Tuesday, December 4, 2012

Post Keynesian and Austrian Perspectives on Heterogeneous Capital and the Capital Debates

Yesterday I posed the question, Are Theories of Modern Money and Heterogeneous Capital Compatible? In the discussion that followed on Facebook, the capital debates became a central theme. For those unfamiliar with the capital debates, here are a few choice selections from Matias Vernengo’s wonderful, yet brief introduction:
The capital debates are associated with the very notion of capital. Classical political economy authors, from William Petty to Karl Marx, including Quesnay, Smith and Ricardo, treated the process of production as a circular one. In this context, capital is a produced means of production,[2] rather than a factor of production used in the process of obtaining final goods. The most important result of the capital debates is that, once capital is defined as produced means of production, there is no direct relation between the relative abundance or scarcity of the means of production and its remuneration. Distribution, in other words, is not governed by supply and demand.
Even though the idea of intertemporal equilibrium, in which capital is treated as a vector of heterogeneous capital goods, was first developed by Eric Lindahl and then popularized by John R. Hicks in the 1930s, and used by Arrow and Debreu in the 1950s, it was only after the capital debates that it came to be dominant within the mainstream.
The problem with the use of heterogeneous capital goods is that it implies a change in the traditional method of economics. Normal equilibrium positions are associated to a uniform rate of profit; however, when dealing with heterogeneous capital goods that are not substitutable between each other, it becomes necessary to discard the notion of long run equilibrium.
Although I don’t want to stray too far from the original question, this last sentence by Vernengo appears to offer support for monetary non-neutrality in the long run. When discussing the subject recently, the question was posed “is the long run therefore simply a series of short run periods?” Perhaps surprising to many of my Austrian colleagues, it appears the introduction of heterogeneous capital provides reason “to discard the notion of long run equilibrium.”

Returning to the main subject at hand, The Radical Subjectivist offers Lachmann’s Quick Comment on The Cambridge Capital Debate:
The second reason rests on the fact that the purpose of all capital, hence also of the current maintenance of existing capital goods, is to secure a future income stream. But the future is unknowable, though not unimaginable, and men have to use knowledge substitutes in order to evaluate future income streams, viz. expectations. Experience shows that different persons will typically hold different expectations about the future income to be expected from the same resource, and that the same person may hold different expectations about the same future event at different points of time. The inevitably subjective nature of all ‘forward looking’ views renders the measurement of capital impossible.
Lachmann was seemingly critical of the capital debates for ignoring subjectivism and not giving credit to earlier authors, including Hayek, that discussed the impossibility of measuring capital. While these points may be correct, they don’t appear to undermine the deeper critiques of neoclassical (mainstream) economics laid out by Vernengo.

Summing up the current discussion, here is a straightforward answer from Lord Keynes (my emphasis):
Post Keynesian economics agrees with Austrian economics that capital goods are heterogeneous.
But heterogeneous capital can also have a significant degree of durability and substitutability. A capital structure in a capitalist economy where we find some important degree of adaptability, versatility and durability in the nature of capital goods means that the Austrian business cycle theory of Hayek, as propounded in Prices and Production, is not a realistic vision of modern economies.

Further reading:
Subjectivism and Economic Analysis: Essays in memory of Ludwig Lachmann
Revisiting the Cambridge Capital Theory Controversies: A Historical and Analytical Study

(Special thank you to Payam Sharifi, Gauchito Gil, and Pablo Bortz)


  1. If I were you I'd read everything Lord Keynes has written on Austrian economics...they have something to offer to the heterodox toolset, but it's very, very small. The sooner you realize that, the better.

    1. Appreciate the recommendation. I've been following Lord Keynes's blog for a couple years and try to read as much as possible (time is far more constrained trying to earn a PhD). For the time being, I'd agree that heterodox economics has far more to say about likely causation in the macro-economy. However, in trying to manage the economy, I think Austrian lessons regarding uncertainty and unintended consequences are very important and often overlooked.

  2. I dont think Lachmann undermined the importance of the Cambridge Capital debates. He acknowledges that the UK side was at least correct in pointing to the fact that capital was heterogeneous. The problem is that the UK side had use Ricardian tools to critique the US side, which is a tool of equilibrium. But I do agree with LK's statement completely. I also like to view LK more as a person close to the American Post Keynesian school, which is more in line with using tools such as disequlibrium, uncertainty, etc. I think it is important to note the difference in American Post Keynesian economics and UK Post Keynesian (or as Lachmann called the Neo-Ricardians) economics. For example, here is Davidson explaning the difference between the two: http://archives.econ.utah.edu/archives/pkt/1994m01/msg00215.html

    In other words, PKs agree with Lachmann in pointing out the glitch with Neo-Ricardians: it is Ricardian in nature, thus classical in nature. They are bound to ignore important aspects of uncertainty precisely because they look at subjectivism as a sin. This is to say, Neo Ricardians dont want to "get tied up in the difficulties of analyzing the 'ephemeral' problems of decision making under uncertainty", as Davidson notes.

    1. Thanks for the link. I'll add it to my reading list for winter break.

      Currently I can't say the difference between US and UK Post-Keynesianism is clear enough in my mind to categorize different bloggers and professors. My sense is that more are associated with the US brand, as you suggest for LK. Either way, this appears to be a good topic for discussing the merits of PK and Austrian economics.

    2. Joshua,

      The difference is a big thing. Those economists in the debate in the UK side were Neo-Ricardians and it isnt quite the same as Post Keynesian economics. I would read this paper by Davidson to make the difference clearer but my overall point is that the Post Keynesian school is superior to the Neo Ricardian school for they included subjectivism into their theory, some that the Neo Ricardians thought was pointless:

      Davidson, P. 2003–2004. “Setting the Record Straight on ‘A History of Post Keynesian Economics,’” Journal of Post Keynesian Economics 26.2 245–272.

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