Preface to the Second Edition

It has been twelve years since the original publication of this book in 1999. Much has happened in the intervening years to affect its relevance.

In the world of economic policy, the relevance of (Austrian type) capital theory has increased dramatically. The appeal of what Ludwig Lachmann referred to as “neoclassical formalism” has not diminished. Policy-makers, following the counsel of their economic advisors, who are ruled by a belief in the significance of economic aggregates, have persistently ignored, indeed precipitated, capital structure distortions; the results of which have been two major domestic economic crises (the dot-com bust and the housing-bubble meltdown), a global credit crisis, a chronic fiscal deficit and an exploding debt burden that threatens to destroy the very fabric of the economy’s value-creating potential. This book is designed for those who wish to understand, in a thorough and fundamental way, the nature and significance of capital. What makes an economy “capitalist”? How does value get created over time? If we get this wrong we may end up paying a high price indeed.

The erroneous ideas upon which disastrous economic policy has been based have come down from the intellectual forebears of the current generation of economic advisors. A full appreciation of this entails understanding the nature of battles fought long ago over the nature and significance of capital and capital theory. Accordingly, the focus of this book on this particular aspect of the history of economic thought remains very relevant.

In the world of economic theory, though the majority of the economics profession remains oblivious of, and contemptuous of, anything outside of its narrow quantitative orientation, and, indeed, has become even more finely specialized and technically esoteric, so that its members know more and more about less and less over time, on the growing fringes of the profession a number of “heterodox” approaches have prospered and are growing. One of these heterodox approaches is that of Austrian economics, which has continued to gain adherents, including from young, energetic graduates who are beginning to make their marks. I hope that the re-publication of this book in a more accessible form will serve to encourage this development and provide a firm foundation for the diverse applications of capital theory that are now becoming evident.

One area in which such applications have been growing apace is that of management and business studies, particularly in the areas of strategic-management, organization studies and entrepreneurship. The Austrian ideas most relevant to this line of research concern the nature of resources and how they can be organized in productive combinations to produce value. The “capital-nature” of productive resources has pointed in the direction of the Austrians. Though long interested in Schumpeter, scholars in this area have recently enthusiastically embraced the ideas of Hayek, Kirzner, and, most recently, Lachmann. In particular, understanding resources as capital has led to an appreciation of the importance of time and knowledge in productive processes, and of social institutions—connected themes examined below, especially in Chapter 9. This literature stream has grown rapidly since 1999. An indication of some of this work and its connection to the work below can be found in Lewin and Baetjer (2011).

This book is about capital in a disequilibrium world, a dynamic world. In the years since its first publication the world in which we live has become even more dynamic. The pace of change has accelerated. The “digital-age” works its magic every day in the form of new products, new organizations, new production techniques, new modes of communication, and who knows what else. This increased dynamism has enhanced the relevance of the capital-based framework developed in this book. One shortcoming that is glaringly obvious to me now in retrospect is the insufficient attention paid to an understanding of capital as a form of “embodied knowledge,” as first developed by Howard Baetjer, to whose work I enthusiastically refer the interested reader (Baetjer 1998, 2000; Lewin and Baetjer 2011).

I have made very few changes to the original text. I have added some references to work published since the first edition, I have added some explanatory footnotes and deleted some others (deemed obsolete or unnecessary) and I have taken the opportunity to make a few stylistic improvements. One major advantage of the new edition is that the footnotes are now found below the text rather than at the back of the book.

Peter Lewin,
Dallas, June 2011