1. Unfinished Plans

CHAPTER ONE

UNFINISHED PLANS

Introduction

In economics, more than in other sciences, a good theory is a structure of which the foundations consist of clearly defined concepts. Economists have, indeed, long recognized the substantive importance to their discipline, of careful definitions. The ability to define usefully the terms used in theoretical economic discussion, turns out almost invariably to call for the very same insight into economic processes that is required for the enunciation of theoretical propositions themselves. Differences in the definitions assigned to key terms usually turn out to reflect differences in the understanding of the nature of the economic processes to which these terms are relevant. In probably no department of economic science is this more obviously the case than in that of the theory of capital. As long ago as 1836 Whately found that eight of the leading writers on political economy presented divergent views on the nature of capital.[1] More recently Solow has remarked that a man from Mars reading the literature on capital theory would be bewildered by the multitude of the connotations of the term capital, ranging from stocks of consumer goods for the maintenance of workers, to wine and growing trees, to durable buildings and machinery, and so on.[2] And the characteristic difficulties and controversies that have complicated modern theories of capital are closely bound up with these differing concepts of capital.

In the present essay we are not ambitious enough to set out to develop a Theory of Capital. On the other hand, we are not seeking merely a definition of “capital”, (in fact, we are only tangentially concerned with definitions). What we seek is an insight into those economic processes in which capital emerges, and which capital theory hopes to illumine. Such an insight is, of course, a prerequisite for capital theory proper—it may be described as a “prologue to capital theory”. And it will provide us with a framework within which to examine and criticize some of the more important of the different notions held to be essential to an understanding of the role of capital in the economic system. In the present chapter such a framework is presented. The subsequent chapters then critically examine some of the more important ideas and problems commonly associated with capital.

A Digression on Method

The understanding of the nature of capital, and of the economic process in a capital-using market economy, that will be developed in this chapter is based on a consistently-followed approach. This approach sees economic theory as the extensively worked out logic of acts of individual choice.[3] The light which the economic theorist can throw on an economic process, or on the outcome of such a process, is viewed as deriving from his ability to relate back the process to the individual acts of choice of which the process is made up. Through the theorist’s understanding of the decisions made by individuals, and of the way in which these decisions have mutual impact upon one another, and become mutually adjusted to one another, he is able to “explain” the course of economic events, and to understand the probable results that will follow from given exogenous changes operating on the system.

While it may be submitted that the theory of the market as traditionally developed, does (at least implicitly) follow this approach, it will be argued in this essay that capital theorists have on the whole, and with unfortunate results, abandoned it. We will in this essay insist on relating everything that is to be said about capital, back to our fundamental unit of analysis, the individual decision. At every step we will describe the objects that are present in the economy in terms of the past decisions responsible for their presence, or in terms of the opportunities for further decisions that their presence makes possible.

“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.”[4]

We will describe the economic processes in which capital plays a part, (or in the course of which changes occur in capital), in terms of the individual plans, choices and decisions of which these processes consist. And when in subsequent chapters, we turn to examine some of the problems which writers on capital theory have encountered, we will almost invariably find that these have arisen out of a failure to view things from the point of view of individual plans, and out of attempts to see capital as something that could be understood and manipulated on its own, without explicit consideration of the relevant choices made by purposeful human beings.

Individual Decisions and the Market

Our framework of thought will, therefore, be as follows. Each individual in the market economy is at all times seeking to fulfil his purposes (whatever they may be at the time) to the fullest extent permitted by (a) the resources he has at his disposal and (b) the opportunities which, to his knowledge, make it possible to turn his resources to account. These latter opportunities are, in turn, determined by the individual’s knowledge of relevant technological possibilities and by his knowledge of opportunities for exchange (either of resources or of products) that exist in the market. His decisions, (and in particular the bids and offers he makes to the market) seek to exploit these technological and market opportunities of which he is aware. At the same time these exchange opportunities that are available in the market are determined by the decisions which the other market participants are making, in their pursuit of their own purposes, in the light of the opportunities that they find available to them. The market process consists in the systematic chain of events that ensue from the interaction in the market of the decisions of numerous participants. These decision-makers find, at the outset, that the opportunities that are in fact being offered to them in the market (by virtue of the decisions of others) are different (either more or less attractive) than those originally expected. From the lessons learned in the market in this way, there follows a systematic pattern of adjustment and revision in the decisions made by market participants. This pattern of adjustment constitutes the market process.[5]

Now, this analytical framework is applicable in the first place to an economy in which capital is completely absent—the “kapitallose Wirtschaft”. What it is proposed to do in this essay is to extend explicitly this same framework of analysis to the consideration of an economy in which capital plays a role both in individual decisions and in market activity. We will first inquire into the capital-relevant decisions of the individual, against the background of assumed given market opportunities. We will then proceed to consider, in barest outline, the manner in which adjustments and revisions will be enforced upon such individual capital-relevant decisions as a result of the interaction in the market place of such decisions made by numerous market participants. The insights obtained from such an approach will, it is hoped, throw light on the nature of “capital,” and provide pointers towards the full development of capital theory.

We will find it to our advantage to proceed very slowly. We must contemplate the kinds of plans which individuals make, we must thoroughly “feel” the opportunities envisaged at the outset, and the way in which, as time goes on, the individual perceives these opportunities to be affected by the actions which he has already undertaken. All this may not seem very exciting; after all we are all continually experiencing precisely these processes. But, as elsewhere in economic theory, progress will be found to follow careful and patient analysis of the pattern of everyday decision-making. We turn then, first to consider the world of the individual, and, as elsewhere, it will prove useful to do this initially in the most individual of all possible worlds, that of Crusoe.

The Decisions of Crusoe: Multi-period Decisions

Crusoe finds himself equipped with definite resources. These are of a number of different kinds. He has land and other natural resources at his disposal; he has some tools; he expects to be able to work at some level of intensity for some number of hours per week. His level of technological knowledge will then identify for Crusoe the array of production opportunities that these resources permit him to choose from. Any program of production that he undertakes involves costs. As seen by the economist the cost to Crusoe of the production program that he adopts, consists in the opportunities that he has rejected in order to exploit the program that he has adopted. The rejected opportunities include in the first place the possibilities that were available to Crusoe to enjoy his resources in direct consumption (he could e.g. have employed his land and his time for sunbathing, instead of for production). In addition the rejected opportunities include all the possible programs of production (leading either to the same products as are being produced by the adopted program, or to different products) that might have been embraced instead.

Since both consumption and production take time, the alternative consumption and production opportunities considered by Crusoe each consists of a possible course of action over a period of time. What Crusoe has to choose from, is not merely whether to produce apples or pears (as if he were standing before a machine that will vend both or either of these products at the press of the appropriate buttons). He must choose between one time consuming process of production (in which resources must be applied at definite dates, and from which apples will be yielded at some similarly definite date,) and another time consuming process (in which possibly the different resources must be applied at a different set of dates, yielding pears at some possibly different date). Crusoe’s planning is, in other words, multi-period planning. The costs that he incurs through a decision are multi-period costs.

A word of clarification may be in order in this regard. A person may lie back and plan out future courses of activity that do not involve any immediate actions. A man may plan to spend his next summer in Asia, the following one in Africa, and the one after that in Europe. But he may not be called upon or even able to do anything about these plans, for the time being. The successful accomplishment of these plans depend on actions that need to be or can be taken only in the fairly distant future. For multi-period plans of this kind, Crusoe may indeed make decisions now, but he is well aware that such decisions can be revoked at will for some time still to come. Multi-period plans of this kind are, as yet, clearly not very important.

But there is room for a far more important class of multi-period plans. Crusoe may, for example, plan to grow wheat. This plan involves the decision to plow now, together with the intention of sowing and harvesting at appropriate dates in the future. Before Crusoe plows his land, the opportunity to grow wheat is one out of an array of competing production programs each of which, let us say, calls for some immediate initial action. While the respective initial actions may each be only small steps on the way to the final respective goals, the decision to make one such initial act is a decision to embark on the long range production program of which this initial act is the first step. Insofar as a plowed field precludes at least temporarily the carrying out of certain alternative possible production programs, the decision to plow is more than a decision to plow, it is a decision to grow wheat. The decision to plow is part of a genuine multi-period plan. The essence of a plan is that each of the activities embraced in the plan is coordinated with the other planned activities. Each portion of the plan “fits in” with the other portions: it depends on their fulfilment, and their fulfilment depends on its fulfilment. A multi-period plan of the kind we are considering, is in similar case. The activities which such a plan calls for currently, “fit in” with those which the plan envisages for the future. Plowing now, is required if the sowing and harvesting planned for the future is to be able to be carried out. And the current plowing is undertaken only on the assumption that future sowing and harvesting will in fact be undertaken as well.

