. 13.
Chapter 1, THE ORDER OF CAPITAL