the pure theory of capital - introduction

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EDITOR S INTRODU TIONLawrence Tf 7zite

[William Bartley]: Wouldn't you say in retrospect that capital theory in theAustrian sense ended with Pure Theory qfCapitaP.Hayek: I d say very largely. No one has done what I hoped would be done byothers.lrlnterviewerJ: You had p articipated in the capital controversies of the 19305along with Protessor Hayek and Professor Knight. Ho w do you evaluate thatdebate and your role in it?[Fritz] Machlup: I think it's very valuable and I think we should go back to it.lt's too bad that Hayek's Pure Theory qfCapital is no longer being read and thatnobody tries now to work on it, after all, it is not the end. The relation ofmoney capital to pure capital has still to be worked in. It's terribly important,but there is still no t sufficient interest in it. 2

n sharp contrast to his vibrant and much-deba ted lectures published as Pricesand Production ten years earlier, E A Hayek's 1941 book 1Jle Pure Theory ofCapi-till attracted little attention. Years of painstaking intellectual effort had produceda dry treatise that became, not coincidentally, Hayek's last book in economictheory. The Pure Theory qfCapital offers a detailed acc ount of the equilibrium relationships between inputs and outputs in an economy where productio n takestime and where some capital goods are not completely versatile. It moves fi'omthe relatively simple type of input-output mapping assumed in Prices and Pro-duction to increasingly complex types of relationships between date d inputs andoutputs. Hayek's staled objective was to make capital h e o r y ~ w h i c h had previously been devoted almost entirely to explanation of the interest rate- useful for the analysis of the monetary phenomena of the real world. 3 His ambitious goal, then, was nothing less than to develop a capital theory that could be

EA. Hayek, Hayek on Hayek: n Autohiographical Dialogue, Stephen and Leif Wenar, cdsUniversity of Chicago Press, and London: Routledg e, 19(4), p. 96.:'Fritz Machlup, An Intcrview with Fritz Machlup , he A1Ll trian Economics e w s l e t t e ~ vol. 3,

Summer 1980. http://www.mises.org/journals/aen/aeIl3_J_Lasp E A Hayek, chapt er 1 below, p. 32.

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EDITOR'S INTRODUCTION

integrated into business cyeIe theory. That no subsequent writers have actually applied The Pure 1heory Capital to business cycle analysis suggests thatwhat he ultimately produced was overly elaborate for the purpose.

The Book's Place in Hayek's Research ProgrammeIlle Pure Theory IfCaj ital began as attempt to re-state the business cycle theoryof Prices and Production with a more rigorous capital-theoretic foundation. AsDon Bellante and Roger Garrison note, Prices and Production was intended onlyas an outline . In the preface to the second edition of Prices and Production,Hayek explained that it was a sketchy outline at best. The invitation to give thelectures that were published as Prices' and Production

carne at a time when I had arrived at a clear view of the outlines of a theoryof industrial fluctuations but before I had elaborated t in full detail or evenrealised all the difficulties which sueh an elaboration presented. The exposition, moreover, was limited to what I could say in four lectures, which inevitably led to even greater oversimplification than Twould probably havebeen llUiltv of in any otber case.

Later in the same paragraph Hayek added:Contact with scientific circles which were less inclined than rwas to take forgranted the main propositions of the 'Austrian' theory of capital on which Ihave drawn so freely in this book has shown'I1ot that these propositionswere wrong or that they were less important than I had thought for the taskfor which I had used t h e m ~ b u t that they would have to be developed ill fargreater detail and have to be adapted much more elosely to the complicatedI::onditions of real life before they could provide a completely satisfactory instrument for the explanation of the particularly complicated phenomena towhich r have applied them.6

This was the agenda Hayek would pursue in The Pure 77zeory qfCapiwl.Among the key simplifications of Prices and Production was Hayek's well-knovvn

,l,'Taphical device in Lecture representing an economy's aggregate 'structureDon Bellante and Roger \\1: Garrison, Phillips Curves and Hayekian Inanglcs: Two Perspectives on Monetary Dynamics , History Iblitiral Economy, voL 20, Summer 19[18, fJP.notes 10, 13.F. Hayek, Prius and 2nd ed. Routledge and Kegan 1935; reprinted, New York: Kelley,p. viii.

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of production' as a series of stages' t ~ a d i n g to the output of consumers'goods.At each stage, an application of 'original means of production' (labour andland inputs) adds value to goods-in-process. In the case of continuous and evenapplication of inputs over time, the rising value of the goods-in-process describes the hypotenuse of a right triangle (one leg is value, the othe r is time).The Hayekian triangle thus drawn corresponded to the simple case of'continuous-input point-output' production that had earl ier been analysed byeconomists William Stanley Jevons and Eugen von Bohm-Bawerk. 7 Such aease can be illustrated by considering a growing tree, supposing that the tree

must be continuously tended. (If no tending is needed between planting andharvesting, the production process would be 'point-input point-output'.) Thetree (a capital good) 'matures' into firewood (a consumer good) with the application of land and labour inputs over time. Or consider a grazing stcer thatmatures into steaks. With a perfectly even application of inputs over the production process, an 'average period of production' (APP), summarising the duration or time-consumption or 'roundaboutness' of the process in 'technical'terms (independent of the interest rate), can readily be identified: it one-halfthe length of the process from start to finish. For each unit of land or labourthat the process 'bottles up' for longer than the APp there is another unit thatit bottles up lor correspondingly less time.Under the classical assumption that workers are paid during the duration of

the process by drawing down a previously accumulated 'wages fund', f,'Teatersaving (accumulating a larger fund) allows a longer APP and hence the use ofmore-productive-but-more-roundabout techniques that yield a greater (undiscounted or steady-state) consumption per worker. A reduction in saving doesthe reverse. The equilibrium interest rate balances the marginal gain fromlengthening the APP against savers' preference for consuming sooner ratherthan JaterYHayek soon came to recognise that the case of even-continuous-input followed by point-output is a very special caseY An APP is no longer technicallylIbid., p. 38, [1. I, noted lhat similar triangu lar figures had earlier heen used by JevollS andKnut WickselL He cited William Stanley Jevons, The flteory ifRJlitical Eamomy, 4th ed. (London:Macmillan, 1911), and K.Hut Wicksell, Lectutes In Iblitical E corlOrny, vol. I, translated by E. Classen

(London: George Routledge & Sons, 1934; reprinted, Fairfield, NJ.: Kelly, 1977). In his foolnoteHayek also endorsed Jacob Mal'schak's suggestion that such triangles be called 'Jevonian investmelll figures .Optimisation and stationary equilibrium conditions in Bolun-Bawerkian models have beenanalysed by Robert Dorfman, A Graphical Exposition of Btihm-Bawerk's Interest Theory ,

&1fiew Ecorwmic StudiR,s, vol. 26, February 1959, pp. 153-58; and by Jack Hirshleifer, A Notcon the Bohrn-Bawcrk/Vv'kksell Theory of Illterest , I l I i e w ~ f E c o n ( } m i c Studies, vol. 34,ApriI1967,pp. 191-99.

noted already in a 1934 article that the use of two dimensions to represent thc rangc ofcanllot usefully be replaced -except by way of a provisional simplifi

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definable (independent of the interest rate) in more complicated cases. Onecomplication, made famous decades later by the 'reswitching' examplesof the'Cambridge controversies' over capital, is an uneven time-distribution of inputs. A second complication is introduced by durable capital goods that helpproduce streams (rather than single points) of u t p u t ~ \Vith durable capitalgoods like a lumberjack's axe in mind, Robert Solow remarke d that "BohmBawerk, who seemed to be thinking mainly about the age at which trees shouldbe cut down, seemed to worry too little about the implement to be used infelling them".10 Hayek's aim in The Pure Theory qf Capital was to analyse suchcomplications, relaxing the Bohm-Bawerkian simplifying assumptions aboutproduction technology (in particular, no durable: inputs or outputs) that Hayekhad adopted in Prices and ProductiOTl.

