Topic: Capital

Quotes

Frank Knight, “Diminishing Returns from Investment” (1944)

• The distinction between maintenance and replacement is in most ordinary cases an arbitrary one.#
• Apart from technological retrogression, the only cause which can operate to produce diminishing returns is an absolute limitation on the supply of some productive agents (an infinite cost of reduplication, literal or by substitution).#
• The essential meaning of new investment under given conditions is the creation of any additional means which were previously known, for the satisfaction (or more complete satisfaction) of wants which were previously known, or in some sense “present.” The difference between change under given conditions and real innovation centers in the matter of new knowledge#
• In the production of laborers the matter of “quality” is far more important than that of quantity in the crude sense of numbers. A human being in the “raw” state would obviously be a liability, not an asset, and his economic value in later life must be imputed to expenditure (again on balance) in rearing and training. These facts mean that, in terms of economic realities, the “laborer” of any type is essentially a capital good; the (social) sacrifice of consumption invested in producing labor-capacity could have been used to create productive capacity in other forms.#
• The worst difficulty with the notion of “factors” [of production] is that only to a very limited extent are productive agents transferred “as they stand” from one “use” to another (however uses are distinguished). In the main, transfer is accompanied in all degrees by disinvestment and reinvestment. This fact makes the theory of capital indispensable to an understanding of qualitative changes, such as might occur in a quantitatively stationary economy, as well as to an understanding of growth (or retrogression). In connection with any social change involving reallocation of production, most productive agents become more or less assimilated to capital goods and have to be considered by the theorist as quantities of capital.#
• If new investment can be freely directed to all uses, i.e., embodied in all types of productive agents indifferently, it will not be subject to diminishing returns.#

Oded Galor & David Weil, “The Gender Gap, Fertility, and Growth” (1996)

• An increase in physical capital input raises the marginal product of mental labor proportionally more than it raises the marginal product of physical labor.#

Ludwig Lachmann, Capital and Its Structure (1956)

• the question which matters [in the definition of capital] is not which resources are man-made but which are man-used.#
• 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)
• 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)
• 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.#
• 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.#
• 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’.#
• 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.#
• 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.#
• 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.#
• 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.#
• 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.#
• 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.#
• 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.#
• 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.#
• 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.#
• 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’.#
• In general, investments will tend to take such concrete forms as are complementary to the capital already in existence.#
• 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.#
• 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.#
• 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.#

Michael Bordo & Anna Schwartz, “Monetary Policy Regimes and Economic Performance” (1999)

• Adjustment to balance of payments disturbances was greatly facilitated by short-term capital flows. Capital would quickly flow between countries to iron out interest rate differences. By the end of the nineteenth century the world capital market was so efficient that capital flows largely replaced gold flows in effecting adjustment.#

F.A. Hayek, The Pure Theory of Capital (1941)

• In the sphere of capital theory, as we have seen, the construction of a stationary state is particularly useless because the main problem, that of investment, arises just because people intend to do in the future something different from what they are doing in the present.#
• A given stock of capital goods does not represent one single stream of potential output of definite size and time shape; it represents a great number of alternatively possible streams of different shapes and magnitudes.#Quoted in Roger Garrison, “Reflections on Reswitching and Roundaboutness” (2003)

Israel Kirzner, Essays on Capital and Interest (1996)

• Capital reversal erodes the notion of a demand curve for capital and thus the view of interest as a “true scarcity price”.#
• In exactly the same way as Austrian value theory had no place for “cost of production” as an independent explanatory element in the causation of economic value, a Mengerian capital and interest theory could have no place for the productivity of capital as an independent explanatory element in accounting for the structure of prices.#

Frank Knight, “Capital, Time, and the Interest Rate” (1934)

• [It is a fallacy] that capital is produced (and reproduced in any sort of cycle) by labour or “primary factors” in any sense. This is palpably absurd; “labour,” “capital instruments,” and “land” are in the first place categories of no homogeneity within themselves and of extensive overlapping, and in the second place, however productive agencies may be classified, it is evident that each is produced and continuously reproduced (when at all) by the co-operation of all, including itself.#
• The quantity of capital in an existing thing depends on the rate of interest and its earning power in any field in which it may have earning power.#
• We may give a fairly realistic or defensible meaning to either the beginning or the end of a production process, but if we do identify either, it is never possible to say what would be meant by the other boundary… If production is regarded as a process occupying time, its only beginning is the beginning of time, and its only end is the end of time.#
• All capital is inherently completely mobile with respect to any change foreseen as to date and character at the time the investment is made… the mobility of capital is overwhelmingly a matter of planning for either a particular transfer or for mobility in the abstract, through general availability.#
• As regards economic—not technical—rôle in production and distribution, no classification of productive factors has any validity.#

