Conclusion Summary

A world in which all individual plans, in every relevant detail, are mutually consistent, is a world in which economic analysis is greatly simplified. It is a world devoid of essential change. All economic values have universal and unambiguous meaning. The capital stock, that set of productive instruments in combinations that give effect to universally perceived productive techniques, has an unambiguous value. Each productive instrument can be unambiguously valued in terms of its clearly identified contribution to the valued production of which it is a part. And any contemplated difference (one hesitates to call it a change) in any of the parameters of the system, like the height of any interest rate, will have predictable and definite effects on the value of the capital stock and the other values in the system.

Such a world, although it strains the imagination and renders non-sensensical the meaning to be attached to the passage of time, is, nevertheless, illuminating as a contrast. And although it is seldom postulated so graphically, it does form the basis of much theorizing in capital theory and in economic theory generally. It is the implicit basis for a conception of capital as a substance, analogous to a physical substance, whether valued in terms of time, labor hours, or any other metric. And it is the basis for the world of “perfect competition” so popular in contemporary theorizing, in which no competition actually occurs and in which no innovation is possible, no mistakes made.

An equilibrium world, in the above sense, makes the connection between capital and time manifest in such a way that capital can actually (and somewhat misleadingly) be expressed in terms of time. In such a world one can characterize every productive process as a process that culminates in the production of a particular output at a particular time. It is thus possible to connect every input to a specific part of every output, and since each output has an unambiguous value, it is possible to impute exhaustively and accurately that value to the specific inputs, and it is thus possible to calculate for how long on average each input remains in the productive pipeline.

In this book I have tried to suggest that such a treatment of capital is inadequate and that to the extent that it has encouraged us to think in terms of capital stocks as “longer” or “shorter” it has been unfortunately misleading. Outside of equilibrium such notions have no ready application. Furthermore, to think of capital in these terms, that is in terms of equilibrium, encourages thinking of capital accumulation as an automatic process of value accretion. It encourages a kind of “capital illusion,” an implicit conviction that by providing the necessary financial capital, or even the specific tangible instruments for various capital combinations, one automatically can achieve the kind of value creation that characterizes the “capitalistic” economies of our real world.

I have suggested a view of capital that is firmly rooted in individual planning in a disequilibrium world. Such a view sees value creation as the result of individual decisions and suggests that to understand how such value is created, one cannot avoid looking at the decision-making environment. The decision-making environment necessarily includes the institutions of the economy and the knowledge of the decision-makers. Both of these are part of the “capital” of the economy. I have suggested a view of capital as a structure rather than a stock. In the first instance, the capital of an economy is embodied in the largely undesigned network of capital combinations of individual capital goods and human resources. This structure operates within a superstructure of (many undesigned) institutions like the institution of money, of private property, commercial law, and, crucially, the private firm. Within the private productive organization that we refer to generically as the firm, capital combinations get made and changed against a backdrop of shared “ways of doing things” that serve to coordinate individual actions by harmonizing their expectations. Certainly such institutions as firms and the law are not rigid, unchanging restraining devices. They do change. But they change slowly enough to provide a reliable backdrop for effective decision-making. So the capital structure operates within an institutional structure. This institutional structure encompasses and gives meaning to the financial structure, the set of financial instruments and practices that facilitate the formation and mutation of the capital structure. The financial structure is volatile and cannot be designed; but in its absence the capital structure has no meaning and no value.

Finally, the productive structure as a whole, encompassing the capital structure (narrowly understood) and the institutional structure (including the financial structure), must also be seen to include the value of human capital. In fact the human capital structure is arguably the most essential (and the most difficult to replicate) ingredient of the entire productive structure. Human knowledge has value. It is an asset. The human capital structure is, however, indescribably complex and unfathomable. While it is possible to understand how individual decision-makers invest profitably in certain types of knowledge acquisition, human capital as a whole remains an unpredictable amalgam of diverse incommensurate elements, many of which are unknown, unarticulated, and unpredictable. It is one of the strengths of a market system that it is able (and has been seen empirically to be able) to evolve the kind of human capital structures necessary to form the capital structures that have brought the kind of creation of value that many have characterized as nothing short of miraculous.⁴

Implications for Policy

If the above vision is correct, then the accumulation of capital is more than a quantitative phenomenon. Adding to the capital of an economy is a complex multidimensional process. It involves not only, or primarily, the addition of existing capital equipment but rather the introduction of progressively more technically advanced equipment, the production of which is made possible by an institutional environment in which the discovery of such technical advances is encouraged. One must be clear that what is involved is indeed “discovery” rather than the implementation of already known techniques. I am suggesting that the process involves a real Popperian “growth of knowledge.”

Capital accumulation thus necessarily involves “knowledge accumulation.” It is true that capital accumulation involves the introduction of more “roundabout” or more “complex” methods of production, as Böhm-Bawerk and Lachmann have suggested. The real question, however, is how do we come to know about these new and improved methods? If the characterization of knowledge as fallible, tacit, and unfathomable is correct, then knowledge in general is not something that can be planned for in a concrete way. It is a product whose value and character cannot be fully known to its owner. This has profound implications.

The superior performance of capitalistic economies thus cannot be logically “proved.” The resort to the efficiency properties of perfectly competitive economies is not only irrelevant and misleading, it is actually counterproductive. For the perfectly competitive model suggests that knowledge is a standardized product equally available to everyone, including would-be central planners (as was quickly recognized by the socialist protagonists in the socialist calculation debate). The superior performance of capitalist economies rests, rather, on the fact that they do not rely on central planners (policy-makers) knowing very much at all. It is, as Hayek realized (1945), rather that capitalist economies are able to effect a division of knowledge that facilitates the accumulation and division of capital. Knowledge is, in effect, economized on. But it is also true that capitalist economies “know more.” The most significant aspect of accumulation is in fact the (largely undesigned and unplanned) accumulation of knowledge.

This has relevance to the efficacy of piecemeal economic planning, whether it be interest rate engineering, antitrust regulation, antipoverty planning, or environmental husbanding. To be effective, policy-makers must have or must be able to acquire knowledge of the relevant economic future; of techniques, of preferences, of values. In addition, since government action requires resources that would otherwise be available to private individuals who would be, implicitly through the competitive process, experimenting with various techniques and theories, the extent of “discovery” displaced by such government action is inestimable. There is literally no way to estimate the “cost” of government, since a crucial part of that cost is the loss of valuable knowledge. Knowledge lost cannot be known about.

This is relevant also to the problem of economic development. The “transition to capitalism” cannot be simply bought. Capital equipment can be bought. Buildings can be built. Experts can be hired. But respect for private property cannot be produced. A system of laws that interprets and innovates property rights cannot be easily acquired. A functional monetary system cannot be centrally designed and implemented—the money has first to be accepted. And the necessary human capital structure in all its subtleties and depths cannot simply be replicated. Some transfers can be simply taught, others can be painfully acquired—“learning by doing” or by immersion in “other cultures”—other aspects are more elusive. Prosperity is a miraculous and improbable evolutionary outcome. If it can be transferred at all, it will be by allowing and encouraging the local population to evolve its own particular brand privately.

⁴In this book I have also suggested that the above conception of equilibrium is, in a sense, too broad. That is, it encompasses too much by requiring that all expectations of everyone be consistent. I have suggested that more restricted view in which some expectations must be, and others must not be, mutually consistent. In short, I have suggested that the real world of capital accumulation is one that is simultaneously both in and out of equilibrium.