Also for simplicity; Prices and Production had made its equilibrium benchmarka stationary economy. Under stationarity; the 'time' axis of the Hayekian triangle can do double duty. The diagram can be interpreted either as a) showing the growth in value through time of the particular batch of goods-inprocess that will reach consumption on a particular date, or (h) showing thevalues held at a moment in time (today) by all the goods-in-process across thevarious stages of completion. Stationarit y implies that the through-time profilelooks the same as the across-stages profile. In The Pure Ilteo1Ji ofCapital, Hayekdisentangled these two aspects of time by giving each its own axis in additionto the value axis). Readers of the book have often had a difficult time makingintuitive sense of the resulling 'three-dimensional' diabrrams.

In tandem with his work in business cycle theory, Hayek by 1941 had doneimportant work on the meaning of economic equilibrium through time. Hehad addressed the question in a 1928 essay, "Intertcmporal Price Equilibriumand Movemcnts in the Value of Money" .12 In the 1937 essay Economics andcation in an early stage of the ---by anyone -dimen siona l ma ,,'nitude such as the 'averageperiod of production'''. F A. Hayek, On the Relationship between Investment and Output ,Economic }ouma(, vol. 41, June 1934_, p. 211.

"'Robert M. Solow, Capital and the Rate Return (Amsterdam: North-Holland,p.12.lIJack Eimer argues that the proposition Hayek called 'The Ricardo Effect' provided an important bridge in the development of Hayek's capital theory between Prices and Production and 7he

Pun: Theory ifGapitaL Rimer finds the Ricard o Effect expressed, though n ot always hy name, in various diagrams Hayek used in Prices and Production, in the 1934 article On the Relationship betweenInvestment and Output , and finally in The PwP, Theory Capital. See Jack Bimel; The Place ofthe Ricardo Effect in Havek's Research Programme in Economics", &VUJ d Economie Rlitwue, vol.

pp.804 16.~ F . A. Hayek, "Intertemporal Price Equilibrium and Movements in the Value of Money",

reprinted as chapter 5 of Good Monq ltJ:rt 1: Tlze }.few f11orid cd. Stephen Kresge, which o ~ s t i t u t e svoL 5 (1999) of The Collected Wo,k ifF. A. Hayek (Chicago: University of Chicago Press, and London: Routledge), pp. 186227. For a critical discussion of this essay see Lawrenc.e II White,"Hayek's Monetary Theory and Policy: A Critical Recollstruction",}oumal o/ vfonq, Lredit, andBall/cing, voL 31, Fehruary 1999, pp. 10920.

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Knowledge" he argued that an economic equilibrium through time is best conceived as the ongoing compatibilit yof various agents' plans. 13 The Pure Theory qfCapital puts the compatibility-of-plans concept to work. Though the book begins with the simple case of a stat ionary economy, Hayek notes that to grapplewith many important problems of capital theory-such as the use of inheritedcapital 'relics' that it does not pay to reproduce in the same fonn, or the transition to a more or less capitalistic structure of production--analysis must go be-examining stationary states.14The broader plan-coordination notion ofequilibrium then serves as the relevant benchmark.

llqyek's Long Struggle with the BookHayek admitted in the preface to TIle Pure 7heory ofCapital that the book hadbeen a struggle to write, and had not reached the complete foml he hadplanned. IS In unpublished notes to The Pure T h e o ~ J i 0/Capital he wrote: The period of gestation of this book has been unduly long and protracted I fearthat evcn in this last form in which I have finally decided to publish it bears fartoo much the marks of long toil and labour and has not achieved anything likethe comprehensive analysis of the whole problcm which I should like to giveit". 16 published, it laid out the capital-theoretic foundations, but did no tcomplete the originally intended superstructure: a full-dress re-statement ofHayek's business cycle theory. As Kenneth Boulding wryly suggested in a review, this developmcnt was ironic given that Hayek's own cyde theory emphasised the economy's inability to complcte projects with overly elaborate foundations:

One has the impression that many of Dr. Hayek's abscractions are foundations without a superstructure. The theory of capital teaches an importantlesson -that foundations may be too elaborate. The lesson of Luke 14:28

'''E A. Hayek, "Economics and Knowledge",Ecrmomica, }v.S . voL 4, February 1937, pp. 33-54;reprinted in Indiviltualism I d Econumic Order (Chicago: University of Chicago Press, 1948), pp, 33 >6, For an accollnt of Hayek's evolving views on equilibrium constructs see Bruce Caldwell,Hqyek s Challenge: An lntellulualBiograph} ~ { F A. Hayek (Chicago: University of Chicago Press, 2004),pp. 224--30. Hayek was already in the midst of writing The Pure 7heory Ca/Jitai when he wrote"Economics and Knowledge," so the essay was undoubtedly influenced hy the book moiect asmuch as the reverse.

14G. L S. Shackle, E A. Hayek, 1899 , in Austrian Economics, eeL Stephen Littlechild (AlderUK: Edward Elgar, 1990), p. 167, discussed the integration of these themes into 1lle P U 1 ~Theory q{Capita{, Uniquely among surveyors of Hayek's thought, Shackle spent more than a thirdof bis essay on The Pure Tlzeary.

5E A. Hayek, Preface below, p. 5."'Friedrich A. Hayek, unpublished appendices and notes to TIle Pum Tlzeorymg., p. I. I am indebted to Jack Birner for providing a copy of this document.

