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New Perspectives on Political Economy
Vol. 20, No. 1-2, 2024, pp. 43-58
43
De-homogenizing the Austrian Theory of Capital
Eduard Braun1
1 Clausthal University of Technology, Institute of Management and Economics,
Julius Albert Str. 2, 38678 Clausthal-Zellerfeld, Germany
eduard.braun@tu-clausthal.de
Abstract
his short paper explores the divergent conceptual foundations within Austrian
capital theory, highlighting signicant dierences in the treatment of capital. It
contrasts three approaches: one emphasizes the critical role of monetary
valuation in economic calculation and decision making, and two focus on physical
aspects of the production process. Of these physical approaches, one is concerned
with the intertemporal structure of production and the other with the coordination of
heterogeneous capital goods. The paper concludes with a proposal for a unied
terminology to ensure clarity and consistency in Austrian economic discourse, arguing
for terminological precision to maintain coherence within the eld.
Keywords
Austrian Capital Theory, capital, structure of production, economic calculation
DOI: 10.62374/ewcd8j17
Introduction
Over time, dierent approaches to Austrian capital theory have emerged, each
based on distinct methodological and conceptual foundations. While this diversity has
enriched economic discourse, it has also led to terminological and conceptual
confusion. This paper argues that there are essentially three approaches within Austrian
capital theory: the monetary calculation approach and two physical approaches.
The monetary calculation approach emphasizes the role of monetary calculation,
subjective valuation, and the structure of a market economy as indispensable to
understanding the concept of capital. This approach, established by the works of Carl
Menger (1888), Fetter (1937), and Ludwig von Mises (1949), is characterized by deriving the
concept of capital from practical economic activities, rather than articially creating a
T
Article details: Received: 2024/10/30, Revised: 2024/12/02, Accepted:2024/12/12, Published: 2024/12/31
New Perspectives on Political Economy
44
concept of capital to solve selected theoretical problems. This tradition has been further
developed and continued in the work of George Reisman (1996), Peter Lewin and Nicolás
Cachanosky (2019; 2021), and Eduard Braun (2024), who emphasize the dynamic and
interrelated nature of capital and monetary calculation within the market process.
The physical approaches include what I call the production structure approach
and the heterogeneous capital approach. These approaches focus on the physical
aspects of the production process. The production structure approach, deeply rooted
in the work of theorists such as Carl Menger (1871), Friedrich Hayek (1935), and Murray
Rothbard (2004), and extended by others such as Renaud Fillieule (2007), Jesús Huerta
de Soto (2010), Mark Skousen (2007), Roger Garrison (2001), and Jörg Guido Hülsmann
(2011), examines the temporal heterogeneity of capital goods and the inuence of
monetary factors on business cycles and growth. In the Austrian school, "capital goods"
is an alternative expression for physical and produced means of production (Mises 1949:
263).
The heterogeneous capital approach, originating in the work of Ludwig Lachmann
(1978) and continued by Nicolai Foss and Peter Klein (2012) and Anthony Endres and David
Harper (2010), emphasizes the fundamental heterogeneity of capital goods and the
crucial role of entrepreneurial coordination and adaptation in managing these physical
resources. While Harwick (2020: 167 f.) suggests a distinction between the two physical
approaches, he does not elaborate on this dierence.
The purpose of this short paper is to show that there are in fact three signicant
overarching approaches within Austrian capital theory. It is important to emphasize that
the aim is not to choose between these approaches. Rather, the focus is on making clear
the distinctions between them.
In Sections 2 through 4, we will each introduce one of these approaches and
discuss its historical background and theoretical foundations. We will examine the key
concepts and contributions of prominent economists within the three approaches,
highlighting the specic economic phenomena that each theory seeks to explain.
Section 5 will propose a unied terminology to enhance clarity and coherence in the
understanding of capital theory within the Austrian School. Finally, section 6 will
summarize the main arguments and conclude the discussion.
The Monetary Calculation Approach
The monetary calculation approach to capital theory is rooted in the seminal
works of Carl Menger (1888) and Ludwig von Mises (1949). This approach emphasizes the
role of monetary calculation, subjective valuation, and the structure of a market
economy as indispensable to understanding the concept of capital. Its primary focus is
New Perspectives on Political Economy
45
on making heterogeneous goods and services comparable, which is crucial for
economic calculation and decision making in a market economy.
