Quotes from Capital and Its Structure

By Ludwig Lachmann (1956)

• the question which matters [in the definition of capital] is not which resources are man-made but which are man-used.#
  Capital
• As long as we cling to the view that all capital is homogeneous, we shall only see, as Keynes did, the unfavourable effects of investment on the earning capacity and value of existing capital goods, since all the elements of a homogeneous aggregate are necessarily perfect substitutes for each other. The new capital competes with the old and reduces the profitability of the latter. Once we allow for heterogeneity we must also allow for complementarity between old and new capital. The effect of investment on the profitability of old capital is now seen to depend on which of the various forms of old capital are complementary to, or substitutes for, the new capital.#Quoted in Steven Horwitz, Microfoundations and Macroeconomics (2000)
  EconomicsCapital
• Money is largely, so to speak, a capital good ‘by proxy’. It symbolizes, at the initiation of the plan, those current services we shall need later on but which, owing to their ‘current’ character, we cannot store until we need them. We store the money instead.#Quoted in Steven Horwitz, Microfoundations and Macroeconomics (2000)
  EconomicsMoneyCapital
• For Adam Smith the division of labour was the most important source of progress. The same principle can be applied to capital. As capital accumulates there takes place a ‘division of capital’, a specialization of individual capital items, which enables us to resist the law of diminishing returns. As capital becomes more plentiful its accumulation does not take the form of multiplication of existing items, but that of a change in the composition of capital combinations. . . . Complementarity plus indivisibility are the essence of the matter. It will not pay to install an indivisible capital good unless there are enough complementary capital goods to justify it. Until the quantity of goods in transit has reached a certain size it does not pay to build a railway. A poor society therefore often uses costlier (at the margin) means of transport than a wealthy one. The accumulation of capital does not merely provide us with the means to build power stations, it also provides us with enough factories to make them pay and enough coal to make them work. Economic progress thus requires a continuously changing composition of the social capital. The new indivisibilities account for the increasing returns.#
  EconomicsCapitalIncreasing Returns
• Böhm-Bawerk’s ‘third ground’ [of a positive rate of interest, viz. the higher productivity of roundabout methods] is an important element of the theory of economic progress which somehow, by mistake, its author put into the wrong pigeonhole and inserted into his theory of interest.#
  CapitalEconomics
• It is quite wrong to say, for instance, that continuous investment will lower the marginal efficiency of capital. What continuous investment will do is to destroy the capital character of some resources for which the new capital is a substitute, while increasing the incomes from labour and capital resources complementary to it. In conditions of capital change the ‘marginal efficiency of capital’ . . . is thus seen to be a meaningless notion implying, contrary to common observation, that the earning capacity of all capital resources will be affected in the same way.#
  CapitalEconomics
• Böhm-Bawerk also made it clear that his thesis did not mean that capital could not be increased in any other way than by ‘lengthening’, but only that, where this is possible, we would soon encounter diminishing returns. . . . Where existing capital is merely duplicated (‘widened’), operated by a given labour force, diminishing returns will soon appear. Where new capital resources, but of the type employed before, are being substituted for existing labour (‘deepened’), we may have to wait a little longer for diminishing returns to make their appearance, depending on the elasticity of substitution, but appear they will in the end. The only way in which we can hope to resist the pressure of diminishing returns is by changing the composition of capital and enlisting an indivisibility which, with fewer complementary capital resources, could not have been used. ‘Higher roundabout productivity’ therefore has to be interpreted in terms of this case. The only circumstances which permit it are those circumstances which permit a higher degree of division of capital.#
  EconomicsCapitalIncreasing Returns
• 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.#
  EconomicsCapital
• Why gramophone records with the music of Irving Berlin find a readier sale than those with the music of Schoenberg is a question about which the economist has nothing to say, but why in an inflation people come to prefer the most illiquid assets to money is a question he can hardly shirk. ‘Asset preference’ is not an ultimate determinant in the sense in which a taste for tobacco is.#
  EconomicsMethodology
• It is true that the modern shareholder rarely takes the trouble of opposing managerial decisions with which he happens to disagree at the company meeting. But this is so because he has a much more effective way of voting against these decisions: He sells.#
  Economics
• If by entrepreneurial decisions we mean decisions involving the making and revising of plans, there is no difference between changing a production plan and changing the composition of an investment portfolio. They are both exactly the same type of action.#
  Economics
• A certain excess capacity, for instance in transport and power production, is necessary if a position is to be avoided in which any increase in capital in one industry requires a corresponding decline in another. It is just such an excess capacity that makes a large number of capital changes in secondary industries consistent with each other. But all this means is that there is, in an industrial economy, as a rule a fairly wide range over which variations in the different rates of investment would be consistent changes. It does not mean that inconsistent change cannot exist.#
  EconomicsCapital
• The distinction between the long and the short run referred originally to the change in resources which occurs in the former, but not in the latter, where such change means purely quantitative change. The distinction between ‘given resources’ and ‘resources adapted to demand’ is unambiguous only where the adaptation means addition or subtraction. Where regrouping exists as an alternative mode of change the matter is no longer quite so simple. The whole notion is clearly linked to a purely quantitative conception of capital.#