It is now of importance to examine Crusoe’s position and outlook at three different points in time. We must appraise his situation (a) before he has taken any steps towards the implementation of a multi-period plan; (b) after a multi-period plan has been successfully executed in full as originally planned; and, (what will be most important for this essay) (c) at some intermediate point in time, when the course of actions envisaged by the multi-period plan have been commenced, but have not yet been completed.

(a) Before the initial steps of the multi-period plan have been undertaken, Crusoe has nothing to look back on except completed history. Whatever he may have done in the past has been done. He recognizes, of course, that his present stock of resources and his own personal present situation are the end result of all past history. But, on our assumptions, he is no longer concerned with the appraisal of his past performances, and, again, he has not as yet unfinished plans to complete. He is able to plan freshly for the future unencumbered by past commitments.

He has before him, as discussed above, a number of alternative possible plans of multi-period action. His choice of one of these commits him to the rejection of the others (the term “rejection” includes of course the possible mere postponement of these other plans). He is aware, in other words, that the plan he is adopting calls for a planned pattern of actions over the future, and that the execution of these actions precludes many other possible actions.

On the other hand it may be that the initial steps required for his adopted plan are identical with those required for initiation of several alternative plans. Plowing may be necessary for the cultivation of other crops besides wheat. In this case he is aware that his immediate decision does not commit him irrevocably to his adopted plan. (In fact, he may in this situation deliberately postpone to the last possible moment, the final decision as to which multi-period plan to adopt, making only sure that his immediate actions are those required to advance whatever plan he will ultimately adopt.)

Or again, while the initial steps towards fulfilment of the adopted plan may be able to be turned to subsequent account in the advancement only of this plan, and be of no avail for the fulfilment of any others, these steps may yet not commit him irrevocably to this adopted plan. Crusoe may be aware that his plan can be scrapped before being brought to fruition. The actions required by the adopted plan for its final stages may simply be replaced by other actions that will lead to other results, if so desired. In other words Crusoe is at the outset aware that his adoption of a particular plan, and even his embarkation on possibly irrevocable initial steps towards its fulfilment, do not by any means necessarily preclude the possibility of subsequent decision-making in respect to this plan, and do not free him from the responsibility of making such later decisions.

Aware of all this, then, Crusoe must, at the outset, select the multi-period plan to be adopted. Since his is a multi-period decision, it involves employment of more than merely those resources of which he is currently in command, and provision for more than merely current enjoyments. His plan depends on his being able to command resources of definite qualities and quantities at definite future dates; and it envisages the provision of output to minister to wants and enjoyments that can as yet be felt and desired only by anticipation. Clearly a multi-period plan involves the expectations that Crusoe holds, not only concerning the technological efficacy of the actions which he contemplates, but also concerning the future course of events as he expects them to unfold (in the absence of any actions on his own part). And his multi-period plan envisages the introduction of specific changes into this otherwise expected course of events, as a result of his planned actions. The degree of uncertainty with which Crusoe is able to forecast the future course of events (as they are expected to unfold in the absence of action on his own part), will vitally affect the particular multi-period plan that he adopts, and will, especially, decisively affect the degree of flexibility that he will wish his adopted plan to possess (that is, the degree in which he will wish to reserve the final, irrevocable, decisions for only later stages in the fulfilment of the adopted plan).

The “initial steps” that have been mentioned in the foregoing discussion may take on any of numerous forms. They may consist in acquiring dexterity in the performance of particular operations; or in the acquisition of necessary raw materials and other supplies; or in the construction of tools or other equipment required for subsequent operations; or in preliminary operations on raw material that will prepare it for subsequent further productive operations. Finally these initial steps may (as in the celebrated textbook examples of Crusoe fishing-net construction) consist in the provision of consumption services for the satisfaction of needs expected to arise during the further course of the adopted plan’s fulfilment, (needs which would be able to be provided for at later dates only at the expense of the adopted plan itself).

(b) We turn to examine Crusoe’s situation after a particular multi-period plan has been finally executed. Crusoe may wish to appraise his completed performance. In the light of the knowledge and experience gained in the meantime, he may wish to reexamine the wisdom of his having made the decisions that he did make (both at the outset of the multi-period project, and at subsequent opportunities for plan revision). He may, in this way, now consider the results actually achieved by the executed plan to be more or to be less significant than originally anticipated; he may now consider the results that might have been achieved by the alternative, rejected projects, as more, or as less significant than originally imagined. Again his maturer judgment (and his ex-post knowledge of the course of events during the time of the plan’s fulfilment) may have taught him that the range of alternatives from which he might have been able to choose at the outset, was actually different from what he had originally believed. Some projects originally believed to be out of reach, may now perhaps be seen to have been perfectly feasible; other plans originally believed to have been feasible may now be seen to have been out of reach.

Crusoe may, in this way, seek to determine whether he has “gained” or “lost” by the fulfilment of his project. He will judge himself to have gained, if the alternatives which (hindsight shows that) he rejected, appear less important than the results actually achieved by his adopted project. He will judge himself to have suffered loss if the achieved results rank less important than these rejected alternatives.

Again, by observing Crusoe’s situation, from the outside, so to speak, after the completion of his project, one may be able to assess “objectively” the difference which this completed course of action has made to Crusoe’s situation. One compares Crusoe’s observed situation today with his observed situation at the time the multi-period course of action was first undertaken. One may be able to measure certain differences, or one may at least be able to describe these differences. And in this way one may succeed in describing the observable achievements of the multi-period plan’s execution. We notice immediately, of course, that the outsider’s appraisal of the impact of the project upon Crusoe’s situation, need bear no recognizable relationship whatsoever to Crusoe’s own assessment of his gain or loss from the project, (as discussed in the preceding paragraphs). The outside observer sees only measurable or describable differences between two actual situations—“before” and “after”. Crusoe himself, while fully aware of, and very interested in these “observable differences,” assesses his own gain and loss by comparing an actual situation (“after”), with hypothetical ones (that might have been achieved through alternative courses of action).

Since we are considering Crusoe’s position after a multi-period plan has been fully completed, and before any other further plans have been considered, any assessment of this position must, it should be observed, be exclusively a “backward-looking” appraisal, not a “forward-looking” one. Since he has as yet considered no further plans for the future, Crusoe is unable to measure what he has already achieved, by measuring what these achievements can enable him to accomplish in the future. All that can be done is to examine Crusoe’s current possessions and circumstances, and compare them, as discussed above, either (“objectively”) with his situation at the outset of the multi-period project, or (from a “profit and loss” point of view), with the hypothetical situations that might have been achieved by means of the rejected plans. The implications of this absence of a “forward-looking” view of Crusoe’s situation are unusual enough to deserve emphasis. Crusoe’s failure to consider further plans means that the things in his possession have significance for him only by their presence at this moment. The stocks of food that he may possess affect his situation now, not at all through their capacity to provide nourishment in the future, but merely by “being there” at this moment (for whatever this is worth). The tools in his workshop, the clothes in his wardrobe, the roof over his head, are of significance to Crusoe, at this time, not because of their capacity to render service in the future, but simply by their momentary presence.

This unusually narrow way of looking at things, is pointed out here not at all because of its own importance. Quite the contrary, it is being pointed to here only in order to emphasize the exceedingly unrealistic nature of the situation to which it is relevant. The contemplation of this narrow and limited evaluation by Crusoe of his possessions will, surely, confirm that a state in which all past plans have already been completed, and in which no future plans whatever are under consideration, is utterly inconsistent with what we know of living human beings. Long before a multi-period project has been completed, we may expect Crusoe to have adopted, or at least considered, plans for the future.