Carl Menger, the founder of the Austrian School, lays the foundation for this
approach in his later work, “Zur Theorie des Kapitals” (1888), partially translated in Braun
(2020b). Menger denes capital as encompassing business assets, regardless of their
technical nature, as long as their monetary value is the object of economic calculation.
That is, Menger (1888) includes non-physical assets, in particular, of course, money itself
(see Braun 2015a: 90). Menger explicitly states: “[C]apital includes business assets,
whatever their technical nature may be, inasmuch as their monetary value is the object of
our economic calculation—that is to say, if they represent an acquisitive sum of money.”
(Braun 2020b, p. 563).
This denition emphasizes the importance of monetary valuation for
understanding capital in the context of economic activity. Menger emphasizes that
capital is inseparable from the practice of economic calculation, positioning it as a
central component of the capitalist economy.
Ludwig von Mises further develops Menger's conceptual framework in his
comprehensive work, "Human Action" (1949). For Mises, the concept of capital is
essential to understanding how capitalism works in contrast to socialism. He emphasizes
that capital is fundamentally a monetary concept, rooted in the economic calculations
made by entrepreneurs in a market economy. Mises (1949, p. 263) claries that while the
term "capital goods" may be used to denote physical items used in production
processes, "capital" itself should not be directly equated with these goods: “But if we
abstract from such an evaluation in money terms, the totality of the produced factors of
production is merely an enumeration of physical quantities of thousands and thousands
of various goods. Such an inventory is of no use to acting. It is a description of a part of
the universe in terms of technology and topography and has no reference whatever to
the problems raised by the endeavors to improve human well-being. We may acquiesce
in the terminologica1 usage of calling the produced factors of production capital goods.
But this does not render the concept of real capital any more meaningful.”
Instead, the term "capital" refers to the monetary value of a rm's total assets,
which entrepreneurs manage and allocate on the basis of expected future returns
(Olbrich et al. 2022, p. 211 f.). Mises (1949, p. 262) specically denes capital as “…the sum
of the money equivalent of all assets minus the sum of the money equivalent of all
liabilities as dedicated at a denite date to the conduct of the operations of a denite
business unit. It does not matter in what these assets may consist, whether they are
pieces of land, buildings, equipment, tools, goods of any kind and order, claims,
receivables, cash, or whatever. “
New Perspectives on Political Economy
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For Mises, capital is a nancial construct that aids in the entrepreneurial process
of managing costs and revenues. The true essence of capital lies in its ability to facilitate
economic calculation, allowing entrepreneurs to make informed decisions about
resource allocation to optimize future returns.
An important implication is that capital is and must be homogeneous. The assets
of any rm are, of course, heterogeneous in terms of their physical characteristics. But
they are homogeneous in that it is their book values that are relevant to economic
calculation. According to Mises (1951, p. 123), economic calculation “serves to bring the
original properties of a concern under one denomination, whether they consisted of
money or were only expressed in money. The object of its computations is to enable us
to ascertain how much the value of this property has altered in the course of business
operations. The concept of capital is derived from economic calculation.”
Building on Mises's foundation, Braun (2024) argues that the nancial aspect of
capital is crucial to understanding its role in the complex social production process.
Braun emphasizes that the valuation of capital through monetary calculation, as
emphasized by Mises, is essential to aligning business actions with economic realities.
He contends that the traditional focus on physical capital overlooks the historically
specic role of capital as money that has been invested in business assets. This
perspective aligns with Hodgson's (2015) call for a return to the business use of the term
"capital", emphasizing the importance of nancial accounting and economic calculation
in organizing the allocation of resources in a capitalist economy. By focusing on the
monetary valuation and practical aspects of capital management in rms, Braun's paper
claries how prot-oriented rms use monetary calculation to make informed decisions,
optimize resource allocation, and ensure economic sustainability, thus reinforcing the
foundational principles of the monetary calculation approach within Austrian
economics.
Other extensions by Peter Lewin and Nicolás Cachanosky reinforce the
importance of monetary calculation. Lewin (2011) is still undecided, with statements such
as: "As a result of the occurrence of capital gains and losses, producers alter the capital
structure." In this sentence, capital refers on one hand to the monetary concept of
capital, but also to the physical structure of the produced means of production.
