A Serious Shortcoming of Böhm-Bawerk’s Theory of Capital Was Its Limitation to Circulating Capital Only

A serious shortcoming of Böhm-Bawerk’s theory of capital was its limitation to circulating capital only. Not surprisingly, several attempts were made by economists working in the Austrian tradition to overcome this limitation and to extend the analysis to fixed capital (see, in particular, Åkerman, 1923-24; Wicksell, 1923; and Hayek, 1941). Studying the problem of fixed capital within an Austrian framework of the analysis was also a major concern of John Hicks in Capital and Time (1973).

According to Hicks, fixed capital goods ‘are “durable-use goods”; their essential characteristic is that they contribute, not just to one unit of output, at one date, but to a sequence of units of output, at a sequence of dates.’ Because fixed capital gives rise to intertemporal joint production, the flow input-point output conception underlying Böhm-Bawerk’s approach to capital theory has to be replaced by that of ‘flow input-flow output’ processes. As Hicks put it:

While the old Austrian theory was ‘point output’ (its elementary process having a single dated output), we shall use an elementary process that converts a sequence (or stream) of inputs into a sequence of outputs. Our conception of capital-using production is thereby made much more general.

—Christian Gehrke and Heinz D. Kurz, “Hicks’s Neo-Austrian Theory and Böhm-Bawerk’s Austrian Theory of Capital,” in Capital, Time and Transitional Dynamics, ed. Harald Hagemann and Roberto Scazzieri, Routledge Studies in the History of Economics 96 (London: Taylor & Francis e-Library, 2008), 84.