In fact, reflection must surely convince us, the very concept of the “final completion” of a multi-period plan project is probably an unsound one. Such a concept presupposes, as we have done thus far in the discussion, that the original plan called for a series of actions designed to achieve definite goals at specific future dates, with no other goals but these in mind. What is far more characteristic, surely, is that the original plan envisages the achievement of the definite future goals with full awareness of the fact that successful achievement of these goals will make possible, and will necessitate, the formulation of further subsequent plans. While in the original formulation of the multi-period plan, these further plans may well have been left completely open for the time being, we may, in a very real sense, consider the original multi-period plan as extending indefinitely into the future. So that we will never be able to find Crusoe in the position of having any multi-period fully completed. Crusoe is always in the position of having future plans under consideration; or, perhaps more correctly, he is always in the middle of an incomplete long-range project (the final stages of which may not as yet have been definitely selected).

These considerations underscore the importance to be attached to our next task, (c) the consideration of Crusoe’s position at some intermediate point in time, when the course of actions envisaged by his multi-period plan has been commenced, but not yet completed.

The Half-Finished Project

At intermediate points in time, Crusoe finds himself with what amounts to a half-finished project on his hands. He has already performed some of the actions initially called for by his multi-period plan, and he now has before him a program of further actions, prescribed by the plan for its subsequent stages. Crusoe appraises his present situation both by looking ahead and by looking back.

Looking back he is aware on the one hand of what has already been achieved through the initial actions. On the other hand, he is in a position to consider again those courses of action that were rejected in order to embark on his own adopted plan. All this is similar to the situation considered in the preceding pages, when we imagined Crusoe to have fully completed his multi-period plan.

Looking forward to possible revisions in his originally planned program of actions Crusoe may see matters from either of two (equivalent) points of view. First, he may, realistically, look at the future from the point of view of one who is, as he is, in the middle of a project, the further stages of which have yet to be finally determined. On this view of things he finds himself faced with the task of choosing the way in which to complete the project which has been started; the program of actions called for by the original blueprints presumably make up one of the alternatives from which this choice is to be made. Alternatively Crusoe may look at the future from a completely fresh point of view. He may choose not to view his task as that of completing something already begun. He may see himself faced with the task of selecting anew a multi-period plan to be commenced now, just as he had selected the originally adopted project—a major difference being, however, that now he has at his disposal the fruits of the unfinished originally adopted project. Of course, it may be that the new multi-period plan Crusoe will now select, may turn out to consist of the very same program of actions that were required by the originally adopted plan for its final stages, commencing from this point in its development.

Clearly these two ways of viewing the future are for all practical purposes completely equivalent. Both views will, with the knowledge available at any given time, lead to identical plans for the future. The difference between the two views is merely in the way Crusoe looks at things. In particular it is a difference in the way Crusoe may look at the interim results of the steps taken so far in fulfilment of the originally adopted plan. From the one point of view these results are seen as a half-finished project. From the second point of view they are seen merely as data, along with other available resources, on the basis of which the new project now to be drawn up can be planned. The former view sees the interim results of the earlier steps taken, as the outcome of (a portion of) an earlier plan. The second view sees these results “positively”; this view is not concerned with how these data came into being, it is not concerned with the “planned” character of these results. To the first view a plowed field represents the intermediate stage on the way to an originally planned wheat crop. To the second view a plowed field is simply a field ready to be sown, if one so wishes.

Just as Crusoe himself may look at the interim results of the first steps of the original plan from these two different points of view, so too can the outside observer see things from the same two viewpoints. If this outside observer wishes only to understand the new plan for subsequent action that Crusoe makes, at the intermediate point in time, then we have seen that, no matter which of the views which Crusoe adopts, he will settle on the same plan for further action. On the other hand, if the outside observer wishes to understand how the present intermediate situation came about, then of course he must view the situation as what it really is,—the outcome of a plan that has not yet been fully carried out. It is worth noticing moreover, that the non-positive view is able not only to explain how these results came about, as already mentioned; it is able, in addition, to interpret the significance to Crusoe of any tangible things that have been yielded by the first steps of the originally adopted project. To the “positive” observer this possibility is not open. To him, for example, a stock of consumption goods is simply a stock of consumption goods. Not only has this observer no interest in explaining how the stock came into existence; he has, for that very reason, no clue as to its purpose. The fact is, of course, that for the “positive” observer, this stock of goods has no purpose, until Crusoe starts afresh to consider the possible plans which his resources make feasible.

But to the non-positive observer, things are quite different. To him, a stock of consumer goods may, for example, be seen not merely as a stock of food, but as provisions prepared in anticipation of a long process of production ahead. This insight not only explains how the goods came into being (as part of an earlier plan); it provides, at the same time, immediate recognition of these goods as having (at least up to the present) a very definite function. The positive observer can describe the tangible things that Crusoe now finds at his disposal, only in physical terms.[6] He is unable to describe them in terms of function because he takes cognizance of no plans in which they play a role. The non-positive observer, on the other hand, is able to describe the tangible things that Crusoe now has at his disposal (as a consequence of the unfinished project), in terms of their function, i.e. in terms of the specific purposes which these things were, in the original scheme, designed to advance.

Imagine that our “outside observer” could observe two islands, each with its own isolated Crusoe, who each started out from identical circumstances, and who each undertook the same multi-period project, commencing on the same date. Suppose that after some time period the observer examines the situations in both islands. Then, if the observer adopts the “positive” view, he must compare the two situations in terms of purely physical description. He may not even say that “tools” exist on one or both islands, (since the term “tool” implies function).[7] He certainly cannot say that the stock of goods possessed by the one Crusoe is “better” than that of the second Crusoe, in the way in which the non-positive observer can say this. The latter (non-positive) observer can compare the two islands not merely by physical description of their situations, but also by assessing the degree in which each Crusoe has succeeded in bringing his project closer to fulfilment.

To the non-positive observer a plan that has not yet been fully carried out may present any of numerous possible spectacles. Everything will depend on the particular plan originally selected, and on the initial steps already taken in its fulfilment. It may be that the observer will find difficulty in discovering tangible evidence of any progress at all by Crusoe toward fulfilment of the original plan. This may be the case for example if the initial steps of the plan called merely for the acquisition by Crusoe of a particular skill. Or perhaps the observer will find stocks of raw materials and supplies prepared for subsequent use. Or perhaps he will find tools and equipment that Crusoe has constructed for subsequent use. Perhaps he will find that preliminary operations have already been performed upon the raw materials—he may find a real half-baked cake in the oven. Or, he may find that Crusoe has (as discussed earlier) merely laid up a stock of consumption goods in preparation for a period of time during which attention to the plan will preclude the provision of such goods.

As we have seen, such an observer will describe the tangible things that are at Crusoe’s disposal (as a result of the earlier stages of the multi-period plan) in terms of their function. That is, he will look back to the original plan, to discover what use that plan envisaged for these things, in the future that is still yet to come. This seems the most natural logical sequence, the observer is able to describe the tangible resources Crusoe now has at his disposal, by reference to a known earlier plan. But it may be that the observer may employ an inverted logical sequence. It may be, for example, that the observer has no prior knowledge of the multi-plan originally adopted by Crusoe. But when this observer sees a hammer and nails, let us say, he is able to infer from this that Crusoe has, in his past planning, envisaged some stage in the fulfilment of his project that will call for the hammering in of nails. This inference, it should be noticed, derives from the relatively specific character of hammers and of nails. Hammers are not very useful except for hammering in nails, nails are clearly designed to be hammered. This specificity enables the observer to infer what use the plan intended for the items under observation; it may also enable the observer to infer what other items are planned to be constructed. Many things can be used only in conjunction with complementary goods. Things which are highly specific in production, will require very definite complementary goods.[8]

Similarly the observer may be able to infer something of the plan that was originally adopted, by taking note of the durability of the tangible things constructed during the early stages of the plan’s fulfilment. Should he find goods that will be able to render service for many years to come, this will tell him something of the length of future time for which the original plan made fairly detailed provision (unless, of course, one knows that the techniques available to Crusoe did not enable him to have control over the durability of the item under observation).