Gerald O'Driscoll & Mario Rizzo, The Economics of Time and Ignorance (1985)

• Any attempt to impute economic meaning to the period of time between the objectively defined original factors and the resulting consumption activity will be in vain.#
• A given stage [of production] does not correspond to a particular industry or even to a particular, objectively defined, collection of capital goods.#

Steven Horwitz, Microfoundations and Macroeconomics (2000)

• The value of capital is often more dependent on the overall complementarity of the capital structure (or its composition) than on the sheer quantity of physical equipment.#
• The concept of capital refers to the place of particular physical objects within the plan of the actor in question. Thus capital cannot be defined in terms of the physical qualities of the object, but rather its purpose or role in the plans of its possessor.#

Joan Robinson, “The Unimportance of Reswitching” (1975)

• There is no such phenomenon in real life as [capital] accumulation taking place in a given state of technical knowledge. The idea was introduced into economic theory only to give a meaning to the concept of the marginal productivity of capital, just as the pseudo-production function was constructed in order to show that it has no meaning.#

Jason Potts, The New Evolutionary Microeconomics (2000)

• Order and change must be traded off against each other; we cannot have both. The more we adapt ourselves to a given circumstance, the less we are suited to changed circumstances. The more we prepare for all possible contingencies, the less we have devoted ourselves to the extant circumstance.#

Ludwig Von Mises, Human Action (1949)

• In an economic system in which there is no private ownership of the means of production, no market, and no prices for such goods, the concepts of capital and income are mere academic postulates devoid of any practical application. In a socialist economy there are capital goods, but no capital.#
• The mere information conveyed by technology would suffice for the performance of [economic] calculation only if all means of production – both material and human – could be perfectly substituted for one another according to definite ratios, or if they all were absolutely specific. In the former case all means of production would be fit, although according to different ratios, for the attainment of all ends whatever . . . In the latter case each means could be employed for the attainment of one end only.#

Peter Lewin, Capital in Disequilibrium (1999)

• The [average period of production] is crucially dependent on being able to identify the stages of production. It is assumed that the process begins at stage 1 and ends at stage n. In this way any kind of “looping” (coal is used in the production of iron and vice versa), where the output of one stage becomes available as an input of an earlier stage, is ruled out. Second, if the output is a flow (as it usually is), then we must also have some way to connect inputs that occur at time periods n—t with precisely that output that arrives at time period n and separate them from those that need to be connected to outputs occurring at time periods n+j where j is an index of time periods occurring after n. In other words, if the production process is a flow input—flow output process, a set of inputs are used to produce jointly a set of outputs occurring over time and the measuring of T becomes more problematic. Similarly, we must be able to identify the amount of labor time l that is used. This obviously presumes that it is possible to reduce any labor heterogeneity to comparable terms, like efficiency units, and then to measure the number of such units supplied per period of time.#
• Production plans, considered as a whole, are typically in disequilibrium—are based, at least in part, on inconsistent expectations, not regarding the “rules of the game,” but regarding the viability of the product or the productive technique. There is no way to derive an aggregate measure of capital in this situation. The net present values as (assumed to be) computed by each individual planner are based on inconsistent futures.#
• Whereas the “wealth effects” of Neoclassical economics are usually assumed to be small enough to be neglected, the capital gains and losses of Lachmann’s world are the most important forces driving changes in the capital structure. #
• Lachmann’s view of capital accumulation and economic progress is in many ways very prophetic of the revolutionary kind of economic change that has characterized the twentieth century, including the last quarter of the century. It is, in this view, impossible to separate the phenomena of technical progress and capital accumulation; capital accumulation always proceeds hand in hand with technical change.#
• An asset is specific when its opportunity cost is substantially below the value of its current contribution to production. In other words, the price that the asset could fetch in the market for employment in its next best use is substantially below (the discounted sum of) its current marginal value product(s)#
• The institutional (organizational) structure overlays and is intimately related to the production structure in such a way that it is impossible to characterize accurately the production structure without bringing in business organizations.#
• Organizational changes themselves can sometimes bring improvements in productivity. This underlines the problems associated with physical notions of the capital stock.#
• [The] institutional structure encompasses and gives meaning to the financial structure, the set of financial instruments and practices that facilitate the formation and mutation of the capital structure. The financial structure is volatile and cannot be designed; but in its absence the capital structure has no meaning and no value.#