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3 I-perhaps the first example of capital t h e o r y - - m a ~ also apply to the construction of intellectual structures.The difficult progress of the book is documentedby - Hayek's correspondence

in the 1930s with his friend and fonner Viennese cl;;assma te, economist Fritzhad gone to the United States on a RockefeUer

on numerous occasions during theing extensive line-by-line recommendations for wordLng changes.In a letter dated February15, 1934, Machlup told I-Iayek that he was awaiting a draft copy of the first part of the book with kec.:n anticipation, which indicates that Hayek probably began the book sometim(;E in 1933. The draft copyarrived a few months later, and Machlup provided I--Iayek with his first set ofextensive comments in September. In addition to thre:::e pages of recommendations for revision of specific passages, Machlup repeatedly emphasised the needfor clarity in Hayek's presentation. fie suggested t r a t Hayek reorganise hispresentation so that diagrams would accompany the relevant part of the text,that the diagrams should only be supplemental to his v"'vritten formulations, andthat formulas used in each chapter should stand on t.::heir own rather than re-

the reader to go back to earlier c hapte rs to c-::lecipher them. Machlupefforts with such difficult material, -but clearly thought thatmuch more needed to be done. The next month Hayoek replied, that hewas going to set aside the first part of the b ook to begi::-n work on the second. Inthe winter he sent a copy of the first chapter of the seocond part their correspondence this is referred to as chapter 7; in the publlished version Palt II begins with chapter 8), and in April 1935 Machlup sent him some more detailedconunents.

Hayek apparently put the book on hold in the Sur:t:a1mer of I reportingthat he was enjoying the summcr and working very litL:le, but returned to working on it in the fall. In May of 1936, Hayek wrote t io Machlup that he hadfinished a first draft of the book before the Easter vac tion and was now bringing it to completion. In his next letter, dated June 21 ,1936, Hayek informedMachlup that he had completely rewritten the intr.oductory section of thebook: "from that which you have already seen nothing rcmains . By summer's

,]fJ14MTTlal r fPolitical Ecnnorrty voi. 50,31. In the Bible passage that Boulding cites, fLuke 1 1 : 2 B ~ 3 0 lmernaone of you wants to build a te ::)wer. Will he not first sit down

and estimate the cost to see i he has enough llloney to complete it ' _? For if he lays the foundatiouand is not able everyone who sees it will ridicule him, sayiing, 'This fellow began to buildand was not able to finish"'.

lSThe may be found in the Fritz Machlup c o l l ~ c t i o n Box 43, folders 15 alld16, The, Hoover Institlltion Archives, Stanford, California, 1 am ir:ldebted to Bruce Caldwell lorthe in/(mnation drawn from the correspondence.xviii


cnd Machlup had received eleven chapters. In the fall of 1936 he providedHayek with eight pages of linc-by-line comments.

In December Machlup, who must have believed that the manuscript wasnearly complete, asked Hayek when he e xpected it to be published_ Progress onthe manuscript was, however, going sideways. Hayek replied that he was stillworking on it, and had totally redone the second chapter. I In 1937 Hayek reported that he had so frustratcd that hc had to put the book aside. In theunpubli shed notes Hayek refers to "having tried even the experiment of puttingfinished manuscript aside for a considerable period". 20 Their

and the book was not mention ed again until Febwhen Hayek asked Machlup to send him a few pages from one of the

chapters, apparently because he had lost his ownHayek must have resumed serious work on the book inletter to Hayek in November from Vera Lutz, a former student thenPrinceton, who was reporting her progress in typing chapters 20In April 1939 Hayek told Machlup that he was working on a chapter on thebusiness cycle (presumably chapte r 27), and by August 1939 he could finally report that the book was almost completed. All but the final revision would bedone in the next month or so.

The evidence from the correspondence is consistent with the recollections ofG. L. S. Shackle, who was a graduate student at the London School of Economics at the time, describing the difficulties Hayek encountered in trying towrite the book:

emerged in its published form from several manuof reading during its composition.

The sustained of thought which it cost its authorimplacable resolve As this work ,..,,.,,,,....PQQpr

several drafts during the middle and later 19308, he responded to its ever-multiplying difficulties with an intense and sustained effort

short of heroic.lOIn the second chapter, "Equilibrium Analysis and the Problem of Capital", o f f i ~ r s his

conception of equilibrium as a relationship of mutual compatibility among agents' plans such thatexpectations are not disappointed, That conception, a Hayek notes, was one he had proposed inhis paper "Economics and Knowledge", which was a presidential address delivered b c f i f t ~ theLondon Economic Club on November 10, 1936, The timing is right for Hayek's writing of theaddress to have overlapped with his rewriting of the chaptcc

E A, Hayek, unpublished appendices, ms. p, I.11 Letter, V('ra Lutz to F A. Hayek, November II, 1938, in the Hayek Collection, Box 36, foWer

II, The Hoover Institution Archives, Stanford, California.22G. T S. Shackle, EA. Hayek, 1899 , op. cit., pp. 163, 157. Incidentally, the false ,tar ts and

periods in the correspondence may help to explain why Hayek would sometimes say in reminiscences that the book took seven years to write, and at other times report thatit took four. See, e,g., ayek Ort Hr1) ek, pp, 9 0 ~ 9 1 p. 10 1.

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The correspondence also corroborates one of Hayek's later explanationsfor why The Pure Theory Capital never completed its planned re-statement ofHayek's business cycle theory, but instead concluded with comparatively briefremarks on the relationship between capital theory and the theory of the cycle.As Hayek told one interviewer,

I never really started on the intended monet aryor dynamic continuation.Though I tried hard to concentrate further on this subject, my interestbeganto wander to other .,,_:,," Z3

Hayek's August 1939 letter to Machlu p specified his new interest: research onthe scientific foundations of economics that would trace the concept ual errorsof the last one hundr ed years, from Saint-Simon to Hitler. Hayek would latercall this line of research the 'Abuse of Reason' project. t would occupy himthrough the war years and generate such essays as "Scientism and the Study of.and The Counter-revolution of Science," as well as his most famousbook, The Road to Serfdom.24 Hayek made it plain in the letter that he was eagerto begin his new project.Complementary to these rising opportunity costs, Hayek in another interview cited declining benefits: to continue to work on the planned re-statementof his cycle theory "would have meant working for a result which I alreadybut had to prove it, which was very dull .75

In a third interview Hayek offered a third less persuasive) rationale, besides distraction by other topics and fatigue with pure theory, for why he didn'tcontinue with the intended mon etary extension:t may you, but during the war I was Keynes's side

his critics, because Keynes was very much afrai d of inflation. I actually hadpublished one or two essays, one reviewing his warti mepamphlet and anotherone on the problem of combating inflation, whieh he already approved. During the war years, the great danger had become inflation, no longer deflation;so we were up against inflation. And in these circumstances, where I wantedto his influence the inflationists, I did not wantto continuethe book.26

Hayek on pp. 78 79.z4E A. Hayek, "Scientism and the Study of Society" [1942-44] and The Counter-Revolution

of Science" L1941J both reprinted in E A The CountlJl-Ri'vuiutwn afScience: Studies on the Abuseo{Reason Glencoe, I.L.: The Free Press, 1952; reprinted, Indianapolis: Libertyftess, 1979), pp. 19182, 1 8 5 - < ~ 6 3 ; E A Hayek, The lload to Serfdom (Chicago: UniversilY of Chicago Press, 1944;reprinted, 1956, 1976, 1994).