However, Lewin and Cachanosky (2018a; 2018b; 2019; 2021) emphasize the dynamic and
interconnected nature of capital and monetary theory within the market process. "The
concept of capital as value rests on the connected social institutions of money and
accounting" (Lewin & Cachanosky 2018b, p. 426). They argue that the meaning of capital
lies in the calculative function it performs in the capitalist system. Capital as a concept
derives from its institutional context—an economy in which there are capital markets.
Without the capital markets the extensive division of labor on which capitalism depends,
could not exist (Lewin & Cachanosky 2018b, p. 426).
New Perspectives on Political Economy
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Contemporary authors writing in this tradition insist that capital is an element of
economic calculation and, as such, essential for the optimal allocation of resources in
society, closely following Mises's original insights.
In what follows, we will focus on the role of this approach within the broader
framework of the Austrian School of Economics. Rooted in the work of Menger (1888) and
Mises (1949), the monetary calculation approach provides a coherent framework for
understanding the workings of capitalism and the critical role of monetary calculation in
entrepreneurial decision making. This approach emphasizes the importance of
monetary calculation in making heterogeneous goods and services comparable,
drawing directly from practical economic activity. Menger (1888) rst formulated this
concept, building on some German-language precursors (Braun, 2015b), and Mises
(1949), in particular, expanded it to provide a profound understanding of the capitalist
system, which takes its name from this concept of capital.
Monetary calculation achieves comparability of heterogeneous goods through
several key mechanisms. First, monetary valuation assigns a value to each good and
service that reects either the consumer's willingness to pay and/or the cost of
production, allowing for standardization in a single unit of measure: money. This includes
not only capital goods but all types of assets as well as labor services. Workers are paid
in money, and their labor represents a use of monetary capital, making it comparable to
other types of asset allocation.
Second, through accounting practices, rms use these monetary valuations to
calculate costs and revenues, keeping track of the nancial positions of dierent
producers ' goods, other assets, and labor resources. This allows for comparative
analysis, where entrepreneurs can evaluate dierent investment options based on their
expected returns and costs, facilitating the selection of projects with the highest
expected net benets. Ecient allocation of capital is achieved, as entrepreneurs are
able to allocate resources optimally by selecting ventures that oer the highest returns.
Most Austrian economists, especially Ludwig von Mises, focus on forward-
looking monetary calculation. Mises emphasizes the critical role of future-looking
economic calculation in entrepreneurial decision making and resource allocation.
Recently, however, Braun and Follert (2024) have also shed light on the importance of
backward-looking monetary calculation. Braun and Follert examine how retrospective
nancial analysis, particularly prot determination, serves as an essential feedback
mechanism for entrepreneurs, allowing them to evaluate past decisions and inform
future planning.
The monetary calculation approach is particularly eective in explaining how
entrepreneurs use monetary valuations to make informed decisions about resource
New Perspectives on Political Economy
48
allocation, cost forecasting, and protability. By emphasizing the role of monetary
calculation, this approach explains how capitalist economies function in contrast to
socialist economies, where such calculations are not possible due to the absence of
market prices for capital goods, other assets, and labor. This makes the monetary
calculation approach indispensable for understanding the economic dynamics specic
to capitalism, including the mechanisms that enable productive coordination and
ecient use of resources.
The Production Structure Approach: Temporal Heterogeneity and Capital
The production structure approach emphasizes the temporal heterogeneity of
capital goods, the structure of production, economic growth, and/or the impact of
monetary policy on business cycles. It is not easy to nd a clear denition of capital in the
works associated with this approach. It seems that the term capital is used synonymously
with "capital goods". In the section on capital formation, for example, Rothbard (2009:
47 .) makes no distinction between the formation of capital and the formation of capital
goods. On p. 941, he explicitly writes: "Capital is the status of productive goods along the
path to eventual consumption". The same goes for Hayek. Hayek (1935, p. 42) even uses
the term "capitalist" in this sense: “As the average time interval between the application
of the original means of production and the completion of the consumers’ goods
increases, production becomes more capitalistic, and vice versa.”
In Hayek (1941, p. 292), he speaks of the "capitalistic structure of production". For
Hayek, not only does the term "capital" refer to the produced means of production, but
even the term "capitalistic" refers only to the use of capital goods and not to the broader
economic system of capitalism.