Axel Leijonhufvud, “Capitalism and the Factory System” (1986)

• [Adam] Smith’s division of labor—the core of his theory of production—slips through modern production theory as a ghostly technological-change coefficient or as an equally ill-understood economies-of-scale property of the function.#Quoted in Peter Lewin, Capital in Disequilibrium (1999)
• As one subdivides the process of production vertically into a greater and greater number of simpler tasks, some of these tasks become so simple that a machine could do them. … [We are led to] the discovery of … opportunities for mechanization.#Quoted in Peter Lewin, Capital in Disequilibrium (1999)

Paul Samuelson, “Parable and Realism in Capital Theory: The Surrogate Production Function” (1962)

• Solow, in the interest of empirical measurements and approximation, has been willing occasionally to drop his rigorous insistence upon a complex-heterogeneous- capital programming model; instead, by heroic abstraction, he has carried forward the seminal work of Paul H. Douglas on estimating a single production function for society and has had a tremendous influence on analysts of statistical trends in the important macro aggregates of our economy. One might almost say that there are two Solows – the orthodox priest of the MIT school and the busman on a holiday who operates brilliantly and without inhibitions in the rough-and-ready realm of empirical heuristics.#

Nicholas Kaldor, “The Irrelevance of Equilibrium Economics” (1972)

• If indivisibilities were the sole cause of increasing returns, there would always be some level of production at which such scale economies were exhausted and “optimum scale” production reached.#
• There is no reason to suppose that “economies of scale” become inoperative above certain levels of production.#

Allyn Young, “Increasing Returns and Economic Progress” (1928)

• The mechanism of increasing returns is not to be discerned adequately by observing the effects of variations in the size of an individual firm or of a particular industry, for the progressive division and specialisation of industries is an essential part of the process by which increasing returns are realised.#

Ludwig Von Mises, Planning for Freedom (1952)

• [The socialist] assumes that the only thing required is to continue in the various plants production of those goods they are producing at the moment of the socialization in the ways they were hitherto produced. No account is taken of the necessity to adjust production daily anew to perpetually changing conditions. The dilettante-socialist does not comprehend that a socialization effected fifty years ago would not have socialized the structure of business as it exists today but a very different structure. he does not give a thought to the enormous effort that is needed in order to transform business again and again to render the best possible service.#

W.H. Hutt, The Theory of Idle Resources (1939)

• When we think of ‘idleness’ in one of the senses in which the condition can be deplored, it is simply a conception which enables us to distinguish the most conspicuous (certainly not the most serious) forms of waste from others.#
• Regrettable idleness, like other forms of ‘waste’, seems to be the product of arrangements which allow private interest to triumph over social interest. It arises, in other words, because our laws permit competition to be restricted. Hence, no improvement of the monetary system alone is capable of eliminating causes of idleness whilst other existing institutions remain.#
• The absence of idleness does not imply the absence of waste.#
• When an unemployed linotype operator becomes a shop assistant, it is evidence of a much smaller loss of capital than is indicated when a linotype machine is completely scrapped and the steel turned into shop fittings.#
• [Pseudo-idleness] can arise when the unit of equipment can provide more services than it is economic to utilize, whilst it is impossible to obtain at all, or impossible to obtain except at a higher cost, a smaller piece of equipment providing fewer services.#
• We cannot say that a fire station has provided no services in a month in which there have been no fires.#
• In any given state of knowledge and institutions, there are resources which perform their most wanted services through their mere passive existence – the service of availability.#
• In the first and second cases [where children are being educated] they do not happen to be in the labour market, but they are employed in the sense in which capital equipment in the course of its own production is employed.#
• To permit a machine to wear out may be socially (or privately) the most profitable way of scrapping it.#

Ludwig Lachmann, Capital, Expectations, and the Market Process (1940)