"'Hayek, Hayek on Hayek, p. 96.?"Ibid., p. 91. Hayek's rcview of J M. Keynes' pamphlet, Haw To Pa)'ll r tlli war, as well as other

relating to the or war financing, are reproduced in part 2 of Socialism and War:

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Given the sharp criticism of Keynes that appears in the published book inchapter 27, we are perhaps entitled to discount the importance of this last rationale.

TIe Relationship q Hqyek's TheolJl to Its PredecessorsHayek described his aim in The Pure T h e o ~ y as "in some respects no more thanan attempt towards a systematic development and elabouration of the fundamental ideas underlying the theory of interest of W. S. Jevons, E. v. BohmBawerk, and Knut Wicksell", though he noted that "parts of their theory"might be "changed beyond r e c o ~ > n i t i o n . n .Among these authors, Hayek gavehigher marks for originality and fruitfulness to Jevons than to Bohrn-Bawerk:

Bohm-Bawerk in many respects simply developed the ideas propounded byJevolls and made (hem intelligible to wider circlesby elaborating them: but atthe same time he gave the impetus to a moveme nt away fromwhat seems tome to be the more fruitful approa ch on Jev(mian lines.

The ideas about capitalistic production that these authors propounded hadcome to bc known as 'Austrian' capital theory after Bohm-Bawerk's nationality, despite the distinct nationalities of Jevons (English) and Wicksell (Swedish),and despite the fact that Bohm-Bawerk's the ory of interest was not endo rsed byhis fellow native Austrian economists Carl Menger, Friedrich von Wieser, orSchumpeter.Austrian capital theory began with a chapter of Menger's 1871 PrinciplesEconomics. Menger emphasised that the market pricesof higher-order' goods(land, labour, and capital goods) derive from their prospective contributions tothe production of valued consumer goods (goods of 'lower order'). Menger thusinverted the classical 'real cost' doctrine according to which the pricesof eon7surner goods derive from the amo unt of labour or land that goes into them.Bohm-Bawerk elabourated on Menger's distinction between higher- andlower-order goods with a fairly straightforward model of aggregate productionthrough time.30 In that model semi-finished proceed from the highest (raw

Docullli nts, and Reviews, cd. Bruce Caldwell, which constitutes voL 10 (1997) of The CollectedfHII*5 f/EA. H( yek.

Z7F. A. Hayek, 4 below, p. 62.2"lbid., p. 63.2 Carl Menger, Principles a/Economics, translated by James Din,gwall and Bert Hoselitz

York: New York University Press, 1981), pp. 149-- H .30Eugen von Bohm-Bawerk, itJsiti1Je Them;' o Capital, translated by George D. Hunke, which

cOllstitules voL 2 of Capital and lrlterest (South Holland, LL : Libe rtar ian Press, 1959). For di ;cus-

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material) stage downward through successively lower stages, with the application of land and labour services at each stage, until they finally become consumable products. Bohm-Bawerk's (in)famous summary measure of the timespent in production was the aforementioned 'aVeraf.,TC period of production'.Hayek llsed the APP concept in Prices and Production to describe cyclicalchanges in the 'length' of the capital structure. By 1936 Hayek would admitthat in general it "is in fact inadmissible, to reduce the descriptionof the rangeof periods for which the different factors a re invested to an expression of the

of a single time dimension such as the average period of production".:;Hayek accordingly acknowledged that while Austrian capital theory was "essentially right and even indispensable for a more detai led analysis, Ican seethat in the simplified foml in which I had to use it in my fanner book it may bemore misleading than helpful" .:n

Thc APP could be misleading because it cannot generally be measuredpurely in technical terms. An 'investment period' (IP) can be technically identified for a particul ar marginal input such as an hour of labour, measuring thetime (or array of times) between its application and the maturing of the finalproduet(s) due to its application. n principle, identifying an input's cont ributions to dated output(s) merely generalises the sta ndard c oncept of identifyingthe physical produc t of a marginal unit of input in timeless production. Beyondthe very simplest cases, many inputs go jointly into producing a given finalproduct, and many fmal outputs (at many dates) result jointly from inputs thatgo into producing a durable tool. Finding the average or aggregate lP forthe entire series of inputs that produces a given final product , afortiori for theaggregate of final products produced by an entire economy, would requireweighting and summing the IPs associated with all the various inputs. Theproper relative weights on inputs at different dates (the relative amounts 'tiedup' in present value telms) vary with the rate of interest. Only in special casescan an,averagebe formed of various IPs in purely technical tenns, indepe ndentof the interest rate, as would be required for the APP to serve as a datum in atheory determining the interest rate. The Pure Theory q Capital aimed to showthat the analysisof time-consuming production can proceed in a modified fashion, and can still reach the key conclusions associated with Austrian capitalsion of Hayek's departure from Bohm-Bawerk in interest theory see Jack Bimer, "Money, Utility,Intertemporal General Equilibrium, and Cyclical Fluctuations: On the Origins of E A. Hayek'sResearch Progrmnrne in Economics", working paper 17/97, ICER (Turin, Italy).

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Hayek: No, no. I certainly didn't. It very gradually dawned upon me that thewhole thing seemed to change its aspect once you could not put i t in the simpleform that you could substitute a simple average period of production for therange of investment periods. The average period of production is the firstmodel showing a principle, bu t it is almost inapplicable to the real situation.35

Hayek considered Wicksell's work on capital and interest to have been themost immediate predecessor to The Pure Theory qfCapital. n the area of interesttheory, Wicksell and his students have systematically develop ed the productivity approach. It is in the shape into which this type of theory has been fashioned by Wicksell that it provides the most useful basis for the present study . 36Wicksell in turn had seen his own analysis as a re-statement and extension ofBohm-Bawerk's theory.37

In Wicksell we find versions of four of the key concepts that Hayek emphasises in The Pure Theory qfCapital:

1. The essential role of capital arises from the time-consuming nature of production.38

2. Two key features distinguish capital goods from other inputs: capital goods (a) arenon-permanent (get used up) and (b) can be used up faster or slower. Pure landand labour, by contrast, are permanent and yield an invariable flow of services.'9

3. The economy's capital structure can be sliced cross-sectionally at a moment intime (thus viewing capital goods as factors of production cooperating with landand labour) or sliced lengthwise through time (thus viewing capital goods as semifinished goods in the process of reaching final consumption with the successiveapplication of land a nd labour services).'o

4. Net capital formation requires a diversion of input services that could otherwisego to the immediate production of consumer goods.4

Hayek departed from Wicksell by offering a consistently forward-lookingconception of capital, in contrast to Wicksell's backward-looking suggestion

'Hayek, Hayek on Hayek pp. 141-42.36 F. A. Hayek, chapter 4 below, p. 65.37W'icksell, Lectures on ItJiitualEconomy vol. 1, p. 147. Wicksell exposite d his capital the ory mostfully in Talue Capital and Rent translated by S. H. Frowein (London: George Allen Unwin, 1954;

reprinted, :-.lew York: Kelley, 1970), and Lectures on Rllitual Economy vol. 1. Both works cite BuhmBawerk extensively. For a helpful exposition of Wicks ell's capital theory see Carl G. Uhr, EconomicDoctrines ofKnut Wzeksell (Berkeley: University of California Press, 1962), chapter 5.