Prior to his 1888 essay on capital, in which he changed his view of capital (Braun
2014), Menger had laid the foundations for this approach in his seminal work, "Principles
of Economics" (1871), emphasizing the intertemporal structure of production processes
and the role of higher-order goods, which are goods that are not directly consumed but
are used to produce consumer goods. Menger's (1871) insights underscore the
importance of understanding the temporal and structural aspects of the production
process by showing that the value of higher-order goods (capital goods) is derived from
the value of the consumer goods they help to produce.
Eugen von Böhm-Bawerk (1891) expands on Menger's work, focusing primarily on
explaining the phenomenon of interest. In his theory, Böhm-Bawerk introduces the
concept of "roundabout methods" of production, illustrating how capital-intensive,
time-consuming production processes lead to greater productivity, which makes it
possible to associate higher amounts of capital with higher interest payments. His
New Perspectives on Political Economy
49
analysis of the structure of production is thus closely linked to an understanding of the
origins and justication of interest rates.
Friedrich von Hayek further developed the production structure approach in his
work "Prices and Production" (1935), focusing on business cycles and economic growth.
Hayek presents a detailed analysis of the intertemporal coordination of production and
how prices guide the structure of production across dierent stages. He argues that
capital goods are heterogeneous in time and form a complex network of interdependent
stages of production that span over time. Hayek shows how interest rates inuence the
allocation of resources across dierent stages of production, aecting the length and
structure of these processes.
Murray Rothbard, in "Man, Economy, and State" (1962), uses the production
structure approach to address both interest and business cycles. Rothbard integrates
the insights of Menger (1871) and Hayek (1935) into a comprehensive framework that
emphasizes the importance of the free market and entrepreneurial decision-making. He
builds on Hayek's theories of the structure of production and the impact of interest rates,
providing a robust analysis of how these factors inuence both growth and cyclical
uctuations. In particular, Rothbard incorporates Hayek's graphical representation,
which plays a crucial role in illustrating the intertemporal nature of production processes
and their sensibility to changes in interest rates.
Israel Kirzner's "An Essay on Capital" (1966) should also be considered as part of
this approach. Kirzner is deeply involved in capital theory and emphasizes the
heterogeneity and specic structure of capital goods, key concepts of the production
structure approach. In addition, his concept of multiperiod planning illustrates how
entrepreneurs coordinate capital goods over time, addressing intertemporal allocation
issues similar to those explored by Menger (1871), Böhm-Bawerk (1891), and Hayek (1935).
Jesús Huerta de Soto, in his work "Money, Bank Credit, and Economic Cycles "
(2010), focuses on the dual aspects of interest and economic cycles, building on the
Austrian business cycle theory as elaborated by Hayek and Rothbard. Similar to
Rothbard, Huerta de Soto adopts Hayek's graphical representation in his analyses.
Huerta de Soto examines how the expansion of bank credit and the fractional reserve
banking system lead to articial booms followed by inevitable busts, extending Hayek's
examination of how monetary policy distorts capital structures.
Roger W. Garrison, in "Time and Money: The Macroeconomics of Capital
Structure" (2001), aligns himself with the production structure approach, focusing
primarily on business cycles and growth. Expanding on Hayek's ideas, Garrison often
uses the "Hayekian triangle" to illustrate the temporal structure of production. These
triangles—graphical representations of the stages of production and their relationship
New Perspectives on Political Economy
50
to time and interest rates—are central to his explanation of how monetary policy aects
the economy.
Mark Skousen further explores the complexity of the production process and its
various stages in his book "The Structure of Production" (2007). Building on the ideas of
Böhm-Bawerk, Hayek, and others, Skousen shows how dierent stages of production
are interrelated and aect business outcomes, emphasizing the importance of
understanding the entire production structure for economic analysis.
In general, this approach emphasizes that production processes are complex and
require the coordination of capital goods over time, with the intertemporal nature of
capital goods needing to be aligned with consumer preferences to avoid economic
imbalances. It examines how interest rates inuence the allocation of resources across
dierent stages of production, aecting the length and structure of these processes,
and analyzes the business cycles and crises that result from articial manipulation of
interest rates and the expansion of bank credit.