• The more fixed capital there is, and the more durable it is, the greater the probability that such capital resources will, before they wear out, have to be used for purposes other than those for which they were originally designed. This means practically that in a modern market economy there can be no such thing as a source of permanent income. Durability and limited versatility make it impossible.#
• In a world of dynamic change unused resources have two functions. Firstly, they act as shock-absorbers when combinations disintegrate. Secondly, their existence provides an inducement to invest in those capital goods which are complementary to them. . . . The production of new capital instruments will have different effects on the earnings of different existing capital resources. Those to which they are complements will earn more, those for which they are substitutes will earn less and often nothing at all. To ask what is the effect of the accumulation of capital on “the” rate of profit is to ask a meaningless question, since one of its main effects is to make rates of profit diverge.#
• There can be no major change which leaves the existing structure and composition of capital intact. All such change tends to create situations in which there is too much of some capital assets and too little of others. In this fact lies the ultimate reason for that instability of the “capitalistic” economy which so many deplore and so few understand.#
• Contrary to what appears to be a widely held view, Böhm-Bawerk’s chief contribution to the theory of capital was not the introduction of time, but of complementarity over time.#
• In the world of our daily experience all unexpected change entails more or less extensive capital regrouping.#
• Every major change is bound to upset some plans and disrupt some complementarities. On the other hand, it is impossible to speak of substitutable factors without defining the kind of change we wish to provide for.#
• Factor complementarity and substitution are phenomena belonging to different provinces of the realm of action. Complementarity is a property of means employed for the same end, or a group of consistent ends. All the means jointly employed for the same end, or such ends, are necessarily complements. Factor complementarity presupposes a plan within the framework of which each factor has a function. . . . Substitution, on the other hand, is a phenomenon of change the need for which arises whenever something has gone wrong with a prior plan. Substitutability indicates the ease with which a factor can be turned into an element of an existing plan. . . . The importance of substitutability lies in that it is usually possible to pursue the same end (output) with a different combination of factors. The importance of complementarity lies in that “technical rigidity” (invariability of the mode of complementarity) may often make it necessary to change the end rather than the means; an existing combination of factors is used to produce a different output.#
• Once we abandon the notion of capital as homogeneous, we should be prepared to find less substitutability and more complementarity.#
• The market process tends to produce a coherent complementarity pattern throughout the economic system ex post, but it does its work by compelling the scrapping of those capital goods which do not fit into this pattern, or at least their removal to other spheres of production where a pigeon-hole can be found for them, usually with a concomitant capital loss. The market process tends to eliminate the results of malinvestment but cannot prevent its occurrence.#

Steven Horwitz, “Monetary Calculation and Mises’ Critique of Planning” (1998)

• Economic calculation is only necessary in a world where capital goods are understood to be heterogeneous and only possible where those heterogeneous capital goods are privately owned and exchanged for money in a genuine market.#

F.A. Hayek, The Constitution of Liberty (1960)

• Because unions are most powerful where capital investments are heaviest, they tend to become a deterrent to investment – at present probably second only to taxation.#

Frank Fetter, “Recent Discussion of the Capital Concept” (1900)

• Interest is looked upon as connected with a special class of goods; it must be recognized to be connected with everything of value.#

Peter Boettke, Chris Coyne, Peter Leeson, & Frederic Sautet, “The New Comparative Political Economy” (2005)

• The visible manifestation of underdevelopment is poverty and its immediate cause is lack of saved capital. The underlying cause, however, is the lack of credible institutions in the realms of politics, law, economics, finance, and society. This lack of credible institutions manifests itself in the inability to ward off predation by either private or public actors. Perhaps one of the most important empirical lessons we have learned from the transition from socialism and the problem of development assistance more generally is that efforts to supply the saved capital in terms of loans are counter productive except in areas where credible institutions which constrain predation are already in place.#
• Technological change [is] actually accorded too much attention in the economic theory of development. Technology does not work itself but must always work through an investment of capital.#

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.#Quoted in Ludwig Lachmann, Capital and Its Structure (1956)

Roger Garrison, “Reflections on Reswitching and Roundaboutness” (2003)

• What is the justification for a rarified unit of capital (dated labor) whose utilization is unwarranted outside the context of the most abstract models?#
• Essential to the projects [which exhibit reswitching] is an interspersing of revenues and outlays. Any project for which all outlays are made before any revenues are received cannot have multiple internal rates of return.#
• The particular temporal profiles of reswitching-prone techniques are sufficiently quirky as to warrant neglect in setting out fundamental supply-side principles – an argument that has its parallel in the neglect of the Giffen good in setting out fundamental demand-side principles.#