  EconomicsCapital
• Time is germane to [the problems of capital], but not merely as the dimension in which the ‘quantity of Capital’ changes, but also as the dimension in which capital resources are turned from one mode of use to another.#
  EconomicsCapital
• This distinction [between economic growth and fluctuations] finds a place in a theory which confines itself to asking whether and to what extent existing resources are being used, whether, and perhaps at what speed, such resources can be augmented, and what are the circumstances in which such augmentation is likely to take place. Once we have learnt to ask how, and in what order, existing resources are being used, and what are the implications of such multiple use, once we have begun to understand the importance of the concrete form of resources in limiting the scope of multiple use, we can easily dispense with the all too simple distinction between economic growth and cyclical fluctuations.#
  Economics
• Where interest rates are kept constant, no hint of ex ante disequilibrium between savings and investment can transpire. Where raw material prices are ‘controlled’ and no rising wages give a hint of approaching labour shortage, we need not be surprised if we hit the ceiling with full force. The sensitive mechanism which emits the storm signals has been switched off; the deviation of actual prices from their normal and expected levels can no longer serve as a measure of disequilibrium and a signpost for action.#
  Economics
• That the economy ‘hits the ceiling’ may mean that a new railway line cannot be completed, or cannot be completed within the time planned, or at the cost planned. But it may also mean that even if it is completed as planed, it will lack complementary factors in the rest of the economy. Such a lack of complementary factors may well express itself in a lack of demand for its services, for instance where these factors would occupy ‘the later stages of production’. To the untrained observer it is therefore often indistinguishable from ‘lack of effective demand’.#
  EconomicsBusiness cycleCapital
• The econometricians have thus far failed to explain why in an uncertain world the meaning of past events should be the only certain thing, and why its ‘correct’ interpretation by entrepreneurs can always be taken for granted.#
  EconomicsMethodology
• The two greatest achievements of [economic] 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.#
  EconomicsHistoryMethodologyExpectations
• 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. . . . Something is capital because the market, the consensus of entrepreneurial minds, regards it as capable of yielding an income.#
  CapitalEconomics
• A progressive economy is not an economy in which no capital is ever lost, but an economy which can afford to lose capital because the productive opportunities revealed by the loss are vigorously exploited.#
  EconomicsCapital
• It is quite wrong to say . . . that continuous investment will lower the marginal efficiency of capital. What continuous investment will do is to destroy the capital character of some resources for which the new capital is a substitute, while increasing the incomes from labour and capital resources complementary to it.#
  CapitalEconomics
• It is possible to define the economic forces engendering investment in terms which avoid the quantification of capital, or even the very concept of capital.#
  CapitalEconomics
• In general, investments will tend to take such concrete forms as are complementary to the capital already in existence.#
  EconomicsCapital
• The shape in which new capital goods make their appearance is determined largely by the existing pattern, in the sense that ‘investment opportunities’ really mean ‘holes in the pattern’.#
  CapitalEconomics
• The business man who forms an expectation is doing precisely what a scientist does when he formulates a working hypothesis. Both business expectation and scientific hypothesis serve the same purpose; both reflect an attempt at cognition and orientation in an imperfectly known world, both embody imperfect knowledge to be tested and improved by later experience.#Quoted in Steven Horwitz, “From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism” (2000)
  EconomicsScienceExpectations
• Expectations, [as opposed to preferences], always embody problematical experience, i.e. an experience which requires interpretation.#
  EconomicsExpectations
• Equilibrium analysis can tell us whether courses of action are, or are not, consistent with each other. It cannot, except in rather special circumstances, explain how inconsistencies are removed.#
  EconomicsMethodologyEquilibrium
• [In equilibrium analysis,] while the failure of each successive plan conveys significant additional knowledge to the individuals concerned, it does not affect the shape of the demand and supply curves. It merely induces individual actors to choose other points on them for testing. It is usually assumed that as a result of the accumulating experience gained from a series of unsuccessful tests, a consistent solution is sure to be found in the end, in other words, that in the ‘real world’ there does exist a ‘tendency towards equilibrium’.#
  EconomicsMethodologyEquilibrium
• Process analysis, we may say, combines the equilibrium of the decision-making unit, firm or household, with the disequilibrium of the market.#
  EconomicsMethodologyEquilibrium
• Just as the profitability of all capital goods in a combination depends inter alia on the wages of the co-operant labour, so the rate of profit on each capital good depends on the cost at which complementary capital goods can be secured.#
  EconomicsCapital
• Idle capacity is economically a form of scrap kept in physical existence by optimistic expectations of future value which may or may not be fulfilled. To understand why this capacity is kept in existence we need to understand, not merely why the original plans failed, but why no alternative use for it has been found.#
  CapitalEconomicsExpectations
• Rigid prices are ‘administered’ prices in a situation in which the ‘administrators’ regard the knowledge they can withhold (from buyers and competitors) as more valuable than the knowledge they might gain by experimenting with price variations. ‘Fear of spoiling the market’ is essentially fear of what consumers and competitors will do in the future with the knowledge derived from price change now.#
  Economics

Joan Robinson, The Rate of Interest and Other Essays (1952)

• A “change in methods of production in a given state of knowledge” is, strictly speaking, a contradiction in terms.#
  CapitalEconomics