Capital Theory in Perspective

  • Lester D. Taylor


At several points in earlier chapters, reference has been made concerning the relationship of fluid capital to the capital notions of Hayek, Keynes, Schumpeter, and others. The purpose of this chapter is to examine these connections in greater detail. In doing this, I hope to provide readers not only with a better understanding of what is meant by fluid capital, but also to convince them that capital theory is still an extremely interesting and fruitful subject for research.1


Physical Capital Intermediate Good Full Employment Capital Account Revolving Fund 
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  1. 1.
    Normal credit creates claims to the social dividend, which represents and may be thought of as certifying services rendered and previous delivery of existing goods. That kind of credit, which is designated by traditional opinion as abnormal, also creates claims to the social product, which, however, in the absence of past productive services could only be described as certificates of future services or of goods yet to be delivered. [Schumpeter (1934, p. 101).]Google Scholar
  2. The current younger generation of economists, at least on the U.S. 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, U.S., no more convinced Cambridge, U.K., of the correctness of its position than Cambridge, U.K., convinced Cambridge, U.S. Moreover, as has been pointed out by Mirowski (1989, Chapter 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.Google Scholar
  3. 2.
    Schumpeter (1934, p. 102).Google Scholar
  4. 3.
    Schumpeter notes (Theory,p. 101) that the entrepreneur may mortgage goods acquired with the newly created purchasing power, but there is still a time interval, if only an instant, in which the entrepreneur’s credit is unsecured.Google Scholar
  5. 4.
    Since the Theory was first published (in German) in 1911, Schumpeter’s concept of forced saving clearly predated the debate between Keynes and Robertson regarding forced saving.Google Scholar
  6. 5.
    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.Google Scholar
  7. 6.
    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.Google Scholar
  8. 7.
    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.Google Scholar
  9. 8.
    At his death, Schumpeter left an unpublished manuscript on money, which was subsequently published in German [Schumpeter (1970)]. As far as 1 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.Google Scholar
  10. 9.
    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 non-zero, 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.Google Scholar
  11. 10.
    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!Google Scholar
  12. 11.
    And even in this case, it would seem that (in normal circumstances) the ability to lend is constrained by current income (or more generally by the current pool of fluid capital).Google Scholar
  13. 12.
    Before leaving this discussion of Fisher’s concept of capital, it is interesting to note that, at one point in The Nature of Capital and interest,Fisher describes capital in terms of the stock of all goods in existence. Assuming that this includes goods-in-process as well as finished goods, it corresponds to the goods side of the pool of fluid capital as defined in this book.Google Scholar
  14. 13.
    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 Bohm-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.Google Scholar
  15. 14.
    Bohm-Bawerk (1959, p. 102).Google Scholar
  16. 15.
    See Baumol (1971). Cf., also, the discussion in Chapter 2 above. 16 See Turvey ( 1968, Chapter 8).Google Scholar
  17. 20.
    That neoclassical growth theory is bedeviled by a fusing of inconsistent theories of value is discussed in detail by Mirowski (1989, Chapters 5 and 6).Google Scholar
  18. 21.
    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.Google Scholar
  19. 24.
    For a detailed elaboration of the points in this section with reference to nonrenewable natural resources, see Taylor (1998).Google Scholar

Copyright information

© Springer Science+Business Media New York 2000

Authors and Affiliations

  • Lester D. Taylor
    • 1
  1. 1.University of ArizonaWilsonUSA

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