The Theory of Capital Explains How the “Invisible Hand” Arranges Enterprises to Organize the Allocation of Resources According to Consumer Demand

The argument is linked to recent findings by Braun (2015a) and Braun et al. (2016) who show that Austrian School economists developed two different bodies of capital theory. The better known one defines capital as a factor of production and concentrates on the physical activities of roundabout production processes that are common to all economic systems. In this paper, the term ‘Austrian theory of capital’ only applies to this theory. Capital in this sense will be called ‘physical capital’ whenever the possibility of confusion arises. It consists of concrete and heterogeneous capital goods — which is nothing but an alternate expression for production goods.

The second and less well-known theory of capital by Austrian school economists, however, constitutes an appropriate starting point for a historically specific theory. It concerns itself with the organisation of the economic system called capitalism. Capital is not considered to be a production factor, but a sum of money invested in business enterprises. It is regarded as the central tool of the economic calculations by profit-oriented enterprises. This theory explains how the invisible hand arranges for profit-oriented enterprises to organise the allocation of resources in the market economy according to consumer demand. It will be called the ‘historically specific theory of capital’. Capital in this sense is simply money invested in business assets and will sometimes also be called ‘business capital’.

A deeper analysis will bring to light that the Austrian theory of (physical) capital can be subsumed under the theory of business capital and, in this capacity, helps to shed further light on specific characteristics of capitalism.

—Eduard Braun, “The Theory of Capital as a Theory of Capitalism,” Journal of Institutional Economics 13, no. 2 (June 2017): 306.