One may, in this way, be able to associate the tangible things available to Crusoe, with rather detailed and fairly definite inferences as to the plans which can be presumed to have been responsible for their existence. So that our non-positive observer may, without prior knowledge of these plans, ascribe definite presumed functions to these tangible things themselves. And he may compare two Crusoes without prior knowledge of their several plans, merely by this kind of insightful examination of the tangible things that the two Crusoe’s respectively possess. He may take significant notice, for example, of the fact that Crusoe A has tractors at his disposal, while Crusoe B has only wooden plows. He may be quick to notice that Crusoe A’s equipment reveals many stages of production and considerable time to intervene between the application of “original” resources and the emergence of consumers’ goods, while Crusoe B’s equipment reveals no such lengthy “period of production.”

Valuable and sagacious as these conclusions of the observer may be, it is to be emphasized (and for the purposes of this essay, emphasized most strongly) that these descriptions, while they may superficially be thought to apply to the “tangible things” themselves, in full reality apply only to the plans, (of which these things are, at present, the interim expression).

Nevertheless, the insights obtained in the preceding paragraphs do serve to underscore something that we have already, in a general way, been aware of. This is that, starting from any given starting point, the plans which Crusoe will make depend, in highly sensitive fashion, upon the particular tangible things over which he has control. Should the equipment at his disposal be of durable character, should he have at his disposal a large reserve stock of consumer goods, he will be able to make different plans for the immediate and the more remote future, than he would be able to without them. Should he have tractors at his disposal he will make different plans than he would if he had only wooden plows in his sheds.

As mentioned earlier, these reflections on the situation as it appears to Crusoe, (or to Crusoe’s unseen observer), at some intermediate point during the fulfilment of Crusoe’s plans, gain in significance from the fact that, realistically, any moment in Crusoe’s life is likely to be such an “intermediate point.” Crusoe is likely always to be in the middle of some plan that has been commenced but not yet completed. So that if one wishes to assess Crusoe’s potential capabilities for the future provision of output, one is likely to start by examining the tangible things he has at his disposal at the present time. One is able to read Crusoe’s future consumption capabilities, so to speak, from the state of his present possessions. This opens up new possibilities of significance for the task that we are surveying in these few pages (that of examining Crusoe’s situation at some intermediate point during the fulfilment of a multi-period plan). One may undertake such a task, it now appears, not only for the sake of describing Crusoe’s situation at that point in time. One may undertake it to gain prevision of the future. (This is related to, but of course not identical with, the approach to the description and measurement of the tangible things Crusoe has at his disposal that, as discussed earlier, ran not in terms of physical characteristics but in terms of function, or prospective usefulness).

This way of looking at things may, however, lend itself to illegitimate over-extension. We have seen that an insightful observer is able to perceive, in the tangible things Crusoe has at his disposal at an intermediate stage in the development of a project, the adopted plan of which these tangible things are the interim expression. There is now a not entirely desirable possibility, that these tangible things may now be looked at exclusively from a converse point of view. They may be seen as being nothing more than the present tangible reflections of streams of future output. One may be tempted to see an oven now as being the “intermediate form” in which countless future loaves of bread are, at the present time, reflected. The error in such a view would be the subtle one of seeing present tangible goods as being themselves an intermediate form of future output, without paying attention to the plans (either past or future) which have to be constructed with reference to the employment of these tangible goods, before any future output at all can be forthcoming.

The undesirable aspect of this view is thus its tendency to suggest that the future streams of output automatically flow out of present resources, and that these resources represent nothing more (and nothing less!) than the entire prospectus of future history telescoped into presently tangible form. There is, it should be apparent, nothing automatic about the way in which Crusoe’s future streams of output arise from his currently available body of resources. At almost every step of the way Crusoe has opportunities to modify earlier plans, to fill in details in earlier outlines of plans, to devise entirely fresh plans. What will be yielded by Crusoe’s resources simply depends on what Crusoe decides to do with his resources.

It is true of course, that when a multi-period plan (or some successive stages of such a plan) of Crusoe has been successfully carried out as originally planned, that he is able, in retrospect, to ascribe the goals achieved to the past resources employed. And it is true that one may then say that the course of events during any period of time is merely the consequence of the immediately preceding state of affairs; and thus that the entire skein of subsequent history was merely the unravelling of what was somehow already present (in “bottled-up” form) at the very outset. But this is able to be said only because the plans actually adopted and executed during this history, are taken for granted, (and are implicitly used in the description of the resources originally available). Moreover, it should be observed that in retrospect significance attaches almost exclusively to states of affairs at points in the past when new plans were made, or when alterations were made in earlier-laid plans. No particular significance attaches to an earlier decision to permit a half-baked cake to remain in the oven, as originally planned, until fully baked. A statement that a fully baked cake “flowed automatically” out of a half-baked cake (and a hot oven), is not a very important statement at all. The statement gains whatever plausibility it possesses from the circumstance that, in fact, no “new” decisions were made at the time the half-baked cake was permitted to remain in the oven. (Alternative decisions were merely considered and rejected). But past states of affairs (seen as the basis for the subsequent course of events) are of interest solely because these states of affairs did, in fact, inspire “new” plans. The course of events during a period in Crusoe’s history does derive from the pre-existing state of affairs—but only because these events depended on the plans which Crusoe adopted, these plans being made at the start of the period, on the basis of the state of affairs prevailing at that date.

We may express these ideas in a slightly different way. We are talking on the one hand of a “state of affairs” at a point in time; and we are talking on the other hand of a “course of events” over a period of time. Whenever one finds Crusoe, one is entitled to enquire as to the “present state of affairs.” And this may involve an examination of the tangible things at Crusoe’s disposal as a result of the initial stages in the execution of as yet unfinished plans. The description of the present state of affairs may thus be conducted in terms of earlier events leading up to the present, or in terms of the possible courses of events open for choice in the future through the availability of today’s resources. Should, however, Crusoe select to complete the final stages of the originally adopted plan as planned, then he will, in retrospect, attach no especial significance to the “state of affairs” at the intermediate point in the plan’s fulfilment, and no especial significance to the array of tangible things that were at his disposal at that time. When he is at the intermediate point in time, these tangible things are the resources which will determine what further steps he will take. After an entire plan has been carried out, Crusoe is aware only of his original goals, and of the final results of his efforts in their pursuit. Looking back at the tangible things that were at his disposal at some past intermediate point, he sees them as nothing more than the means that were necessary to “carry” the actions performed in the earlier stages of the project up to the time when the ultimate outcome of the project has come to fruition. Looking back, those intermediate tangible things merely “stored” the earlier efforts up to the time when their final results could be derived from “them.”

Crusoe and An Overlapping Sequence of Plans

We have already noticed the artificiality of the assumption that Crusoe chops up his lifetime into separate periods of time, in each of which a new plan is both started from scratch, and carried to completion. We have noticed, that is, the artificiality of considering points in time when earlier plans have been fully executed, while new plans have not yet been considered. It is more plausible to think of Crusoe’s life as consisting in a series of actions, (each one of which is designed to advance some plan), such that long before earlier plans (which may, as discussed, each have an infinite horizon) have been “completed”, new decisions and plans have already been superimposed on the program that had previously been laid out for subsequent execution.

Complicating as the recognition of this pattern of planning may seem to be, it should be clear that very little of what has been discussed so far in this chapter has thereby lost its relevance. Perhaps the only important respect in which matters have changed, consists in the fact that the ideas developed in the earlier discussions are likely to seem less obvious in this more complicated case of continual, overlapping decision-making. This is particularly likely to be the case if Crusoe’s programs of activity happen to follow a fairly regular and repetitive pattern.

We may imagine Crusoe engaged in various productive activities year after year. At any one time he is employing an array of resources available to him. During any given period of time Crusoe’s productive activities are channelled into the provision of goods for consumption, together with the maintenance, periodic replacement, and also the possible expansion, of his stock of tangible resources. In this scheme of things, a look at Crusoe’s situation at any time, will reveal an array of tangible things at his disposal, that is not very different in composition from the array of tangible things available to him at other times. Crusoe always seems to be in the middle of a project or projects, and his “state of affairs” is always about what it was before.

In these circumstances it is quite easy to overlook the prime importance of Crusoe’s plans, that are continually being revised and extended and which at all times determine the use to be made of the available array of tangible things. It is easy to overlook the fact that at any one time Crusoe is likely to have a number of projects simultaneously under way, and that these projects will be in various stages of advancement.

