Transcript Garrison Lect-1. 1 Capital Theory

Austrian Capital Theory
A Prelude to Capital-Based Macroeconomics
Two Views:
The Knightian Stock-Flow Model
The Hayekian Stages-of-Production Model
The Keynesian “Animal Spirits” Model
July 22, 2013
“Bank Capital”:
The Many
Assets minus Liabilities,
i.e., Net Worth.
Meanings
of “Capital”
The Measuring of “Capital”
Capital is heterogeneous.
Capital is radically heterogeneous.
Capital is dimensionally heterogeneous.
The Measuring of “Capital”
(units)
Not all ____________
of labor are alike.
worker-hours
acres
(units)
Not all ____________
of land are alike.
chunks
doses
(units)
hunks
Not all ____________
of capital are alike.
hunk
chunk
units
dose
Clark
and Bohm-Bawerk
Butted
Heads
about
Capital
Knight
and Hayek Butted
Heads
about
Capital
John
FrankBates
H. Knight
Clark
1885 — 1938
1847
1972
Eugen
Friedrich
von Bohm
A. Hayek
Bawerk
1851
1899 —
— 1914
1992
Black-Box Capital Theory (Clark and Knight)
A flight recorder on an aircraft.
Any complex piece of equipment, typically a “plug-and-play” unit in an
electronic system, with contents about which the user has “no need to know.”
THE
CAPITAL
STOCK
DO NOT OPEN
Black-Box Capital Theory (Clark and Knight)
A STEADY-STATE ECONOMY
A flight recorder on an aircraft.
Any complex piece of equipment, typically a “plug-and-play” unit in an
electronic system, with contents about which the user has “no need to know.”
THE
CAPITAL
STOCK
DO NOT OPEN
MAINTENANCE OF CAPITAL
FLOW OF CONSUMPTION
Black-Box Capital Theory (Clark and Knight)
A STEADY-STATE ECONOMY
The Capital Stock in this theory includes maintenance as a technical detail.
Hence, the Capital Stock is “permanent.”
The Capital Stock is permanent, in
asato
so
it sense.
were.
speak.
THE
CAPITAL
STOCK
MAINTENANCE OF CAPITAL
DO NOT OPEN
And accordingly:
The “permanent” Capital Stock yields a “perpetual” income.
QUALIFICATIONS: “in a sense,” “as it were,” “so to speak,”….
Black-Box Capital Theory (Clark and Knight)
The economy is a system of “capital”
“sources”yielding
yielding“consumable
“services.” output.”
There is only one factor of production.
It’s “capital” ---in the broad sense of “sources.”
Land, labor,* and capital are all “capital” in the broad sense.
THE
CAPITAL
SOURCES
STOCK
DO NOT OPEN
MAINTENANCE OF SOURCES
CAPITAL
FLOW
SERVICES
OF CONSUMPTION
Black-Box Capital Theory (Clark and Knight)
THE
CAPITAL
STOCK
DO NOT OPEN
Black-Box Capital Theory (Clark and Knight)
AN EXPANDING ECONOMY
THE
CAPITAL
THE
STOCK
CAPITAL
STOCK
DO NOT OPEN
Black-Box Capital Theory (Clark and Knight)
A CONTRACTING ECONOMY
THE
CAPITAL
STOCK
What about production time in a Clark-Knight vision?
George Stigler defends Clark and dismisses Bohm-Bawerk on
YEAR
1
2
the basis
of the simultaneity of production and consumption:
“We can say that any one row [of trees] takes fifty
years to mature, but since there is a constant output
of timber forever, there is simply no point in saying it.”
George Stigler, Production and Distribution Theories, 1941
Once a Steady State is reached, production time is irrelevant.
The trees have a linear maturity structure (log-linear, actually).
Each period, a sapling is set out, and a mature tree is harvested.
The next period presents us with the same maturity profile.
It is the setting out that “enables” the harvesting.
Setting out the sapling (now) “produces” the harvestable tree (now).
Production and consumption are “simultaneous.”
QUALIFICATIONS: “in a sense,” “as it were,” “so to speak,”….
Knight and Hayek Butted Heads about Capital
Maintenance is a technical detail.
Maintenance is a matter of choice.
Capital is permanent.
Capital is ever changing.
Capital is the only factor.
Capital is unique and heterogeneous.
Production time is irrelevant.
Production time is a key variable.
It’s all about sources and services.
It’s all about temporal capital structure.
It’s about steady-state equilibrium.
It’s about dynamic market processes.
Frank H. Knight
1885 — 1972
Friedrich A. Hayek
1899 — 1992
Bohm-Bawerk’s
Maturity
Classes
MENGER’S
LAW
The value of higher order goods derives from
the value of the respective consumer goods.
