APPENDIX II A POSTSCRIPT ON THE CONCEPT OF CAPITAL

To form concepts correctly, one must not ignore the requirement that the concepts of a nomological science can only be meaningful in respect to the statements making use of these concepts; that is, in respect to the formulation of laws. One easily gives in to the temptation of incorporating apparent similarities in one concept. Yet, when this concept is then to be applied, it becomes clear how little science can use it. Particularly regarding the concept of capital, however, the orientation towards a specific problem area is so easy to see that one really should be amazed that the not-very-glorious debate on the concept of capital could be carried on for so long.

The problem of capital arises in roundabout production. Once one recognizes that the introduction of roundabout production methods has as its prerequisite the setting aside of a subsistence fund and that the productive power of the subsistence fund limits the possibility of lengthening the roundabout production process, then everything else follows without difficulty. However, two facts have caused the problem of roundabout production methods to be completely misconceived by a viewpoint that is all too concerned with outwardly visible occurrences: the ample supply of durable capital goods and the far-reaching synchronization of production.

Because of the ample supply of fixed capital equipment, which in particular has made an ever greater shortening of the duration of production possible, one easily overlooks that a “sacrifice of time” is essential to capitalist production. We have shown that fixed capital investments are always related to the problem of free capital by the necessity of forming a renewal fund and of employing free capital as a complementary good. Only centering the question of capital on the visible capital good could permit the nonsensical doctrine of a surplus of capital to arise, and could permit the opinion to grow that an economy “too amply” endowed with capital would be capable of producing so much that sales would no longer be possible. These opinions can only be overcome by constructing a theory of capital that recognizes the problem of roundabout methods of production and takes it as its starting point. An erroneous theory of capital which views existing capital investment exclusively as the material wealth of an economy is the ultimate reason why vulgar economics as well as, in many cases, economic policy are caught up in a fetishism of the existing firm, in particular of big business. Owning capital equipment can never in itself represent wealth; it only becomes wealth if it can be integrated into the structure of production. However, if one overlooks this, if one attempts to protect the value of factory equipment even if it does not operate economically, then one invests ever more capital in a place where it is lost from the outset. Capital goods are always things that have been created and that are subject to the law of perishing. The process of the changing economy will always create new kinds of investments of capital goods if it is allowed to take its course unhindered. And if an existing investment must be lost because it does not—or can no longer—fit into the economy, then the loss is smaller than if the newly forming free capital is sacrificed to maintain what is destined to decay. However, a flawed theory of capital is also the reason for the animosity towards machines, which is again so popular these days. Machines appear to people to be something that replaces their labor and makes them breadless—no longer as something that humans have created in order to employ their labor better and more successfully. One overlooks that in the end, the use of machines only means that human labor can be used in other ways, namely in lengthened roundabout production methods. If the use of machines is “correctly” integrated in the production process, if in particular the important complementary good of free capital exists and a corresponding renewal fund can be created out of the product, then the machine will not lead to unemployment, but instead to wage increases and to richer provisions.

Equally dangerous and misleading as adhering to an objectivistic concept of capital in the sense of material capital goods is the opinion that the synchronization of production eliminates the problem of roundabout production methods. If subsistence means are produced daily, then it no longer seems necessary for those working in antecedent production stages to wait until their product has matured into a consumer good; for at any time they can exchange their product for finished consumer goods. Producing more consumer goods or more factors of production no longer appears to be as difficult a problem. Earlier we encountered the question of the qualitative composition of the product, and we have seen how it can arise in the area of the production of consumer goods. The structure of the demand for consumer goods suffices to determine the “correct” composition of produced consumer goods. However, it would be a mistake to raise the question of the production of one or another product as such; that is, the question of the creation of consumer goods or capital goods—without taking into account that the mutual adjustment regarding the production of capital goods and consumer goods is the prerequisite for an undisturbed economic course. The adjustment is not only necessary such that just enough subsistence means will be created in order to support antecedent production stages. Beyond this it is also necessary that factors of production be produced in the right amount and of the right kind, so that a regular supply of subsistence means is secured. However, we are now at the problem of the length of the roundabout production methods—even for production which is synchronized to the furthest extent. The “correct” structure of production—the distribution of the supply of capital goods among stages more or less close to consumption—is dependent on the length of time necessary for the completion of production. The fact that roundabout production takes place in time and that this time is thus “economically relevant” cannot be eliminated by any synchronization. However, if one believes it possible to ignore the problem of the length of roundabout production methods and the provision of a subsistence fund because of the synchronization of production, then one must overlook everything resulting from these problems. In particular, one will not be able to recognize the consequences of choosing too lengthy roundabout production methods.

Yet, there is still something to be said here. If by capital one only understands capital goods, then something appears as capital which by its very characteristics is a capital good—something that can only be used as such. One thus ignores the important fact that the supply of capital is a problematic notion, which in turn leads to further questions. If one starts with free capital in the sense of a subsistence fund, then this does not become capital because of its material quality, but only because it is used as capital by its owner. The same is true of monetary capital. Owned money is never of itself capital, but through a particular use by its owner it becomes monetary capital. Thus, the supply of capital is always determined by a factor which lies outside pure economic ratiocination. In our analysis of the business cycle we attempted to show the immense significance of this fact.

Going beyond the realm of capital goods in the definition of capital is also necessary because only then do we have an approach to a useful concept of monetary capital. If by monetary capital one only wished to include that money which serves in the turnover of capital goods, then this would, first of all, contradict the requirements of terminological discipline: For good reasons, a much broader concept of monetary capital is needed in practice—the practitioner also knows an operating capital, a wage capital. But this alone could not be decisive. More important is that the concept of money capital must be constructed such that it leads to the problem of the length of roundabout production methods in the money economy. We believe to have made it clear that this requirement is only fulfilled if monetary capital is conceived of as the representative of means of subsistence. Only from this point of view can those movements be recognized that result when money capital takes effect as an “independent factor,” i.e., when money capital and real savings capital are not identical.

We set out to describe the economic necessities which exist in the structure of production. The concept of capital with which we worked had to arise necessarily from the problem of roundabout methods of production.