But once attention is drawn to these facts, it is impossible to escape the conclusion that the considerations discussed in the preceding sections, remain as completely valid and relevant for this more realistic example, as they were for the more artificial cases discussed earlier. The “state of affairs” at any point in time may be gauged in part from the composition of the tangible resources then at Crusoe’s disposal. And, as before, it will be possible to describe these tangible resources in terms of the relevant plans from which they have sprung, and in terms of the functions designed for them by these plans. It must only be remembered that each bit of tangible resource must be related back to its own (possibly unique) plan. Instead of being in the middle of one project, Crusoe is in the middle of a number of projects, at different stages of incompleteness. That is all. The fact that the overlapping of these different projects leads to a fairly constant periodic volume of output, (after replacing worn-out equipment), is quite irrelevant to what has been discussed so far in this chapter. This last point is important enough to require some elaboration.

When Crusoe does in fact engage in activities that repeat themselves year after year, making sure that at all times his stock of tangible things available for productive employment is constant, then the outside observer, and perhaps even Crusoe himself, may lose sight of the role of the plan in the system. Crusoe might argue as follows. At each point in time he has control over the (constant) stock of productive tangible things. During each period of time he is able to attain a (constant) level of consumption (after deducting from gross output enough to maintain the constant level of his stock of productive tangible things). Were he not to possess such a stock, then the annual level of consumption that he would be able to produce, would be significantly lower. So that the steady annual increment in consumption that he is now able to enjoy is clearly associated with the steady presence and employment of his stock of tangible things. It is only the presence at all times of the same stock, that makes possible during each period the enjoyment of this increment in consumption output. It is tempting to consider the increment in output obtained in each year, as the result of the current presence of the stock of tangible things. After all it would be impossible to keep up the present level of output without currently maintaining the stock of tangible things.

So that Crusoe, and the outside observer, might conclude that the significance, for an appraisal of Crusoe’s circumstances, of an examination of his stock of tangible things, differs from what has been discussed above. Instead of examining this stock for an indication of future production potential, for a clue as to the length of future time for which some provision has already been made, it may now be proposed to see Crusoe’s stock of tangible things merely as a measure of his currently superior productive potential. From this point of view two Crusoes whose present stocks of tangible things are different, differ from one another primarily in the sense that one of them has the means to produce more current output than the other. It would be as if the one Crusoe had been endowed by nature with a greater capacity for rendering labor services, than the other.

Now, if there were some foreordained law that elevated such a case of constantly maintained output to a role of primacy, than there might be a case for looking at things in this way. For Crusoe himself, in fact, if he attaches especial importance to maintaining a constant pattern of consumption, there can again be no objection to his mentally associating this year’s output, with the presence of this year’s stock of tangible things. Such a mental association might be helpful in achieving the desired constancy in output. But for the outside observer to seize on this mental association as the indicator of which causes bring about which results, is clearly an error. If Crusoe is interested in maintaining a constant level of consumption, then he must plan his actions to this end. In these plans, the immediate maintenance intact of the stock of tangible things is required, not for the sake of current output, but for the sake of the adopted goal of maintaining the current level of output indefinitely during the future. To do this may call, as discussed earlier, for the simultaneous undertaking of a number of “staggered” projects; Crusoe must commence on new projects while earlier-undertaken projects are still in various stages of partial completion. The age composition of Crusoe’s stock of tangible things can be understood, and can serve as a basis for explaining the future, only by steadfastly bearing in mind the particular plans that have brought about the present state of affairs.

Multi-Period Planning by the Individual in a Market Economy

We turn now to apply the ideas learned from our discussion of Crusoe planning, to planning within the context of a market economy. We consider first the multi-period plans of individuals. Then we will consider the implications to be drawn from the fact that the data of the market result from the interaction of numerous individual plans.

In a market economy an individual is able to make multi-period plans with a greater range of freedom than was possible for Crusoe. Crusoe considered the resources at his disposal, made a guess as to the resources likely to be placed at his disposal by the course of future (external) events, and made his plans accordingly, striving to put his resources to use in the most efficient way possible, for the satisfaction of his own anticipated wants. In a market economy, too, an individual considers, just as Crusoe did, the resources at his disposal now, and those expected to be made available to him by future (external) events. But the individual in a market economy can make plans which call for the employment of resources which he does not now possess, and which he does not expect to come directly into his possession at all. He is able to do this because he is able to exchange in the market the resources which he does expect to come directly into his possession, into the other resources required for the execution of his plans. A special, very important example of this, arises from his ability to borrow the means to acquire the resources he needs.

An individual will then make multi-period plans that are limited, not by the particular resources expected to come directly into his possession, but by the arrays of resources expected to be obtainable in the market place through sale of his own resources, or by the terms on which present resources can be borrowed. Moreover, these multi-period plans may be designed to produce output for which the planner himself anticipates no desire, and which will only later be exchanged in the market for the goods the planner himself expects to consume.

Prominent among the factors that an individual must take into consideration in formulating his plans, will therefore be the market prices of (a) the resources that he expects to come directly into his own possession, and (b) the resources that will be required for the execution of the various plans under scrutiny. For the purposes of the analysis of individual multi-period planning, one assumes that these prices are given and externally-determined. The existence of these prices (in conjunction with output prices) makes possible the calculation in monetary terms of the costs associated with the various projects up for consideration. The relationship between the prices of future output and those of current resources determines the attractiveness of those projects feasible only through the employment of borrowed resources.

But once notice has been taken of these possibilities that are opened up through exchange opportunities on the market, one is able to apply without further significant modification, the same ideas that were relevant to the multi-period plans of Crusoe. Let us take an individual and imagine, (as we did with Crusoe), that he undertakes a plan.

At the outset our individual may possess resources and/or may expect to come into possession of resources without action on his part. He may, in addition, consider possibilities of borrowing various resource combinations. He may describe these resources in terms of their physical characteristics, or in terms of the possible functions that these resources can fulfill (in certain combinations). But he may also, in the market economy, describe them in terms of their purchasing power; in particular he can measure their monetary value. (Should, indeed, he acquire resources through borrowing, then it may be a sum of money that is borrowed). Nevertheless, when an individual considers a particular plan of production, he must still at some stage in his calculations, deal with it at a technological level. While calculation can now be carried on in monetary terms, the alternative plans being weighed still involve the same real elements that were relevant to Crusoe.

At the technological level it is, therefore, still possible to examine the tangible things that represent the state of an individual’s half-finished project. It is still possible to describe these things in terms of past plans, in terms of the functions assigned to these things by these past plans, and in terms of the functions likely to be assigned to these things by the new plans that will be made in the light of changed conditions.

At the same time the facility for calculative purposes that is possessed by money enables the planner to measure the success or failure of his project. In particular it enables the value of the stock of tangible things on the one hand, and that of the flow of finished output on the other hand, to be expressed in homogeneous units of money. The individual concerned is certainly very interested in the relationship between the value of his stock of equipment and that of the annual output that he is able to produce with its assistance.

It is rather important to observe that these possibilities of measurement that exist in a monetary economy carry with them certain fairly subtle temptations to the observer, that may avert his attention from the planned character of the tangible things that represent the state of an individual’s half-finished projects. In our discussion of Crusoe, we came across similar temptations; in a monetary economy these possibilities acquire much greater importance. When both the resources with which a project is undertaken, and the outputs which are yielded by the project are both measured as sums of money, it becomes easy to forget that the one sum of money represents something which is being striven to be attained, while the other sum represents the means seized upon to further the sought ends. When the state of an individual’s affairs are appraised during the course of a project’s execution, this becomes even more serious. The tangible things which the individual possesses as a result of the initial stages of fulfilment of his project are valued as a sum of money. To an observer contemplating the magnitude of this sum, there is nothing to indicate that it is the outcome of a planned course of action; and there is nothing to indicate that the original plan envisaged any additional actions to be taken with respect to the things which this sum represents. Nor is there any indication of alternative plans that might be able to turn these things to account.

