Mises and Menger Are Outliers within the Austrian School When It Comes to Capital Since They Adopt the Financial Capital Concept

Ludwig von Mises never produced a work devoted solely to an exploration of the meaning of capital or its role in the economy. Other Austrian school economists such as Böhm-Bawerk (1890), Hayek 1941a), Lachmann (1956), and Kirzner (1966) all published books on the subject, in addition to numerous articles. Mises’s views must be gleaned from his remarks in works devoted to other specific or general topics. He did not enter into any “capital controversy” or specifically consider them. Yet, his views on capital are interesting and highly suggestive in a way that we believe has been generally underappreciated. In particular, Mises seems to be something of an outlier within the Austrian school when it comes to capital — though his position is arguably foreshadowed in a neglected article by Menger (1888).

Only very recently has the issue of a dissenting view on capital by the older Carl Menger been noted (Braun, 2015 a, b). In this article Menger opposed all attempts to define capital as something physical. He considered it necessary to stick with common terminology where capital relates to sums of money dedicated to the acquisition of income. But, having come this far, Menger does not do much more than criticize other definitions of capital, opting for the abandonment of physical capital concepts in economics. 

In particular, he does not indicate what a capital theory that is based on the financial capital concept he endorses would look like (Braun, 2015a: 91). 

Of the later Austrians, only Mises based his discussion of capital on Menger’s (1888) financial capital concept. Both in his treatise on socialism (Mises, 1922: 123) and in his magnum Opus, Human Action, Mises (1949: 262), he stuck to the more common understanding of capital and chose to orient his definition of capital to business practice. For him, capital is a sum of money which is determined by accounting. As previously quoted:

Capital is the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit. It does not matter in what these assets may consist, whether they are pieces of land, buildings, equipment, tools, goods of any kind and order, claims, receivables, cash, or whatever. (Mises, 1949: 262)

To Mises, it is not physical characteristics that determine whether assets are part of capital or not. Of primary interest is rather which role they play in the operations of business units (Lewin, 1998). Thus, Mises, together with Menger (1888), deviates from the majority view of the Austrian school on capital. Different from Menger (1888), however, Mises (1920, 1922, 1949) actually contains several hints as to what a capital theory based on a financial capital concept would look like. 

 —Peter Lewin and Nicolas Cachanosky, Austrian Capital Theory: A Modern Survey of the Essentials, Cambridge Elements in Austrian Economics (Cambridge, UK: Cambridge University Press, 2019), 41-42.