Economists Fall into the Error of Defining Capital As REAL CAPITAL, As an Aggregate of PHYSICAL THINGS

Böhm-Bawerk defined capital as the aggregate of intermediate products (i.e., of produced means of production) and in so doing was criticized by Menger. Menger sought “to rehabilitate the abstract concept of capital as the money value of the property devoted to acquisitive purposes against the Smithian concept of the ‘produced means of production.’” As early as his work on Socialism (1923), Mises emphatically endorsed the Mengerian definition. In Human Action he pursued the question even more thoroughly, though without making it explicit that he was objecting to Böhm-Bawerk’s definition. Economists, Mises maintained, fall into the error of defining capital as real capital, as an aggregate of physical things. This is not only an empty concept but one that has been responsible for serious errors in the various uses to which the concept of capital has been applied. 

Mises’s refusal to accept the notion of capital as an aggregate of produced means of production expressed his consistent Austrian emphasis on forward-looking decision-making. Menger had already argued that “the historical origin of a commodity is irrelevant from an economic point of view.” Later Knight and Hayek were to claim that emphasis on the historical origins of produced means of production is a residual of the older cost-of-production perspectives and inconsistent with the valuable insight that bygones are bygones. Thus, Mises’s rejection of Böhm-Bawerk’s definition reflects a thoroughgoing subjective point of view.

—Israel M. Kirzner, “Ludwig von Mises and the Theory of Capital and Interest,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 139-140.