And yet it is clear that the sum of money is “tied up” in the form of tangible things only for the purpose of gaining still larger sums in the future. It is clear that the larger the sum that is so tied up, the larger will be the future sums that can be so gained. An observer will thus still attempt to gain prevision of an individual’s future by an appraisal of his present “state of affairs”; and he will do so by examining the magnitude of the sum of money which the individual has tied up in his projects at any one time. This way of looking at things will do more than merely divert attention from the planning that is embodied in the particular tangible things that this sum of money measures. It will in addition, and as a result, foster the notion (noticed already in our discussion of Crusoe) that the gains that are anticipated for the future will somehow flow automatically from the fund of purchasing power that is at present tied up in the individual’s assets.[9] The fact that these future gains are measured in the very same monetary terms as are these assets themselves, serves to support this view of things. This makes it all the more easy to consider a fund of money as somehow possessing the capacity to grow, almost spontaneously; it makes it easy to think of the assets (which may be expressed in terms of such a monetary sum) as possessing somehow a “productivity” of their own. (This misconceived view certainly seems to fit in only too neatly with the circumstance that on the loan market, sums of money do seem to “grow” automatically with the mere passage of time.)

This misconception depends, it is worth noting, on yet a further consequence of the monetary measurement of assets. This is the misleading impression of homogeneity that is imparted by the representation of a set of tangible things by a sum of money. These tangible things may be very different from one another; they may in addition be the interim results of a number of quite separate plans. But this heterogeneity is completely submerged when assets are expressed as a value of money. This leads to an emphasis on the feature common to all tangible things possessed by an individual, viz. the mere fact that they are assets. This facilitates the appraisal of the individual’s “state of affairs” in terms of the homogeneous pool of resources over which he has control, and, as seen above, the way is clear to the idea that from this homogeneous pool the future gains will flow more or less spontaneously. In particular, as we shall discover later in this essay, these notions have fostered the idea that, beneath the superficial heterogeneity of the particular stock of tangible goods an individual may possess, there exists a commonly-shared characteristic that is responsible for the future surplus that these tangible goods will yield.

The earlier discussions of this chapter will have made clear the misleading nature of such ways of thinking. Of course the tangible things that an individual has in his possession (as a result of earlier stages in the fulfilment of a project) are the source of future gains. This is because the existence of these tangible things places the individual nearer to his goals than he would be without these things. After all, that was why his project called for the provision of these tangible things in the first place. But there is nothing in the mere existence of tangible things themselves that justifies their being looked at as merely the reflection of the future outputs to which they will give rise. This we saw in our discussion of Crusoe. Tangible things will give rise to future outputs only if they are put to use in appropriately planned ways. Even more emphatically must we deny that these tangible things possess some hidden common property that possesses “productivity” of its own, apart from the particular characteristics of the various tangible things, and apart from the various possible plans in which these tangible things might find a role.

Interacting Plans

We must now take up the task of interpreting the significance, for our purposes, of the fact that a market consists of interacting individual plans. We do not have numerous Crusoes each formulating his isolated individual plan against the background of market data, but of individuals each of whose plans exercises direct influences on the plans of the others. Let us first recognize the role of division of labor.

Crusoe had first to construct an oven, to grow, harvest and grind grain into flour, and finally to bake bread. In a market economy these various steps in the long process of production leading to bread are broken up into separate self-contained processes. The man who grows wheat does not have to plan its further development into bread; the oven manufacturer’s plans need not reach back to iron mining, nor need they extend to wheat-growing or to bread baking. Each plans his own process. Taken together the plans tend to fit into an integrated pattern. But no single mind has formulated any such overall integrated plan. It is enough for the oven maker to know that there are men willing to sell him iron, that there are men willing to buy ovens from him. And so on.

Of course, each of these stages of production may itself take time, and will involve multi-period planning on its own account. At any given time each of these individuals will be in possession of intermediate tangible things. From his own individual point of view these things represent half-finished products—where the finished product is simply that which he sells to further participants in the productive process. It is the interaction in the market place of the plans of the various different individuals to undertake different small steps in the overall process of production that may force adjustments in these plans and gradually tends to mould these plans so that altogether they constitute an integrated pattern.

Recognizing the role of the market in bringing about this tendency towards coordination among the various stages of production, we are immediately forced to look on the tangible things that are the intermediate products of the individual producers, as having a significance reaching beyond the narrow horizons of these individuals. We look on an unfinished oven, not merely as a half-way station toward a finished oven, but as a half-way station toward bread; and we are aware that it is a half-day station along a road that reaches back to the iron mines and to the wheat-fields. While the oven manufacturer does not need to know (and certainly not to plan) that his ovens will be used to bake bread, he does know that bakers can be expected to offer him prices for his ovens. And we know that these prices will be offered by the baker as initial steps in the fulfilment of his plans to bake and sell bread. So that we must indeed see the oven as an intermediate product, the result of the first stages in the fulfilment of a series of (at least partially) interlocking plans whose ultimate end is to produce bread and sell it to the consumer.

This way of looking at things emphasizes the most fundamental of the insights into the market-system that economic analysis has been able to supply—the perception that the plans made in a market interact in a manner that tends to bring about a system of interlocking plans.

At the same time economic analysis warns vigorously against the simple assumption that all the plans being made at any one time do in fact interlock perfectly. Such perfection serves as a definition only of the state of equilibrium, a state which can in principle be attained only through the exhaustive operation of the market process, carried to its very end against the background of given tastes, factor availability and technological knowledge. Moreover, when, as in this essay, our interest is focused explicitly on the multi-period plans of individuals, the requirements for the perfect interlocking of all relevant plans, reach proportions of formidability as to render such a notion of no significance at all except as a theoretical construct.[10] A perfectly interlocking systems of individual multi-period plans would require that plans made now fit in not only with the plans of others being made now, and with relevant plans made by others in the past, but with all other relevant plans to be made in the future.

The existence of a half-finished oven at any time, then, signifies not that plans have in fact been laid to bake bread, but that the oven-manufacturer’s plans anticipate, in effect, the future formulation of such plans. In the case of Crusoe we found that the existence of intermediate tangible things during the course of a project’s execution, reflected Crusoe’s past plans, but represented also currently available resources on the basis of which Crusoe may now wish to formulate new production plans (should he feel his circumstances to have changed). Tangible things might in the end be used for different purposes than those for which they were constructed in the first place. In the market economy this kind of possibility is now seen to acquire additional importance.

In the market economy, too, tangible things may in the end be used for different purposes than those for which they were originally constructed. An oven-manufacturer might, in the event of a sudden sharp rise in the price of scrap metal, decide that it is to his advantage to sell his half-finished or even his finished ovens as scrap rather than to continue in his original line of manufacturing. This is quite similar to the possibility we found in the Crusoe economy. Or again, the passage of time may have so adversely affected the market for bread that the oven manufacturer finds himself forced to alter his plans, with respect both to future production and to goods in process. His original multi-period plans may have been perfectly adjusted with earlier anticipated conditions in the bread market, (as exemplified, for example, in the plans for the future made earlier by bakers). Changing conditions have thrown things out of adjustment: new multi-period plans must be made by the oven-manufacturer. Or, at least, he must make revised plans to fit in with different multi-period plans of others, than those originally in mind. This possibility too is rather similar, in principle, to possibilities we have found already in the Crusoe economy.

But a market economy may open up possibilities for altered plans (with respect to the utilization of intermediate tangible things) that have no close parallel in the Crusoe case. An oven-manufacturer may have undertaken his line of business under a profound error. He may have entered oven manufacturing under a badly mistaken impression of the extent of demand for ovens on the part of bakers. The passage of time alters nothing in this case except to provide to the oven-manufacturer clearer and clearer evidence of his entrepreneurial error. He may be forced, under such circumstances to revise his production plans in midstream, and possibly to dispose of his stock of finished and half-finished ovens in ways quite different from those first planned. What has happened here is that the seething agitation that makes up the course of the market process itself has resulted in the alteration of plans. As we have seen, it is precisely this, the enforcement of changes in plans in order to bring different plans into closer mutual adjustment, that is the function of the market process. This is well recognized in the case of single period plans. What is here being pointed out is that in the context of multi-period planning, the market process exercises a very special influence. This influence consists in the enforcement of new plans that will, possibly, embrace uses for existing tangible things for which these things had originally not been constructed.

It is of some importance to notice the range of adjustments that may be enforced by the market process in this way. This range is as wide as the range for entrepreneurial error itself. Not only may, for example, machines have been produced to serve industries which have no use for these machines. Machines may have been produced that were designed to be used for a long period of time, and these machines may in fact be used (perhaps more intensively) for only shorter periods. All such errors will lead to disappointments on the part of those who erred in their planning. These disappointments will strike planners primarily in the form of the emergence of market prices for their tangible things that differ from those originally anticipated. As a result they may sell their products to others than the producers for whom they were originally intended.