3 Knut Wicksell, Lectures on ItJiitical Economy vol. 2, translated by E. Classen (London: GeorgeRoutled ge Sons, 1935; reprint ed, Fairfield, NJ: Kelly, 1978), pp. 150, 171-72,236.39Wicksell, Value Capital and Rent p. 99.

4Wicksell, Lectures vol. 2, pp. 236-37.4lJbid., pp. 21718.

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that capital be regarded as a mass of saved-up labour and saved-up land .42In his essay-review of Hayek's book, Arthur Smithies argued that this departureleads necessarily to rejection of the average period of production device: For,as [Hayek] correctly points out, when capital is defined as a congeries ofheterogeneous resources, the only way to calculate an average is to weight theseresources according to their relative values and their relativc values 'will inevitably depend on the rate ofinterest '.43But even on Wicksell's backwardlooking view, the same problem arises: a weighting would be necessary to calculate an average from labour and land inputs that had been incorporated intothc 'saved-up' mass at different dates, and the weights will depend on the rateof interest.Irving Fisher's work on capital and interest, early in the twentieth century,had a seminal influence on neoclassical capital and growth theory.44BohmBawerk and Wicksell had already made the analysis of intertemporal production largely subordinate to explaining the phenomenon of interest and theheight of interest rates, but Fisher took this tendency to the extreme. Hayek'sapproach in The Pure Theory qf apital was the reverse: he made the theory of interest subordinate to explaining the structure of intertemporal production.With regard 1;0 determination of the interest rate, Hayek declared that Fisher's1930 book had provided the most systematic work on the subject which wepossess, a formally unimpugnable exposition of the theory of interest .45 Hayekaccordingly adopted Fisher's expository apparatus for understanding the interest ratc as an equilibrium exchange rate between the near and distant future. 46In that apparatus, the equilibrium interest rate emerges from tangency betweenan economy-wide intertemporal transformation curve (a production-possibilityfrontier between ncar-future and distant-future output) and a represcntativeagent's intertemporal indifference curvesY

Fisher's apparatus accorded intertemporal tranifOrmation and time-prderence logically co-equal status as determinants of the interest rate. Intertemporal trans

12Ibid., p. 150.


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formation is sometimes calledlatter phrase has rise to misunderstandings. Productivity in the sense ofintertemporal transformation is measured at the margin by the extra productthat results from extending the temporal length of an investment period. Itmust be carefully distinguished from productivity in the sense of the usefulnessof capital goods, which is measured by the marginal product that results -forany given production period from having more tools. Bohm-Bawerk's wellknown critique of 'productivity theories' (attempts to explain interest by capital productivity in the second sense) made the point th at the usefulnessof capital goods why positive prices are pai d to rent toolsand machines, justas positive wages are paid to hire labour and rent land, but it does not explaininterest. Bohm-Bawerk's critique did not show that an economy's array of intertemporal transformation opportunities isolated by Fisher and Hayek) isirrelevant to explaining its interest rate. Con trary to some commentators,Bohm-Bawerk's positive theory-in which intertemporal t ransformation playsa key role-was not inconsistent with his own demolition of 'productivity theories' of interest. Su ch commentators included Hayek himself, who stated thatBohm-Bawerk's "effective, although I think mistaken critique of the earlierproductivity theories of interest had the effect of causing later developments tocentre increasingly round the 'psychological' or 'time-preference' element inhis theory rather than the productivity element". l l

Hayek in The Pure Iheory qfCapital took the positionformation is in more important than time-preference for determiningthe interest rate, graphically represented hy the slopeat which theral transformation and indifl:erence curves are tangent, in the sense that the intertemporal transfol1nation curve is in practice less bowed than the representative agent's intertemporal indifference curve. Later Hayek published areconsideration on that point, where he noted that his earlier position assumeda long-run equilibrium, but he now recognisedthat intertemporal indifferencecurves are likely to be less bowed than the s h o r t ~ r u n intertemporal transformation curve for an unexpected drop in the willingness to save.49 Whichever wasmore bowed, Hayek's analysis of interest determination in terms of the two setsof curves was thoroughly Fisherian.

Fisher's interest theory, like Hayek's productionequilibrium theory in which goods and services are date dby when they are used).50For Fisher's purpose-explaining the interest rate as4"Ibid., below chapt i'r 4, p. 63.9F. A. Hayek, "Time-Preference and Productivity: A Reconsideration", Eronomir,a, N.S. vol.

12, FebruaJy 1945, pp. 22-25. This article is fi'printed below as Appendix V.Hirshleifi'r, Investment, Interest, nd Capital (Engli'wood Cliffi, NJ: Prentice-Hall, 1970),p. 194, has characti'rised the "Fisherian starting point" as "placing the underlying interlemporal o n ~

choices at the heart of the analysis". In that sense approach is certainly Fisherian.

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an equilibrium intertemporal exchange r a t e ~ - i t was sufficient to consider thesimplest possible intertemporal produ ction choice: one composite commodi tyand 1\\'0 time periods. In the representative agent version, as noted, the slopeofthe tangency between the intertemporal produ ction possihility frontier and theintcrtemporal indifference curves determines the equilibrium interest rate. For Hayek's purpose in TIe Pure Theory qfCapital-understanding the structure of production in a world where capital goods are moreor kss specific to particular uses-i t was necessary to generalise to many inputs, and to dehomogenise inputs from outputs. Thus Hayek rightly commented that "because of his concentration on interest rather than on themethods of production, Professor Fisher's work hardly touches on a good dea lof what is treated as important in the present study .51 Hayek's innovation inhis 1928 essay, made the central focus of his I941 hook, was the notion of amulti good intertemporal equilibrium. That notion was needed to analyse the

of intertemporal produc tion plann ing connected with specific capital goods. principal concern in the 1928 article was with thc equilibrium path of the price level over time. For that purpose he neededjust twogoods-a composite consumption commodity and o n y ~ t each date. Thebehaviour of the price level over time is the behaviour of the money ofthe composite consumption good. In his late r business cycle works, and finallyand most fully in lhe Pure Iheory qfCapital, Hayek considered the problems ofintertemporal planning connected with a variety of capital and consumptiong o o d ~ and a variety of agents.

