Mises’s Theory of Capital Is a Theory of the Way Monetary Calculation Based on Financial Capital Helps Entrepreneurs Organize the Production Process

Capital, in Mises’s view, is a basic and indispensable tool of economic calculation used by entrepreneurs in capitalist economies, that is, in market economies. He clearly considers it as an historically specific concept:

The concept of capital cannot be separated from the context of monetary calculation and from the social structure of a market economy in which alone monetary calculation is possible. It is a concept which makes no sense outside the conditions of a market economy. It plays a role exclusively in the plans and records of individuals acting on their own account in such a system of private ownership of the means of production, and it developed with the spread of economic calculation in monetary terms. (Mises, 1949: 262)

 Monetary calculation based on capital is possible only under capitalism. Owing to the tools of capital accounting, entrepreneurs are able to compare the economic significance of their inputs and their outputs even in a complicated and dynamically “changing industrial economy” (Mises, 1949: 511). That is what distinguishes capitalism from other economic systems: “[O]nly people who are in a position to resort to monetary calculation can evolve to full clarity the distinction between an economic substance [capital] and the advantages derived from it [income], and can apply it neatly to all classes, kinds, and orders of goods and services” (Mises, 1949: 261). Mises’s theory of capital is a theory of the way monetary calculation based on (financial) capital helps entrepreneurs to organize the production process under capitalism. One could also say that his theory of capital is a theory of capitalism, a theory of how entrepreneurial operations are guided by capital accounting.

 —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), 45-46.

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.

For Austrians, Economics without the Entrepreneur is Like Hamlet without the Prince

We have attempted to outline the elements essential for understanding Austrian Capital Theory (ACT). A good grasp of ACT is absolutely necessary for understanding what Austrian economics is all about, and how it differs from the mainstream and other heterodox schools of economics, both in its reasoning and in its policy implications.

If one were to pick the one theoretical component that distinguishes Austrian from mainstream economics, it would surely have to be the presence of the entrepreneur. Neoclassical economic analysis has almost nothing to say about the entrepreneur. Its equilibrium analysis proceeds in terms of the eradication of all profit opportunities, and, if there are no profits there will be no entrepreneurs. More accurately, the entrepreneur is that shadowy figure who ensures that profits cannot last for very long in the theory. His appearance is instantaneously eradicated en route to the final equilibrium that is the center of the analysis. By contrast, the entrepreneur is the heart and soul of Austrian economics, wherein he is a vibrant, busy, creative, reckless, innovator. He is a prominent, perpetual presence. As Mises and Kirzner affirm, he is the driving force of the market process. For Austrians, economics without the entrepreneur is like the proverbial Hamlet without the prince. If the objective is to understand the how real-world markets work, the entrepreneur must take center stage.

—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), 65-66.

The Transformation of Goods of Higher Order into Goods of Lower Order Takes Place in Time

Menger talks of higher-order goods [production goods or produced instruments of production] being sequentially “transformed” until their emergence as consumption goods [first-order goods, lowest order goods]. At an early stage in the development of civilization people learn that they can do more than simply “gather the goods of lowest order that happen to be offered by nature” and can deliberately and carefully fashion more productive means of production, production goods. Doing so, however, takes time.

The transformation of goods of higher order into goods of lower order takes place, as does every other process of change, in time. The times at which men will obtain command of goods of first order from the goods of higher order in their present possession will be more distant the higher the order of these goods.

Production goods thus exist at any moment in time in a structure of production. The structure of production reflects the fact that production takes time. Some production services must be used sooner than others, and some production services must be used together as complementary inputs. Because production takes time, and because time is valuable, the “longer” the process of production the more productive of utility it must be in order to be economically justifiable. And the longer one takes in production, the more opportunity is available to perfect the quality and/or increase the quantity of what is being produced.

—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), 5-6.