It should be noticed, however, that disappointingly low prices for tangible things, do not necessarily mean that these things will be put to uses for which they were not originally planned. It is still entirely possible that the ovens may yet be sold to bakers. The low oven prices may indeed spell severe losses for the oven manufacturer. But these low prices may make it just worthwhile for the baker to continue baking bread. What has happened in this case is that entrepreneurial error on the part of the oven-manufacturer has channelled resources into a branch of production (bread baking), where these resources “ought not” to be employed, as judged from the view point of an omniscient observer. In other words, perfect foreknowledge of market conditions on the part of all entrepreneurs would have inspired multi-period plans in which bread baking would now be a smaller industry than is now in fact the case. But, the error on the part of the oven-manufacturer once having been made, competent entrepreneurship has been able to make the best of a bad situation. The ovens have been put to work, bread baking has been permitted to exploit the ready-to-hand ovens (even though these ovens would not, on better judgment, have been produced in the first place). In other words the plans originally made for the ovens has been successfully carried through to completion. The only reason for this, is that the ovens were produced before the error in their being produced was perceived. The market process has enforced adjustments in current planning in order to exploit, as far as possible, the steps already taken in execution of earlier plans (that ought, nevertheless, not to have been undertaken in the first place). It is not difficult to see how this same pattern might hold true for a Crusoe economy: once he has started on a project, he may decide to continue even though he might now think this project to have been ill-advised in the first place.

The “State of Affairs” of an Economy

Consider the state of an economy at a particular point in time. An examination of the economy reveals the existence of numerous, heterogeneous tangible things. Since we confine our observations to a single instant, this is all that can be observed. How are we to interpret the significance of a particular set of such tangible things? What does the existence of the set tell us about the history of the economy? What basis does it provide for a prevision of the future? Our discussions thus far are sufficient to indicate the way in which these questions may be answered by the economist.

Looking at the economy as a whole, one observes significant similarities to the picture of Crusoe’s state of affairs as obtained from the stock of tangible resources available to him at an intermediate point in the fulfilment of his plans. The buildings, the machines, the stocks of raw materials, the tangible things present in an economy at a given time, are all the results of past plans; and they all represent half-way stations along roads intended to lead far beyond themselves. The future output of the economy, as of Crusoe, depends on the present stock of resources.

But whereas we were assuming Crusoe’s stock of resources (resulting from earlier steps taken in fulfilment of his multi-period plans) to be the interim outcome of a single integrated plan, the stock of produced things in a market represents the heritage of numberless separate past plans. And we have already noticed that these plans can by no means be assumed to have been perfectly interlocking plans. Taken individually each piece of tangible produced good still represents the past plans of its producers, and their expectations as to its further employments. But there is not very much more that can be said to preserve the parallelism between a Crusoe economy and the market economy. The state of affairs in a market economy is not the result of a single integrated past plan, nor does it lay the basis for any such future plan. The state of affairs in a market economy represents the status of the numberless individual past plans, and it reveals the extent to which the market process has brought these plans into consonance with one another. At the same time an examination of this state of affairs may reveal the degree to which past plans have failed to mesh. This may then indicate the future revisions in these plans that will be necessitated, not by changing underlying conditions (as was the case with Crusoe) but by the mere fact that the future conflicts between jarring plans can be expected to result in eventually altered plans.

Nevertheless, despite these very real differences between the market economy and the Crusoe economy, it must be admitted that for some rough and ready purposes these differences can be quite usefully ignored. When one observed two Crusoes, one of whom possesses tractors while the second has only a wooden plow, one knows immediately something about the likely respective future outputs of the pair. And when one compares two countries and finds the one well stocked with roads, buildings, machines, and unfinished goods inventories, while the other is relatively poor in these tangible things, one does feel that one knows which country will enjoy the greater volume of output. It may be noted that our tendency to make this kind of judgment about a nation’s economic future rests, if it is to be at all valid, on an implicit faith in the past and future ability of a market economy to coordinate plans. In the Crusoe case we saw how the future can be surmised from the present array of tangible things, only by speculating on the plans Crusoe will make to use these things. In the market economy we can draw conclusions about the future only by assuming, not only that individuals will make plans to employ the things they possess, but that they will do so in such a way that these plans will, at least to a large extent, exhibit a meshing and interlocking pattern.

If one is willing to make this kind of assumption then it is entirely in order to assess a nation’s future by referring to its current stock of things. This can be done by looking at these things—not, we must insist, as though future output can be expected to flow, automatically and planlessly, from these things,—but as though a single integrated plan for the entire economy was in the process of being smoothly carried out, promising the future attainment of some coordinated set of relevant goals.

Some Remarks on the Theory of Capital

Thus far in this chapter little use has been made of the term “capital.” During our discussions of multi-period planning by Crusoe, and by individuals in a market economy, use of the term has, in fact, been studiously avoided. We have been exploring the implications of the fact that people make multi-period plans; we have taken notice of the circumstance that in a market economy multi-period plans exercise influence over each other just as single period plans do; in particular we have taken notice of the circumstance that at any given time an economy—whether that of Crusoe or a market economy—will reveal the existence of unfinished projects.

The central theme of this essay is the recognition that significant economic relationships can be revealed by paying attention to the as yet unfinished projects that exist in an economy at each point in time, and to the tangible things that represent the interim status of these projects. We have discovered that many, perhaps all, of the tangible things available at any time represent such “intermediate products;” that the composition of the array of such tangible things present at a given time in the market place, can be explained by reference to the past plans to which these things owe their existence, and to the way in which the market process has enforced a degree of coordination among these plans; and that, insofar as the course of future events depends on the present state of affairs, prevision of this future can be obtained by recognizing the as yet uncompleted plans that were formulated in the past for the further utilization of these tangible things (and of the possible revisions in these plans that may be enforced by the future course of the market process).

The relevance of all this to the concept of capital is not far to seek. The body of analysis generally understood to be embraced by the theory of capital, happens to deal with these same problems. Despite the number of different definitions assigned to the word “capital,” the concept is invariably used in theories that attempt to grapple with the relationships between resources at one point in time and outputs of subsequent points in time, and with associated problems. The multiplicity of different formulations of the capital concept attest, not only to the elusive nature of the concept itself, but, even more importantly, to the innate complexity of the economic relationships hoped to be elucidated with the aid of this concept, or rather these concepts. The contribution which this essay seeks to make consists in its suggestion of a way of looking at these things, that while not at all novel, has yet, in the area of capital theory, not been followed through with sufficient perseverance or with sufficient consistency.

The remaining chapters of this essay critically appraise in turn some of the more important of the confusing aspects of the capital concept as treated in the literature. These chapters show how confusion frequently seems to have arisen from a failure to exploit the insights that we have obtained during the course of the discussions thus far in this chapter. There has been, it may be assumed, little in these discussions themselves with which issue might be taken. The sole purpose of the discussions has been merely to focus attention on a particular way of looking at things. The point at which we do part ways with other writers on capital theory is with respect to the usefulness for this theory, of this way of looking at things.

Let us consider, for example, the time-honored definition of capital, or of capital goods, that runs in terms of produced means of further production. Factors of production that are not “original”, but man-made, are grouped together as capital goods. Now this may be a very useful definition. There is no doubt that many of the tangible things that are capable of being turned to account in production, are man-made, and that their having this characteristic may be of considerable significance. But this definition is all too frequently accepted in bald terms, completely ignoring the relevant plans that are involved. It is used to focus attention on certain factors of production, and finds a certain uniqueness inhering in this class of objects, viz. their having been obtained by the past productive efforts of men, rather than from direct endowment. The past history of these objects provides a criterion for their definition.[11] Proceeding from this foundation one is then able to discourse further concerning the past inputs, or the “waiting” that are somehow “embodied” in capital goods. And then one is able to formulate propositions that, for example, attempt to relate these past inputs to the contributions that the capital good is able to make to production. If introduced at all, plans play only a subsidiary role in this scheme of things.