We now turn our attention to the signicance of this approach in the broader
context of the Austrian School of Economics. Building on the work of Menger (1871),
Böhm-Bawerk (1891) and Hayek (1935), the production structure approach has its roots in
classical economics and the need to justify interest. In the nineteenth century, a central
question was why owners of productive resources should earn interest, particularly in the
face of socialist critiques that argued that they contributed nothing to production and
therefore had no rightful claim to interest. This debate, however, has historical
antecedents, as the payment of interest has been viewed critically not only by socialists,
but also in antiquity and the Middle Ages. Philosophers such as Aristotle in ancient
Greece criticized interest on ethical grounds, and the medieval Catholic Church
condemned it as usurious based on theological grounds.
Classical and later neoclassical economists sought to demonstrate that capital,
by contrast, is a factor of production that contributes to the production process (Braun
2024). In particular, the inuential economist John Bates Clark (1899, p. 4) makes it clear
that his eorts to show that the distribution of income reects the productive
contributions of income earners, including the owners of capital, are aimed at countering
socialist claims: “The indictment that hangs over society is that of 'exploiting labor'.
'Workmen' it is said, 'are regularly robbed of what they produce. This is done within the
forms of law, and by the natural working of competition'. If this charge were proved,
every right-minded man should become a socialist; and his zeal in transforming the
industrial system would then measure and express his sense of justice. If we are to test
the charge, however, we must enter the realm of production. We must resolve the
product of social industry into its component elements, in order to see whether the
New Perspectives on Political Economy
51
natural eect of competition is or is not to give to each producer the amount of wealth
that he specically brings into existence.”
Böhm-Bawerk (1891, p. 17) takes a similar point of view. He argues that if interest
cannot be explained in terms of the productivity of capital, then it must be a prot
obtained through "abuse and injustice". However, he maintains that longer, more
roundabout methods of production, which require more productive resources and are
more capital intensive, are in fact more productive. This higher productivity is one of
three reasons he proposes to explain (and thus justify) the payment of interest. Together
with Menger's (1871) earlier work, Böhm-Bawerk's perspective laid much of the
groundwork for the production structure approach to capital theory.
Hayek (1935) adopts the temporal structure of production from Menger (1871) and
Böhm-Bawerk (1891) and uses it to extend the business cycle theory of Mises (1953). By
integrating the concept of the production structure, Hayek emphasizes the role of
interest rates in coordinating dierent stages of production over time, providing a more
comprehensive analysis of business cycles and the impact of monetary policy on the
production process.
The production structure approach emphasizes the temporal heterogeneity of
productive resources and the structure of production. It provides a thorough
understanding of business cycles and growth, in particular by showing how interest rates
aect the allocation of resources across dierent stages of production. This approach
is relevant for understanding macroeconomic trends and is useful for long-term
investment strategies and the dynamics of production structures.
The Heterogeneous Capital Approach
The heterogeneous capital approach emphasizes the fundamental
heterogeneity of capital goods and the crucial role of entrepreneurs in coordinating and
utilizing these diverse resources. Unlike the previous approach, which focuses primarily
on the temporal aspect of capital goods within the structure of production, this
approach emphasizes the fundamental heterogeneity and specic uses of dierent
capital goods. It focuses on the entrepreneurial function of coordination in managing
these heterogeneous physical resources. When it comes to dening capital, this
approach diers from Menger's (1888) and Mises's (1949) usage of the term "capital.
Lachmann (1978: 36) explicitly rejects "the concept of capital actually used in business
life" as irrelevant to his purposes. For him, it is fundamental that capital is not
homogeneous, but that "[a]ll capital resources are heterogeneous" (Lachmann 1978, p.
2). Endres and Harper (2010, p. 34), following Lachmann, adopt his approach under the
label of "layer-cake capital". According to them, "[l]ayer-cake capital comprises a
nested hierarchy of capital goods, capital combinations and overall capital structures".
New Perspectives on Political Economy
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Again, Menger (1871) serves as the starting point. Carl Menger's basic principles
emphasize that higher-order capital goods are used in the production process over
several successive stages to produce consumer goods (lower-order goods). This
concept paved the way for subsequent developments that stress the heterogeneous
nature of capital goods and the need for eective entrepreneurial coordination.
Ludwig Lachmann, in "Capital and Its Structure" (1978), uses his theory of capital
primarily to understand the role of entrepreneurs in a dynamic market economy.
Lachmann stresses the role of uncertainty and expectations in the use of capital goods.