In contrast to Hayek's earlier work on business cycles, TIe Pure lheory qfCalJ-ital makes little reference to the writings of Ludwig von Mises. Hayek does offer~ ~ o o ~ ~ catch-all acknowledgement to f\,fises's work on the business ; '3

SPC:Cltlc work of Mises that he and that in an appendix, is a Imonograph on monetary policy/'4 although a 1933 Mises essay on "Inconvertihle Capital"55 appeared in the bibliography.sD He does not refer to Mises'sNalionaliikonomie, the German-language predecessor of .Mises's m a g ~ u m opusHuman Action (in which capital theory is prominently discussed), published in

51 F A. Hayek, below chapter 4, p. 64.Milg-ate presumably had something like this in mind when he credited 1928

than Fisher, or before him B()lull-Bawerk or Ricardo) with originating the idea ofin tp r tpmn r ~ l


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but this is because he only received it in manuscript form in August 1939,when his own manuscript was more or less completed. 7In Hayek's view, the capital-and-interest theories most useful for his analysis

of production were those along the lines of Jevons, Bohm-Bawerk, and Wicksell, "which stressed the 'productivity of capital' and were in consequencebased on an analysis of the material structure o f p r o d u c t i o n . ~ 8 Mises, by contrast, favoured a of interest (sometimes called the 'pure time-preference'that views the mater ial productivity of capital goods in either sense asirrelevant to explaining the interest rate. For Mises, the productivityof havingadditional tools explains only their rental prices Bohm-Bawerkhad argued).Intertemporal transformation in value terms is entirely the result of present

value discounting in the pricing of capital goods; the discount rate in tum is explained entirely by time-preference. Mises had little to say about the tradeoff between near-future and distant-future physical output. To athis trade-off s crucial for determining the prospective scarcityof near-futureto distant-future output, and thereby the equilibrium rate of timepreference. When Hayek subsequently reviewed Mises's Nationaliikonomie in thepages of the Economic Journal, he accordingly commented that "on a first reading his development of the psychological element in the Bohm-Bawerkian theory, although highly illuminating in some respects, seems to the reviewer as awhole less convincin than most narts of the work".59

The 1930s Capital Debatesn a series of journal articles in the 1930s Hayek (with help from Fritz Machlup)debated capital theory at length with Frank Knight, and more briefly withNicholas Kaldor.1io Perhaps surprisingly, the Hayek-Knight debate does not

von Miscs, Nationaliikimomie: Theorie des Handelns und Wirtschtiflens (Geneva: EditionsMises, HllmanActioll, 3rd cd. (Chieago: 1966). Hayek mentions

received the manuscript in his letter of August 28, 1939 to fritz Machlup, the fritz Machlup collection, Box 43, folder 15, The Hoover Institution Archives, Stan/{lf(J, California. Hayek didreview the book in 1941 (see note 59 below).

58F. A. below, p. 62.59F. A. "Review of Nati(Jllalokorwmie: Theorie des Hande/liS ulld des Wirtschafter/.) bv L. Von

Ivl ises , EcollmnirJournal, vol. 5 I, April 1941, p. 125.GOThe major papers by frank Knight were: "Capitalist Production, Time, and the Rate of Re

turn", in Economic Essa]s in Honour ifGustav Crusei (London: Allen and Unwin, 1933), pp. 327 42;Time and the Interest Rate", Economica,J'{.S., vol. I, August 1934, pp. 25786; "Profes

the Theory of Investment", Economic]oumal,vol. 45, March 77.. 94; "Professor Knight and the 'Period of Production': Comment" ,]ournal qf1hlitical f:CoTwmy, vol. 43, October 1935, pp. 625-27; "The 'Period of Production': A Final Word"vol. 43, December 1935, p. 808. and Machlup countered with E A Hayek, "The Mainte

x..xviii


explicitly in 17ze Pure T h e o ~ v qfCapital. All references to Knight, with oneare favourable. ol The exception registers Hayek's dissent from"mystical" notion that capital must be viewed as a perpetual fund,the reader to Hayek's 1936 article on "The Mythology of Capital" .62

Important differences between Hayek and Knight nonetheless remain evident in The Pure 1 7 z e o ~ ) qfCapital. Hayek sharply criticised the ap proach (whichhe attributed to the Cambridge School, but which was in this respect akin toKnight's) that "treats one part of capital as being permanent, and the otherpartas involving no waiting whatsoever: all the problems of capital are thenevaded" .63 Pervading the book is Hayek's rejection of the Knightian propositions that (1) capital may be regarded as a homogeneous fund; (2) the permanent maintenance of capital is to be taken for granted; (3) there is no economically mcaningful distinction to be made between 'original factors' (land andlabour) and capital; (4) input and output are synchronous, so production is es-sentially instantaneous, and concepts of time-duration in production (the period of production or the investment period) are useless; and (5) production andconsumption are simultaneous, so it is pointless to speak of waiting'.Mnance of , Emnomica, .N.S., vol. 2, August 1935, pp. 21-\-76; Hayek, "The Mythology of

Fritz Machlup, "Professor and the 'Period of Productionm, :Journal FbliticalECOIWI1' Y, voL 43, October 1935, pp. 577 624; Machlup, "The 'Period of Production" A FurtherWord",]ounwl if Political &'orw l)', vo ' 43, December 1 9 ~ 3 5 p. 808.Kaldor criticised Hayek in "The Recent Controversy on the Thf'ory of Capital", Econometrica;voL .'i,July 1937, pp. 201--33; "Capitallntensily and the Trade Cycle," Economica, A:,4,'., vol. 6,February' 1939, pp. 40-66; and "Professor and the Concertina Effect," Em/wmica, .N.S.,vol. 9. Novemher 1942, pp. 359-1l2. Hayek's responses to the first two articles r:alllC in the present volume.Thesc debates are taken up in Capital and llltere.I/, which comprises vol. II (fonheoming) of 7lIeCollected Works ( /HA. Hayek.

"'The Jar:k of explicit criticism of Knight is perhaps why Shackle, E A.lieved that "When he came to write The Pure 7lIeory ifCapital . .. his attitude had softened towards Frank Knight". It is not evident that Knight had persuaded Hayek of anything, however, other than the predominance of productivity over time-preference in explaining the interestrate (the position Hayck later reconsidered).

OlE A Hayek, below chapter 7, p. 107; "The My1ho\ogy ,op. cit.03 :: A. Hayek, below chapter 24, p. 304. For a penetrating critique of the conceptual under-

ofKllight's Israel Kirzner, An Essay on Capiull(New York: Kelley, 19(6),2-3. Kirzner's essay is reprinted in Idem, Esso]s 011 Capital and Interest: An Austriantive (Cheltenham: Edward 1996)."4Ross Emmett explains the last of these propositions: "Knight's approach asks us to considerthe output of the economy to be like a choral music production The choir's act of producinglhe music which \Vl: enjoy is simultaneous with our act of consumption. Production is the cn:atiollof a stream of enjoyable servin:s; is the enjoyment of the stream of services al-

we often distinguish between them, the two processes occur at the S8me moment." RossB. Emmett, "'What is Truth' in Capital Theory?: Five Stories Relevant to the Evaluation of Frank

Contribution to the Capital Controversy", in New Economics and Its History, ed. Tohn B.