The approach that is here being advanced starts out on the other hand, from the fact that men make multi-period plans, which, prior to their ultimate completion, result in unfinished projects. Attention is then sought to be trained upon the objects of which these unfinished projects consist, for the purposes outlined above. For these purposes no significance is attached to the physical characteristics or the physical history by which these objects might possibly be grouped apart from other objects. The fact that these objects have been produced (rather than received as natural endowment) is in itself of little moment. The significance associated with the circumstance that these objects were produced consists in the fact that all production is planned production, so that produced objects are the results of plans. And since these objects are themselves potential factors of production, their production presumably resulted from plans in which their own eventual employment was envisaged.

What we suggest here is that the elusive element in the economic system that economists have been trying to pinpoint by their various definitions of capital and capital goods, comes into clear and unmistakable focus as soon as we recognize that at least part of the tangible things present in an economy at any time correspond to the intermediate objects here being discussed.[12] It would seem to us, then, most natural to appropriate the term “capital goods” for the technical identification of such intermediate objects. While no particular importance can be attached to the definitions of particular terms, and another term could very easily be coined for the purpose in question, we offer no apology for saddling the term capital with yet one more (different) definition. Confusion would be heightened rather than lessened by the introduction of a new term for the purpose of identifying these intermediate objects. The principal point to be emphasized is that capital goods, thus defined, are distinguished in that they fall neatly into place in a teleological framework. They are the interim goals aimed at in earlier plans; they are the means toward the attainment of still further ends envisaged by the earlier plans. It is here maintained that the perception of this aspect of tangible things now available provides the key to the unravelling of the problems generally attempted to be elucidated by capital theory.

The distinguishing characteristic of our capital goods is, then, not a positivist one. Just as a positivist can see in an oven nothing but joined pieces of shaped metal, so will he be unable to distinguish our capital goods from other objects. This is not true of other criteria used to demarcate capital goods from other resources. It remains true, of course, that the identification of a “resource,” as distinct from other physical things, cannot be made without reference to human purposes. But for the distinction between capital goods and other resources, the criteria employed in the literature would be entirely acceptable to a positivist. Resources that have been produced can be shown to be such by observation; resources that are producible (“augmentable”)[13] can be recognized on purely technological grounds; resources that are non-permanent[14] can be similarly identified. The criterion for the identification of capital goods that is advanced here, on the other hand, cannot be applied on a purely empirical basis. Only understanding of the nature of the multi-period plan enables us to focus attention on the “intermediate objects” under discussion. This is completely consistent with the situation elsewhere in economic analysis. Progress in economics starts with the recognition that goods possess “utility”—in other words that goods provide fulfilment for consumer plans. For us the plan is not something that may be invoked (along with other possible explanatory principles) in attempting to explain certain phenomena. Rather, insight into the propensity of human beings to plan imposes the scientific obligation to study the consequences of this propensity. This at once draws our attention to the significant, the relevant features of the real world and provides a theoretical framework into which we may then seek to fit the course of events in this real world.

Is a Theory of Capital Really Necessary?

It will be recalled from our discussion of the Crusoe economy that significance attaches to a the “state of affairs” at a point in time primarily when future prospects are being appraised from the point of view of this date itself. The state of affairs that existed at some date already past, when looked at retrospectively, from the vantage point of some later date, is of interest only when one wishes to understand how future prospects must have appeared to those present at the past date; or it may be of interest if this past state of affairs has turned out to have inspired subsequent actions that represented changes in the plan that had previously been mapped out for the future. Where multi-period plans (or portions thereof) have been successfully carried through to complete execution as originally planned, little interest can attach to past intermediate states of affairs. Nothing that has been accomplished demands explanation in terms of past intermediate states of affairs. Everything can be fully accounted for by reference to conditions existing at the times when decisions were made, either at the initiation of entirely new plans or in the revision of earlier plans.

It turns out, then, that the course of history in a world in which no plans needed to be altered, does not call for economic explanation having recourse to intermediate states of affairs. For a world in which there prevails perfect knowledge of future external change and in which the multi-period plans of all individuals interlock faultlessly, it follows that everything that needs to be explained, outputs, prices, interest rates, and the like, can be explained without seeking causes represented by intermediate states of affairs in the past. For such a world the state of affairs at intermediate stages during the execution of a plan represents only a result, a result that one may wish to explain, but which itself adds nothing to the explanation of the subsequent course of event that could not have been explained by direct reference to past actions (applications of input, exchanges, and the like).

It might appear then that a theory of capital is not necessary for an understanding of the chains of cause and effect operating in the real world. Events in a multi-period model of a market economy would appear to be determined entirely by other events. Past states of affairs, too, are themselves the outcomes of earlier events. Analysis might seem capable of by-passing consideration of these states of affairs, and proceeding directly to the prime causal elements. These are clearly events rather than states. It seems that this, in effect, is the basis for a number of suggestions made in recent years that economic theory, (explicitly extended to deal with multi-period models), can do without a theory of capital altogether.[15]

In defense of capital theory several points ought to be made. In the first place there is room for a theory that will explain how “states of affairs” came to be what they were. A theory is required that should account for the particular array of tangible things available at a given date; the particular types of equipment, the particular degrees of durability of the various things available, the particular stages of completion which the various unfinished products have attained, all these need to be explained. This can only be done by an application of multi-period analysis for an understanding of the tangible things that emerge when a series of multi-period plans are, so to speak, arrested in midstream.

More important, a theory of capital is indeed necessary in order to account for the course of events subsequent to a given date. We live in a world in which knowledge of the future is characteristically spotty, so that at all time earlier plans are being revised. In addition, we live in a world in which equilibrium is characteristically absent, so that the multi-period plans of different individuals do not form a faultlessly interlocking system. For this reason, too, earlier plans are being continually revised. These revisions of plans cannot be understood without reference to the stocks of equipment, raw materials, half-finished products and finished products, that are available at the relevant dates. What is required is a theory that will explain the new multi-period plans that will be made, the new forces acting to determine prices and interest rates, outputs, industry size and organization, future rates of accumulation of stocks of new tangible things, and so on, that follow from the presence, at a given date, of a particular array and distribution of capital goods. For all this we require an articulated, fully worked out theory of capital.[16]

In this view of the role of capital theory, we join those writers who have deplored the long standing, almost traditional, tendency to see capital theory as a mere adjunct to the theory of interest. Interest rates represent merely one particular kind of price—the intertemporal price—that is determined, along with all the other market phenomena, by the multi-period plans that are being made by market participants. Of course capital theory is involved. But capital theory is required in order to understand the current market price for shoes, just as much as it is required in order to understand the ratio between the future price of shoes and the current prices.

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[1] R. Whately (1836) pp. 231–2. (When the name of an author is followed in this way by a date in parentheses, the work referred to will be found in the List of References, pp. 143–147 below).

[2] R. Solow (1963) p. 12; see also Böhm-Bawerk (1921) Book I, Chapter III, for an exhaustive discussion of earlier competing concepts of capital; see also Fisher (1906) Ch. 4, para. 2.

[3] For the antecedents of this “praxeological” approach, see Kirzner (1960) Ch. 7.

[4] Lachmann (1956) p. vii.

[5] For a more detailed analysis of the market process on these lines, see Kirzner (1963).

[6] He may, of course, similarly be able to describe these things in terms of their physical history, by referring to the physical things or services used in their construction.

[7] See e.g. Hayek (1949) p. 59; (1955) p. 27.

[8] See Lachmann (1956) pp. 2–12.

[9] “Monetary values furnish the common denominator for diverse types of capital goods. . . . Thus it becomes possible to regard capital as a fund of abstract productive power.” (Kendrick, [1961] p. 105)

[10] See Hayek (1941) Ch. 2.

[11] Hayek (1941, p. 89) has described the definition of capital as the produced means of production as “a remnant of the cost of production theories of value.”

[12] Cf. Böhm-Bawerk’s definition of capital in terms of intermediate products (1921, p. 14).

[13] On the “augmentability” criterion see Kaldor (1937) p. 174; also Hayek (1941) pp. 57–58.

[14] See Hayek (1941) Ch. 5; also Hayek (1936) pp. 369–370.

[15] Cf. e.g. Blyth (1960) p. 136; Solow (1963) pp. 16, 25; Samuelson (1961) p. 308; Usher (1965) p. 183, n.1. See also Lachmann (1956) p. v.

[16] Cf. Hayek (1941) pp. 3, 15, 296; see also Griliches (1963) pp. 115–116.