HIGHER ORDER GOODS
Value Imputation goes from Bottom to Top
Production Proceeds Top to Bottom
GOODS OF THE SEVENTH ORDER
GOODS OF THE SIXTH ORDER
RICH COUNTRY
GOODS OF THE FIFTH ORDER
GOODS OF THE FOURTH ORDER
GOODS OF THE THIRD ORDER
GOODS OF THE SECOND ORDER
POOR COUNTRY
GOODS
CONSUMPTION
OF THE GOODS
FIRST ORDER
S T AOGRE DS E O
R FS PORF OG
DO
UO
CD
T ISO N
GOODS OF THE SEVENTH ORDER
GOODS OF THE SIXTH ORDER
GOODS OF THE FIFTH ORDER
GOODS OF THE FOURTH ORDER
GOODS OF THE THIRD ORDER
GOODS OF THE SECOND ORDER
GOODS OF THE FIRST ORDER
The Hayekian Triangle
PRODUCTION TIME (A SEQUENCE OF STAGES)
---from F. A. Hayek’s
The Pure Theory of Capital, 1941
CONSUMPTION
The Structure of Production
STAGES OF PRODUCTION
Capital-based macroeconomics disaggregates capital intertemporally.
Consumable output is produced by a sequence of stages of production,
the output of one stage feeding in as input to the next.
Early-stage investment activity
Late-stage
is exemplified
investment
by
The temporally defined
stagesdevelopment.
are arrayed graphically
from
left to right, by
product
activity
is exemplified
the output of the final stage constituting consumable
output.management.
inventory
PRODUCT
DEVELOPMENT
INVENTORY
MANAGEMENT
WE ARE
HERE
YOU ARE
HERE
The directory at the front gate includes
the conventional YOU ARE HERE sign
but no Hayekian WE ARE HERE sign.
CONSUMPTION
The Structure of Production
STAGES OF PRODUCTION
For pedagogical convenience, the initial capital structure is shown as
having five stages. With growth, the number of stages will increase.
Although all five of these stages are in operation during each time period,
resources can be tracked through the structure of production over time.
Watch the resources, or “goods in process,” move through the stages.
CONSUMPTION
The Structure of Production
STAGES OF PRODUCTION
For pedagogical convenience, the initial capital structure is shown as
having five stages. With growth, the number of stages will increase.
Although all five of these stages are in operation during each time period,
resources can be tracked through the structure of production over time.
Watch the resources, or “goods in process,” move through the stages.
NOTE: Hayek introduced his triangle in 1931, when Henry Ford was still
producing the Model A. If only Hayek had had PowerPoint, he could
have shown how the abstract triangle aligns with real world output.
CONSUMPTION
STAGES OF PRODUCTION
Together, the sequence of stages form a Hayekian triangle, a summary
depiction of the economy’s intertemporal structure of production.
In an economy experiencing secular growth, the triangle increases in size
but not in shape.
CONSUMPTION
STAGES OF PRODUCTION
Together, the sequence of stages form a Hayekian triangle, a summary
depiction of the economy’s intertemporal structure of production.
In an economy experiencing secular growth, the triangle increases in size
but not in shape.
Watch the Structure of Production expand.
CONSUMPTION
STAGES OF PRODUCTION
When people choose to save more, the change in their preferred temporal
pattern of consumption is registered by the market, first and foremost by a
reduction in interest rates.
Reduced current consumption frees up resources in the late stages
---which can then be employed in the early stages.
Lower interest rates favor more time-consuming production processes.
CONSUMPTION
Watch the structure of production
respond to an increase in saving.
Note the emergence of a sixth
stage of production.
STAGES OF PRODUCTION
When people choose to save more, the change in their preferred temporal
pattern of consumption is registered by the market, first and foremost by a
reduction in interest rates.
Reduced current consumption frees up resources in the late stages
---which can then be employed in the early stages.
Lower interest rates favor more time-consuming production processes.
CONSUMPTION
THE
CAPITAL
STOCK
DO NOT OPEN
STAGES OF PRODUCTION
In the Hayekian construction,
increased saving results in a
reallocation of resources among
the stages of production.
Here, the differential interest-rate
sensitivities are at work.
In the Knightian construction,
increased saving (i.e., saving
beyond the technical requirement
of maintaining capital) results in a
an increase in the capital stock
(and a decrease in the flow of
consumables) with no implications
about capital’s temporal structure.
CONSUMPTION
THE
CAPITAL
STOCK
DO NOT OPEN
STAGES OF PRODUCTION
The increased output of consumer
goods emerges over time as the
early and intermediate products
move through the more timeconsuming structure of production.
This is the construction that allows
us to depict both economic growth
and the boom-bust cycle.
In the Knightian construction,
increased saving (i.e., saving
beyond the technical requirement
of maintaining capital) results in a
an increase in the capital stock
(and a decrease in the flow of
consumables) with no implications
about capital’s temporal structure.
CONSUMPTION
THE
CAPITAL
STOCK
LET’S DO OPEN
STAGES OF PRODUCTION
We can clearly see the critical difference between Knight and Hayek.
If we burn through the casing of the Knightian Black Box, we see the
Hayekian temporal structure of capital that allows for differential
interest-rate sensitivity and hence reveals the market mechanism that
tailors production plans to intertemporal preferences.
If interest rates are telling the truth about people’s willingness to save,
we get genuine, sustainable growth. If interest rates are being held
down by the central bank we get an artificial boom followed by a bust.
Knight and Hayek Butted Heads about Capital
Frank H. Knight
1885 — 1972
Friedrich A. Hayek
1899 — 1992
Austrian Capital Theory
A Prelude to Capital-Based Macroeconomics
Two Views:
The Knightian Stock-Flow Model
The Hayekian Stages-of-Production Model
July 22, 2013