He argues that capital goods are diverse and subject to constant change due to evolving
market conditions and technological advances. Lachmann emphasizes the idea that
capital must be viewed heterogeneously, because dierent capital goods have specic
uses and are not easily substitutable. "As long as we disregard the heterogeneity of
capital, the true function of the entrepreneur must also remain hidden" (Lachmann 1978:
16). Lachmann (1978, p. 13) highlights the adaptive nature of capital, stressing that
entrepreneurs must constantly reassess and reallocate resources in response to
changing market signals: “We are living in a world of unexpected change; hence capital
combinations, and with them the capital structure, will be ever changing, will be
dissolved and re-formed. In this activity we nd the real function of the entrepreneur.”
Nicolai Foss and Peter Klein, in their works such as "Organizing entrepreneurial
judgment: A new approach to the rm" (2012), focus on understanding the strategic
decision-making and organizational aspects of rms. For Foss and Klein, the concept of
capital is essential for exploring how entrepreneurs create and coordinate business
activity in a dynamic and uncertain environment. Following Lachman closely, they argue
that the "entrepreneur's role, then, is to arrange or organize the capital goods he owns"
(Foss et al., 2007, p. 1165). They see capital as a structure of heterogeneous goods that
must be coordinated and combined by entrepreneurs in order to produce goods that
satisfy consumers.
The theory of the rm then becomes a theory of how the entrepreneur arranges
his heterogeneous capital assets—what combinations of assets will he seek to acquire,
what (proximate) decisions will he delegate to subordinates, how will he provide
incentives and use monitoring to see that his assets are used consistently with his
judgments, and so on (Foss et al., 2007, p. 1168).
Other Austrian economists specializing in entrepreneurship theory, such as
Bylund et al. (2023), adopt this approach to capital.
Anthony Endres and David Harper (2010; 2020) also follow this tradition by
emphasizing the heterogeneous and systemic nature of capital. Building on the theories
of Menger and Lachmann, they emphasize that capital must be analyzed as a structurally
New Perspectives on Political Economy
53
organized system of interrelated goods. Endres and Harper argue that understanding
capital means recognizing its composition, environment, structure, and the mechanisms
by which it is formed and evolves. They stress the importance of entrepreneurial activity
in shaping capital structures, noting that entrepreneurs continually recongure their
capital assets in response to changing market conditions.
While Endres and Harper share Lachmann's and Foss and Klein's view that capital
is inherently heterogeneous and requires entrepreneurial coordination, they diverge in
their methodological approach. Endres and Harper place greater emphasis on the
philosophical and ontological foundations of capital theory, drawing extensively on
systems theory to explain the organization and evolution of capital structures. Their work
incorporates detailed theoretical frameworks for understanding the intricacies of
capital combinations and the emergent properties of the overall capital structure. In
contrast, Foss and Klein often take a more practical, empirically grounded approach.
They apply their analysis directly to the strategies and organizational decisions within
rms, focusing on how entrepreneurs manage and arrange their heterogeneous capital
assets to achieve economic goals.
In general, this approach focuses on the entrepreneurial aspects of capital
theory, emphasizing the importance of continuous adaptation and strategic
management in the face of market uncertainty.
In considering its role in Austrian economics, Lachmann's approach diers
signicantly from the production structure approach, which focuses primarily on
explaining the interest rate or illustrating the inuence of interest rates on the structure of
production. Lachmann (1978, p. 4) stated: "[W]e are not interested in interest as such",
indicating a shift away from viewing capital as a uniform and measurable factor of
production that generates income. Instead, his work emphasizes the fundamental
heterogeneity of capital goods and the importance of entrepreneurial adaptation in a
dynamic market environment.
Similarly, Foss and Klein (2012), and Endres and Harper (2010; 2020) focus
primarily on the coordination and management of heterogeneous resources and the
cognitive and institutional processes involved. The role of interest is only marginal in their
analyses, as they prioritize strategic management, organizational decision making, and
the entrepreneurial process of adapting to changing market conditions. Both sets of
authors contribute valuable insights into the management and organization of
heterogeneous resources but do not centralize the role of interest within their theoretical
frameworks. This omission marks a distinct boundary between their work and traditional
approaches to capital theory, including the Austrian production structure approach,
which extensively examine interest as a key factor in economic modeling and resource
allocation.