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Alan Ebenstein has suggested that conflict between Knightian and Hayekian capital theory remained a live issue at the University of Chicago (whereKnight had taught) when Hayekjoined the University's Committee on SocialThought in 1950. He quotes Chicago economist Milton Friedman as sayingthat the Chicago economics departmen t didn't agree with [Hayek's] economics. Prices and Production, his capital theory-if they had been lookingaround the world for an economist to add to their staff, the ir prescription wouldnot have been the author of Prices and Production . ; j

Reception and Subsequent Influence on Mainstream EconomicsThe Pure Theory Capital was published just as the 'Keynesian revolution' wassweeping the economics profession. From the perspective of the 'New Economics' of pervasively unemployed (hence effectively non-scarce) labour andcapital, Hayek's concern with optimally allocating scarce factors of productionwas hopelessly old-fashioned. Hayek was a well-known critic of Keynes, andthe book's final paragraph was sharply anti-Keynesian. The book's professionalreception was accordingly chilly. In the opening sentence of a lengthy essayreview in the American Economic Review, Arthur Smithies likened Hayek's message to old-time religious fundamentalism:

Professor Hayek has addressed a weighty appeal to his fellow economists to return from the pursuit of Mammon to the contemplation of economic fundamentals; and since his belief is, and always has be en, that the ultimate truthwas revealed in varying degrees to Jevons, Bohm-Bawerk, and vVicksell, hispresent book consists in the main of higher criticism and extension of the workof these authors, rather than of new developments in economic doctrine.

Kenneth Boulding offered a similar analogy, though his appears more sympathetic to Hayek:

Davis, annual supplement to HistorJ' q[Political Econom) vol. 29 (Durham: Duke university Press,1998), pp. 231-50. Uhr, Economic Doctrines Knut Wicksell, pp. 109- 13, provides a useful accountof the last four of these Knightian views and the contr asting Austrian positions in Wicksell and.Hayek. The contrast between Knight and Hayek on the first proposition was noted by R. G.Hawtrey, Professo r Hayek's Pure Theory of Capital , EconomicJournal, vol. 51,June-September1941,p.287.

Alan Ebenstein, Friedrich Hayek: A Biography (New York: Palgrave, 200 I , pp. 172-73.oOSmithies went on to identify himself as a renegade from the Austrian faith who found it

difficult to survey his discar ded beliefs with the toleran ce and sympathy they deserve . He attributed his apostasy to the influence of Schumpeter, Knight, and Keynes. Sec Smithies, Professor Hayek on The Pure Theory Capital , p. 767.

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Mr. Keynes's economics of surprise, like Hitler's, may be admirable in producing spectacular immediate success. But we need Puritan economists likeDr. Hayek to point out the future penalties of spendthrift pleasures and todangle us over the hell-fire of the long runY

Writing two decades later, during the Keynesian heyday, Carl Uhr commented:For their time, approximately 1920 -35, analyses of the Wicksell-Akermanvon Hayek type represented outstanding achievements both in capital andbusiness cycle theory. Since then, and particularly with the arrival of the socalled 'Keynesian revolution', very little more is heard of capital structureanalyses on the one hand and capital shortage explanations of the upper turning point of business cycles on the other.68

Keynesian theory depicted current income as proximately determined bycurrent expenditure (Y= C I G rather than by prior production. The 'circular flow' supplanted capital theory in macroeconomics. Current-period analysis displaced intertemporal analysis. The interest rate no longer played anequilibrati ng role. Left to its own devices, the economy could readily get stuckat a level of expenditure too small to achieve full employment. Smithies foundit remarkable (note his apparently sneering use of quotation marks) that Professor Hayek's point of view is that a 'real' economy, if left to itself, will automatically achieve 'equilibrium' and that the disturbances that occur in real lifeare due to the subversive influence ofmoney .69Keynesian theory, asUhr putit, 'demoted' the interest rate from the role of guiding intertemporal allocationto that of rewarding the sacrifice ofliquidity.70Though it never became mainstream doctrine, some Keynesians nearly overthrew the idea that capital isscarce, and needs to be carefully allocated, in favour of the 'secular stagnation'thesis that remunerative uses of capital are or soon will be hard to come by.Whatever the full set of reasons for t he success of the Keynesian revolution,the popularity of Hayek's approach undoubtedly suffered in part because ofthe author's policy stance. 7 Economists and policy-makers eager to do something about the Great Depression rejected Hayek's counsel of non-activistmonet ary policy. Uhr wrote of the Hayekians' failure to interpre t the Great

07Boulding, Review of The Pure Theory ifCapitnl , p. 131.oBUhr, Economic Doctrines qfKnut Wicksell, p. 143.

Smithies, Professor Hayek on The Pure Theory Capital p. 769.7GUhr, Economic Doctrines Knut Wuksell, p. 143.7 For reasons for the success of the Keynesian revolution, see Mark Blaug, Second Thoughts

on the Keynesian Revolution , History Political Economy, vol. 23, Summer 1991, pp. 171-92; c[Bruce Caldwell, Editor's Introduction , Contra Keynes and Cambridge: Essays; Correspondence, whichcomprises vol. 9 (1995) of The Collected Works if A. Hayek, pp. 31-40.

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Depression in a sufficiently meaningfulmanner to suggest criteria for realisableeconomic policy".72Hayek's message tha t the way to avoidan economic collapse is to prevent monetary policy from creating an unsustainable bo om in thefirst place- was regarded as an irrelevant 'counsel of perfection' in the midstof a dee p depression.The fact that passages from Ihe Pure 1heory r Capital werelater reprinted in a compendium of 1he Critics lIi!ynesian Economics underscoresthe point that Hayek's analysis was alien to the new macroeconomic mainstream.

Since the late 1950s some of the concerns addressed by Hayek's capital theory have reclaimed economists' attention, in the form of the neoclassicalgrowth theory developed by Robert Solow and others. Growth theory is allabout intertemporal allocation, particularly the trade-offbetween current consumption and futurc consumption savings and capital accumulation). Andyet Hayek's work had no apparent impact on the development of neoclassicalgrowth theory. Jack Birner has offered two explanations.74 The first is thatgrowth theorists were too focused on immediate modelling and econometricproblems to look into old books and journals for guidance. The second is thatwhat they did know about the older literature did not encourage them to lookfurther. Birner relates an interview with Solow in support of the second explanation:

In an interview with the author (20 April 1989), Solow admitted that hc knewHayek's Prices and Production: "I did read Hayek as a student ( ) I found itcompletely incomprehensible.l was assigned to read Prices and Production ( )

not tha t I thought it was wrong so much as I did not understand it( ) 1 thought there's got to be something wrong with the man who couldwrite that. And I never read rany other work of Hayek's], 1 simply found itincomprehensible".75

This statement is consistent with Solow's earlier published remark that "I findthe earlier discussions [between Bohm-Bawerkand Clark, and between Hayekand Knight] terribly confusing and occasionally incomprehensible to a contemporary economist". U

72Uhr, t:'conrmlic Dochws ffKnut ~ i c k s e l l p. 144.3 Henry Hazlitt, ed., 'Ihe Critics qf K e . ~ n e s i l l n Economics (Princeton:D Va.n Nostrand, chap

ter 7."Jack Bimer, 'Ihe Cambridge C )l1.troversies in Capital StUffy in the Logic De1!elopment

Routledge, 2002), pp. 25 27.p.27.

