Handbook on Contemporary Austrian Economics

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134 <strong>Handbook</strong> on contemporary Austrian economics Since the planning bureau has no way of evaluating this loss, it cannot determine if the loss in output from other industries caused by promoting one industry is greater or less than the benefit produced. The planning agency has no way to know if it is promoting development or retarding it. Because capital is heterogeneous and multi-specific whenever competitive market forces are not allowed to dictate the capital structure an economy will not generate the level of prosperity that it is capable of. 9.6 Conclusion The fact that capital is both heterogeneous and multi-specific should be obvious. But economic models that have failed to incorporate this fact have done a poor job at explaining real world phenomena. Some of the biggest economic events of the twentieth century; the failure of socialist planning, the length and severity of the Great Depression, stagflation, and the failure of official development assistance, have been explained coherently by Austrian economists. In each case, the unique Austrian conclusions stemmed, in part, from the fact that Austrians were relying on realistic models of heterogeneous and multi-specific capital while competing theories modeled capital as homogeneous. Boettke claimed that all of the unique contributions to substantive economics made by Austrian economists stem from the importance of economic calculation. He may be right, but it is because Austrian capital theory seriously grapples with the fact that capital is both heterogeneous and multicspecific, that allows Austrians to reach unique conclusions about economic calculation and thereby reach similarly unique conclusions in other applied research areas. Notes * I thank Jeffery Hummel and Andrew Young for helpful suggestions on an earlier draft. The usual caveat applies. I. Austrians are certainly not alone in critiquing neoclassical capital theory. For an alternative critique see the Cambridge Controversies. A short retrospective summary of the debate appears in the Journal of Economic Perspectives 17(1): 199- 214, "Whatever Happened to the Cambridge Capital Theory Controversies" by Avi Cohen and G.c. Harcourt (2003). 2. Measurement inaccuracy can be a matter of degree. With a strong tendency toward equilibrium and a huge proportion of plans that do tum out to be ex post compatible then summing the monetary value of capital would yield an approximation of the capital stock. These arguments should ~Iso not be taken as a complete condemnation of equilibrium theorizing in Austrian economics. Hayek's classics, Prices and Production ([1931) 2008) and Pure Theory of Capital ([1941) 1975) and more recently Garrison's Time and Money (2001) all fruitfully begin with a macroeconomic equilibrium analysis of the capital structure and study deviations from that equilibrium. 3. This is not to claim that the issue of capital heterogeneity has not been raised in the mainstream. Certainly Solow and others involved in the Cambridge controversies did debate it and there are still attempts by some mainstream economists to incorporate
Some implications of capital heterogeneity 135 heterogeneity into their models. The point is that the main thrust of neoclassical growth theory, whether the Solow model, or later endogenous growth theory, has failed to adequately incorporate capital heterogeneity and usually chooses to assume it away. References Boettke, Peter. 2001. Calculation and Coordination. New Brunswick: Routledge. Garrison, Roger. 2001. Time and Money. New Brunswick: Routledge. Hayek, Frederic von. [l931J 2008. Prices and Production. Auburn: Ludwig von Mises Institute. Hayek, Frederic von. 1937. "Investment that Raises the Demand for Capital," Review of Economic Statistics 19(4): 174-7. Hayek, Frederic von. [I941J 1975. Pure Theory of Capital. Chicago: University of Chicago Press. Hayek, Frederic von. 1945. "The Use of Knowledge in Society," American Economic Review 35(4): 519- 30. Horwitz, Steven. 2000. Microfoundations and Macroeconomics. New Brunswick: Routledge. Lachmann, Ludwig. 1978. Capital and its Structure. Kansas City: Sheed, Andrews and McMeel. Lavoie, Don. 1985. National Economic Planning: What is Left Cambridge: Ballainger Publishing Company. Mises, Ludwig von. [l920J 1990. Economic Calculation in the Socialist Commonwealth. Auburn: Ludwig Von Mises Institute. Mises, Ludwig von. [I949J 1998. Human Action. Auburn: Ludwig Von Mises Institute. Powell, Benjamin. 2002. "Explaining Japan's Recession," Quarterly Journal of Austrian Economics 5(2): 35-50. Rothbard, Murray. [l962J 1993. Man, Economy, and State. Auburn: Ludwig Von Mises Institute. Rothbard, Murray. (I963J 2000. America's Great Depression. Auburn: Ludwig Von Mises Institute. Schumpeter, Joseph. 1942. Capitalism, Socialism, and Democracy. New York: Harper & Row.
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Handbook on Contemporary Austrian Economics

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