Capital and Its Structure (Studies in economic theory) [Hardcover]

Ludwig M. Lachmann (Author)

Book Description

Series: Studies in economic theory | Publication Date: April 1, 1981

Table of Contents:

Chapter I: The Order of Capital
Chapter II: On Expectations
Chapter III: Process Analysis and Capital Theory
Chapter IV: The Meaning of Capital Structure
Chapter V: Capital Structure and Economic Progress
Chapter VI: Capital Structure and Asset Structure
Chapter VII: Capital In the Trade Cycle

a selection from:

CHAPTER I - THE ORDER OF CAPITAL

The realm of economics consists of many provinces between which, in the course of time, a fairly high degree of interregional division of labour has evolved. Naturally, development in some of these regions has been faster than in others. There are some -backward areas-, and a few of them actually appear to merit description as -distressed areas-. None seems to have a better claim to this unenviable status than the Theory of Capital. In fact it would hardly be an exaggeration to say that at the present time a systematic theory of capital scarcely exists.

Considering the degree of division of labour just mentioned this surely is an astonishing state of affairs. There can hardly be a field of economic thought, pure or applied, in which the word -capital- is not more or less constantly employed. We hear of a world-wide capital shortage. In discussions on the convertibility of currencies we are asked to distinguish between -current- and capital transactions. And it is clear that the -economic integration of Western Europe- requires that some at least of the industrial resources of these countries be regrouped and change their form; in other words, that it entails a modification of Europe's capital structure.

Yet, in the Theory of Capital the present state of affairs is as we have described it. The product imported and used by the other economic disciplines is not a standardized product. The word -capital-, as used by economists, has no clear and unambiguous meaning. Sometimes the word denotes the material resources of production, sometimes their money value. Sometimes it means money sums available for loan or the purchase of assets. While to some economists -capital- has come to mean nothing but the present value of future income streams. The conclusion suggests itself that no progress made in the theory of capital could fail to pay handsome dividends in the form of -external economics- to be reaped by all those who have to work with the notion of capital.

The root of the trouble is well known: capital resources are heterogeneous. Capital, as distinct from labour and land, lacks a -natural- unit of measurement. While we may add head to head (even woman's head to man's head) and acre to acre (possibly weighted by an index of fertility) we cannot add beer barrels to blast furnaces nor trucks to yards of telephone wire. Yet, the economist cannot do his work properly without a generic concept of capital. Where he has to deal with quantitative change he needs a common denominator. Almost inevitably he follows the business man in adopting money value as his standard of measurement of capital change. This means that whenever relative money values change, we lose our common denominator.

--This text refers to the Kindle Edition edition.

Product Details

• Hardcover: 130 pages
• Publisher: New York University Press (April 1, 1981)
• Language: English
• ISBN-10: 0836207408
• ISBN-13: 978-0836207408
• Average Customer Review: 5.0 out of 5 stars  See all reviews (3 customer reviews)
• Amazon Best Sellers Rank: #3,232,892 in Books (See Top 100 in Books)

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7 of 7 people found the following review helpful:

5.0 out of 5 stars Capital Markets and the Structure of Capital, April 5, 2008

By 

D. W. MacKenzie (New London CT) - See all my reviews
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This review is from: Capital and Its Structure (Studies in economic theory) (Hardcover)

Lachmann is recognized (among Austrians at least) for stressing the importance of disequilibrium more so than most Austrians. Capital is always in disequilibrium, so we can only understand capital structure by thinking in terms of disequilibrium. While there is no doubt that Lachmann criticized neoclassical general equilibrium theory, there are other elements of his analysis that deserve attention.

Lachmann stressed the role of financial markets. Lachmann insisted that "When left free of political intervention, the market grows institutions in response to challenges ... Among these institutions forward markets and the stock exchange call for our particular attention" (p67). This is a critical point. Neoclassical economists never tire of pointing out that general equilibrium require a complete set of markets, including forward markets. Lachmann thought of capitalism as an evolutionary system, and certain financial markets evolve to solve coordination problems. Of course, financial markets are incomplete. But what is the alternative?

In my own interpretation, Lachmann's insight into how financial markets evolve to solve coordination problems is his most important contribution. His insight into financial markets explains his discontent with general equilibrium analysis, as well as the primary advantages of the capitalist system over its alternatives. Capital and its Structure is a short and insightful book. More economists should read it, including more Austrians.

4 of 4 people found the following review helpful:

5.0 out of 5 stars A Neglected Book, July 12, 2006

By 

Hans Haneberg - See all my reviews
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This review is from: Capital and Its Structure (Studies in economic theory) (Hardcover)

This is Ludwig Lachmann's best work on economics. Written in 1956, this small book made little to no impact upon the then dominant neo-classical paradigm, even though it should have. This can be explained because Lachmann was an advocate of Karl Menger's Austrian method and a pupil of Fredrick von Hayek at the London School of Economics. Both Hayek and the ideas of Menger were unfashionable during the publication of this work.

Lachmann dissects most neo-classical economic models for relying too heavily upon a homogeneous concept of capital. He reminds us in this small volume that capital goods are heterogeneous and valued as such through the eyes of the entrepreneur/individual actor.

In his own words:

"The generic concept of capital... 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 (Lachmann 1956: xv)."

The impact of such a work is important, especially when thinking about business cycle theory. If integrated with other Austrian works, this idea solidifies the concept of Malinvestment, a distinctly Austrian term.

1 of 1 people found the following review helpful:

5.0 out of 5 stars Capital in Disequilibrium, June 10, 2008

By 

James F. Mueller "Lachmanniac" - See all my reviews
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This review is from: Capital and Its Structure (Studies in economic theory) (Hardcover)

Peter Lewin is the only contemporary Austrian who has written at length on Lachmann's capital theory. This is almost ironic because, as Lewin himself notes, capital theory is probably the most important topic in Austrian economics and yet no Austrian since the 1970 revival has written about it.

Well for those who ever develop an interest in capital theory, the Austrian position can be found here in this short little book. Lachmann's book is a tour de force. It is important to remember that Lachmann is describing a world in perpetual disequilibrium (i.e., the real world). This means that the prices for goods are not yet equlibrium prices. Therefore, it makes no sense at all to speak of aggregate values of capital goods. We cannot add up all the capital goods (in monetary terms) and hope to get a reliable or meaningful measure of the value of capital. Now while it is clear that we cannot add computers and automobiles, Lachmann goes even further and argues that we cannot even add up their monetary values (prices) because these prices are disequilibrium prices. This is because all capital goods are used in some production plan. But not all production plans succeed. Business is about success AND failure. Therefore, the prices of these capital goods are not accurate because the use to which they are put will result in failure and error. Prices of capital goods in a disequilibrium world cannot serve as accurate indicators of value. This is why Lachmann spoke of capital as a "structure."

This is the theory of capital Lachmann employs in this book. He makes use of several illustrative examples throughout the book. This theory is also applied to financial markets and the Austrian business cycle theory, among other things. Austrian economists have yet to fully appreciate the implications of Lachmann's analysis. For example, how cogent is Mises' calculation argument if prices in a capitalist market are always inaccurate indicators of value? Kirznerian entrepreneurship cannot even rescue Mises' point because Lachmann challenged the very ability of prices (even in disequilibrium) to convey meaningful information in the second chapter of this book "On Expectations." There is must to be done with Lachmann's capital theory. I only hope that the silence of the contemporary Austrian school will not prevent future generations from developing Lachmann's theory further.