Part III. Capital in a Dynamic World

I have, to this point, explored aspects of the history of capital theory, and the nature of interest, profit, and rent. One should distinguish between capital goods and capital as an abstract category. The latter refers to the value to be attributed to a particular plan or set of production plans. The profits or losses to be attributed to a production plan are the result of changes (or the absence thereof) in the capital values attributed to it over time. These appreciations (or depreciations) in value are, in turn, the result of (are derived from) changes in consumers’ evaluation of final production.

The meaning and the value of any particular capital good derives from its position in a particular production plan. Production plans are like any other human plans (as discussed in Part I). They are defined by particular purposes and they are informed by particular kinds of knowledge. Every production plan must envisage a combination of resources—a capital combination. Capital goods and labor and land work together to fulfill the plan. This combination must be made by someone with the knowledge of how to do it. This involves knowledge of the natural world, technological knowledge (knowledge type 1), and knowledge of social habits and institutions (for example, if individuals have to be coordinated and motivated—knowledge type 2). It may also involve specific expectations (knowledge type 3) concerning individual behavior (can we rely on a particular worker?) or nature (will the weather be favorable?). But it seems reasonable to assume that often most of the knowledge involved in the implementation of the production plan is heavily weighted in favor of knowledge types 1 and 2. There are notable and important exceptions: those production plans that depend heavily on the “speculative” actions of others—for example, on the supply of a yet to be discovered source of raw materials, etc.—or those production plans that depend heavily on the implementation of innovative (untried) productive techniques and the results of research programs (as in the search for a new chemical substance or medical drug). In general, production plan implementation rests heavily on typical events and, perhaps to a lesser extent, on specific ones. In addition to successfully coordinating the inputs, the successful implementation of any production plan rests, however, on the successful sale of its output. And it is this aspect that is most likely to be dependent on the particular producer’s expectations (knowledge type 3).

In a world in which the production and sale of outputs was part of a plan that was assumed to be consistent with all other related plans, so that there were no disappointments in production schedules or, most notably, in the sale of output, the value of the resources that were part of the plan would clearly be certain. And if everyone shared in the knowledge of the value of the output and the contribution of each input, then, in some sense, these values would be reflected in prices of the inputs. In such a situation of perfect plan coordination, a meaningful capital aggregate could then be obtained.¹ It should be clear, however, that such a construction abstracts not only from time, but also from those aspects of a capital-using economic process that are responsible for its dynamic, innovative character.

If it is true, by contrast, that production plans typically rest on expectations of the sale of particular outputs, sometimes of new products, sometimes involving new production techniques, then we should not reasonably expect such plans to be consistent and coordinated with all other plans in the economy. In particular, capitalistic production involves rivalrous activity that clearly implies the pitting of one entrepreneurial vision against another. In such a world the value of productive resources, indeed the value of productive ventures as a whole, cannot be known to all and cannot be added together. Many will depend on mutually exclusive outcomes. These outcomes might be simple market shares in the case of similar but differentiated (brand named) products or they may be the progressive adoption of particular Standards like Windows versus Unix or VHS versus Beta. For example, we can imagine two video stores, one renting VHS cassettes, the other Beta cassettes, reasonably basing their expansion plans on inconsistent expectations, each betting on the growing adoption of their particular standard.

Production plans, considered as a whole, are typically in disequilibrium—are based, at least in part, on inconsistent expectations, not regarding the “rules of the game” but regarding the viability of the product or the productive technique. There is no way to derive an aggregate measure of capital in this situation. The net present values as (assumed to be) computed by each individual planner are based on inconsistent futures. However, this absence of equilibrium in no way precludes action—no more so than the absence of knowledge of the outcome of a football game prevents the players from playing. All action occurs within an institutional environment that includes the knowledge of the actors, and, as we have seen, much of this knowledge does imply a consistency of expectations.

In Part II I impressionistically traced the development of capital theory from Adam Smith through Ricardo to modern times. I drew a distinction between the Ricardian and Mengerian traditions. In Part III I turn to a discussion of some non-Ricardian approaches to capital theory and related topics. Some of these may be seen to derive from Menger (Hayek, Lachmann), while others (essentially complementary to the Mengerian line) may be termed “post-Marshallian” (Penrose, Richardson, Teece, Williamson, Loasby, Langlois, and others). What these approaches have in common for our purposes, is a process approach to the accumulation of capital. Capital decisions are seen as occurring within an evolving economic environment and are embedded within individual production plans. The success or failure of these plans is inevitably linked to the organization of production. This leads, therefore, to a discussion of the nature of economic organization more generally, particularly to the economics of the firm. Indeed we shall see that capital theory cannot be separated from a consideration of the economics of business organization.

¹It is not clear that prices would exist in a world of perfect certainty such as that postulated here. In such a world everyone would know ahead of time who should have which resources, etc. But resources could unambiguously be imputed values which may be thought of as “prices.”