New Perspectives on Political Economy
54
Terminological suggestion
Terminological dierences within Austrian capital theory have existed for a
considerable time, reecting the diversity of approaches and perspectives within the
school. Table 1 below lists the main authors of the various approaches, arranged roughly
in chronological order. It is not always easy to assign individual authors to specic
approaches, as some move between them, sometimes consciously, sometimes
unconsciously. For example, Reisman (1996, p. 132) denes capital as follows: "The
aggregate of capital goods in the possession of an individual can be described as his
capital". However, later in the book, Reisman (1996, p. 448) claries that in capitalism,
"capital is the wealth employed by business enterprises," thus aligning more closely with
the position of Menger (1888) and Mises (1949).
Table 1: Key Authors in the Three Approaches of Austrian Capital Theory
Monetary Calculation
Approach
Production Structure
Approach
Heterogeneous Capital
Approach
Carl Menger (1871)
Carl Menger (1871)
Carl Menger (1888)
Eugen von Böhm-Bawerk
Frank Fetter
Friedrich von Hayek
Richard von Strigl
Ludwig von Mises
Murray Rothbard
Ludwig Lachmann
Israel Kirzner
George Reisman
Roger Garrison
Jesús Huerta de Soto
Mark Skousen
Anthony Endres
Nicolai Foss
David Harper
Peter Klein
Eduard Braun
Nicolas Cachanosky
Peter Lewin
Renaud Filleule
Per Bylund
Source: Author’s research
This situation raises the question of whether it is wise or even possible to achieve
complete uniformity in the use of terms. Nevertheless, an eort should be made to
construct terminology in such a way as to minimize confusion and misunderstanding. The
primary purpose of this paper has been to identify and clarify the existing approaches to
capital theory within the Austrian School. In this section, I propose a terminological
distinction between them.
New Perspectives on Political Economy
55
For the sake of clarity, I suggest reserving the standalone term "capital"
specically for the monetary calculation approach. This should make sense even from
the point of view of the adherents of the physical approaches. The term "capital" denotes
a homogeneous magnitude. It does not reect the heterogeneous nature of capital
resources, which both the production structure approach and the heterogeneous
capital approach stress. Thus, it would be benecial to establish terms for these physical
approaches that emphasize their inherent heterogeneity: for the production structure
approach, highlighting the temporal heterogeneity of production processes, and for the
heterogeneous capital approach, emphasizing the fundamental diversity of capital
goods. Since it is unlikely that the adherents of the physical approaches will abandon the
term "capital goods", a feasible alternative for them might be to eliminate the stand-
alone term "capital" altogether and refer exclusively to "capital goods". This would allow
for a clearer distinction while still recognizing that these perspectives are integral to
Austrian capital theory. Within this framework, the production structure approach could
specically discuss dierent "orders" or "stages" of capital goods in order to emphasize
the temporal aspect of production processes. The Heterogeneous Capital Approach,
on the other hand, could focus on emphasizing the fundamental heterogeneity of capital
goods. Regardless, it is crucial that the terms are clearly dened at the outset and are not
confused during the discussion. This concern is particularly pronounced when the
physical approaches refer to “capital” without any qualiers, as this increases the risk of
confusion and ambiguity.
Concluding remarks
This paper has highlighted three distinct approaches within Austrian capital
theory. The monetary calculation approach, rooted in the work of Carl Menger and
Ludwig von Mises, emphasizes the critical role of monetary valuation and economic
calculation in facilitating entrepreneurial decision making. It views capital as a nancial
construct essential to the allocation of resources in a market economy. In contrast, the
production structure approach focuses on the intertemporal structure and
heterogeneity of capital goods within the production process, with a strong emphasis
on the physical aspects of these goods. Scholars such as Friedrich Hayek and Murray
Rothbard examine how the time dimension and interest rates aect the allocation of
resources across dierent stages of production, thereby inuencing business cycles
and growth. Lastly, the heterogeneous capital approach, articulated by Ludwig
Lachmann and others, stresses the fundamental diversity of capital goods and the
essential role of entrepreneurs in coordinating and managing them, while also
emphasizing the physical characteristics of capital.
For the sake of clarity, it is suggested that the term "capital" be reserved for the
monetary calculation approach, while the physical approaches use specic terminology
New Perspectives on Political Economy
56
such as "capital goods". This distinction is intended to reduce confusion and promote a
more nuanced understanding of capital theory within the Austrian school.
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