9. Capital Theory in Perspective

The current younger generation of economists, at least on the US side of the Atlantic, might think that conceptual problems involving capital have been solved, comfortable with the idea that capital is simply the argument “K” in the aggregate production function. In my opinion, this is an incorrect reading of what finally emerged from the capital controversy of the 1960s and 1970s. Despite the apparent agreement on reswitching, Cambridge, USA, no more convinced Cambridge, UK, of the correctness of its position than Cambridge, UK, convinced Cambridge, US. Moreover, as has been pointed out by Mirowski (1989, Chap.​ 6), the concepts of capital of the two sides were simply too incompatible for there to have been any meaningful compromise. What happened (at least in my view) was that both sides simply tired of the debate, and went on to other things.

Schumpeter (1934, p. 102).

It should be noted that if the economy is at less than full employment when credit is created to finance a new combination, forced saving is not necessary because the resources to be transferred to entrepreneurs can come out of existing stocks. Moreover, there is no necessity of a temporary increase in prices. Since Keynes saw unemployment as the norm, this is obviously an important difference between Schumpeter and Keynes.

The only problem I have with Schumpeter’s view regarding the creation of entrepreneurial credit is the implication that purchasing power cannot be borrowed, but must be created de novo. This was necessary for Schumpeter because of his assumption that innovation always begins from a position of full employment.

At various points in his writings, Schumpeter extended his concept of “claim ticket” to income by viewing income as representing a pool of claims to the social dividend. This characterizes the definition of income adopted in this book.

At his death, Schumpeter left an unpublished manuscript on money, which was subsequently published in German (Schumpeter 1970). As far as I know, the only part of this book that has been translated into English is the editor’s introduction. This is found in a Ph.D. thesis by Michael Reclam (1984) at the University of California at Riverside. See also McCraw (2007, p. 155, footnote 11).

This is in marked contrast to Keynes, for whom the rate of interest was determined, in normal circumstances, by the unwillingness of individuals to give up the liquidity of money. In assessing this difference between Keynes and Schumpeter, however, it must be kept in mind that their two points of reference are very different. Schumpeter’s equilibrium was a stationary state in which the circular flow endlessly repeated itself, and there was no uncertainty. In disequilibrium – i.e., when investment was occurring – when the interest rate for Schumpeter is nonzero, there is not much difference between their two views on interest. Also, in the very long run, Keynes had the marginal efficiency of capital falling to zero, which, in the absence of uncertainty, would imply a zero rate of interest as well.

In general, Schumpeter had a very critical view of Keynes. He had admiration for the Treatise on Money, but none at all for the General Theory. Schumpeter undoubtedly viewed Keynes as his rival as the “World’s Greatest Economist,” whereas Keynes did not reciprocate. I doubt that it ever crossed Keynes’s mind that the world’s greatest economist was anyone other than himself!

There is a tendency in the literature to equate roundaboutness with the period of production and to associate more roundabout techniques with a longer period of production. This is a mistake. Although Böhm-Bawerk, himself, seems guilty of this at times, his intent, it is pretty clear, was to identify roundaboutness with division of labor, which in most cases leads to a shortening, rather than a lengthening, of the period of production.

Böhm-Bawerk (1959, p. 102).

See Baumol (1971). Cf., also, the discussion in Chap.​ 2 above.

See Turvey (1968, Chap.​ 8).

Hirshleifer (1970).

Samuelson (1976, p. 11).

See Appendix A.

That neoclassical growth theory is bedeviled by a fusing of inconsistent theories of value is discussed in detail by Mirowski (1989, Chaps.​ 5 and 6).

The physical capital goods in reference are those in inventory, not those already in situ through investment. The latter are represented in the stock of produced means of production.

Cf. the discussion in Chap.​ 2.

For a detailed elaboration of the points in this section with reference to nonrenewable natural resources, see Taylor (1998).

The case where the oilfield is sold after development, but before production begins, will be considered in a moment.