'Solow, and the Rate qfReluln, p. 9. J can personally report a similar reaction fromneoclassical economist: as a college senior, in the fall of 1976, I approached Ken

neth Arrow, one of the chief architects of modern general equilibrium theory. to sec whether he

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Solow would likely have found little of use in 1he Pure Theory rfCapital, or inthe Hayek-Knight debates, had he read them. Although neoclassical growththeory does revolve around the trade-off between consumption (today) andaccumulation (for dIe sake of future consumption), it typically treats thecapital stock as an undifferentiated aggregate. In 'one-sector' growth modelsthe capital good is even identical to the consumption good. Capit alen massenoted K) combines with labour (L) in production, with the resulting volumeofgoverned by the level of technology. Elapsing time enters the model inthe form of time-paths for capital accumulation, labou r force growth,and output f,'Towth, not in the foml of time-consuming production. 'Real businesscycle' theorists subsequently adapted the Solow model to help explain business(Their prefer red impulse for generating thc business cycle is technologyshocks, not monetar y shocks, hence the label 'real'.) .More recently 'endogenous growth' theorists have focused on explaining the technological improvements that are empirically associated with the lion's share of growdl in percapita output (the share associated with capital accumulation is muchHayek's capital theory, by contrast, focuses on the time elapsing within a production process between the application of inputs and the final emergence ofconsumption goods. It matters for the theory that capital takes the form ofpartly finished goods-in-process, and imperman ent tools, intended to produceparticular outputs at patt icula r future dates. The structure and composition ofthe capital stock-not just aggregate quantity of capital-matterboth for long-run grm-vth and for business cycles.Expositors of neoclassical capital theory have similarly overlooked 1he Pure

rfCapital even when they have discussed Austrian capital-theoretic COIlcepts. Jack Hirshleifer, in a textbook along Fisherian lines, cited only BohmBawerk and Wicksell in connection with the notions of the period of production and of capital as goods-in-process. This is understandable ,>1ven thatHirshleifer did not go beyond the simple stationary Bohm-Bawerkian caseof ahomogeneous capital good in various stages of completion (the parabl e of thegrowing stand of trees of various ages), whereas Hayek's aim in 1he Pure 1heorywas (as noted above) precisely to investigate more complicated cases. EdwinBurmeister in a monograph on Capital1heory and pynamics mentioned in passing "the Austrian tradition associated with such economists as Bohm-Bawerk,Wicksell, and Hayek," but neither cited nor listed in his biblioh'Taphy any workany of the three.78Would be interested in supervising a scnior thesis I proposed 0 write about tk Purt 7hear}ital. (I hadn't yetread the book, but I hali read B(jhm-Bawcrk and thought I was ready:) Arrow t oldmc (hat he had once tricd to read nle Pure ThOT) Capital, hut found it too hard to unden.land.77Hirshleifer, Investment, Inl:erest, and Capital, pp. 187 92.

7IJEdwin Burmeister, Capital ThaT), and Dynamics (Cambridge: Cambridge UniversilY Press,pp.I44-54.

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Austrian Theory ifterThere are at least two branches of Austrian capital theory since 1911.

theory) tha t might

Studies in Austrian Capital Thmry, Investment,

In Europe a 'neo-Austrian' capital theory, based more on Bohm-Bawerk than onHayek of the Pure '!heory qf Capital, was developed by John Hicks and subsePeter Berhholz, Malte Faber, and their associates.79 Hicks's 'ncoAustrian' efforts began with a 1967 essay reconsidering Prices awl Production.Hicks proposed that IIayek's theory was "a fore-runner of the growth theory ofmore recent years," and briefly sketched a theory of secular changes in real factors (rather than the monetary disturbances of Hayek'sbring about the capital shortage that is characteristic of the Hayekian crisis,sIn the 1973 monograph Capital and Time: A .Neo-Austrian T h e o ~ y Hicks workedout in some detail the implications of an 'Austrian' production technology(time lags between inputs and resulting outputs) for growth theory.1ll Though hementioned Hayek, Hicks made no reference there to The Pure '!heory qfCapital.

The subsequent 'neo-Austrian' capital theorists have focusedon mathematical analysis of time-filled production. In that respect their research has beenclose in spirit to the central cha pters of '!he Pure Theory qfCapital: they analyseintertemporal allocation under various assumptions about the temporal structure of available production techniques. They have rightly emphasised thattheir work builds directly on Bohm-Bawerk and Wicksell, rather than onHayek's extensions and modifications of the earlier work.In the United States the members of an 'American Austrian' school have invarious ways combined Hayek's analysis of the structure of production withMises's 'p ure time-preference' analysisof interest. Into this schoolwe can placeMises himself (who relocated to the U.S. in 1940, t aught at New York University from 1915 to 1969, and included chapters on capital and interest in hisHuman Action of 1949), Ludwig Lachmann (who published Capital awl Its Structurein 1956 while teaching in South Africa,but later b ecame a visiting professoratNY'U), Murray Rothbard, Israel Kirzner, Peter Lewin, and Roger a r r i s o n . 8 ~

Hicks, Capital (md Time: A ,."feo-Austrian 7 7 l o ~ y (Oxford: Clarendon Press, 1973). On thecontrasts between the neo-Austrian and American-Austrian schools see Malte Faber, "O n,the Development of Austrian Capital Theory " in Faber, ed"amI Time, pp. 12-4,3; Ingo Pellengahr, "Austrians Versus Austrians I: A Subjectivist View of Interest, in ibid., pp. 60-77; and idem, "Austrians Versus Austrians Ii: FunctionalistVersus Essentialist Theories of interest," in ibid. pp 78 -95.

80John Hicks, "The Hayek Story", in Crilical Essays ll iV/onetary ,[heory (Oxford: Clarendon Press,1967), p. 211.Capivd and 'lime.

Ludwig Lachmann, Capital and its Structure (London: Bell & Sons, 1956;reprint(;d, Kansas City, M.O.: SheedA.ndrews and McMeel, 1978); Murray Rothbard, Man, 1 .COrt-omy, aM State (Los Angeles: Kash l'ublishing, 1962); Kirzncr, EHil;y on Capital; Peter Lewin, Capital,in Disequilibrium: The 1W!e ofCapital in a CIumging World T ,ondon: Routlege, 1999); and Roger Garrison, Time and Money: 'lite A1acroeconornies ofCapital Structure (London: Routledge, 200 I).

XXXIV

EDITOR'S INTRODUCTiON

Hayek's efforts in the central chapters of The Pure '!heory of Capital wcrerelentlessly abstract and constructive, devoted to forming and illustratingcomparative-equilibrium propositions under stringcnt simplifying assumptions. Lachmann' s work, by contrast, was relentlessly de constructive, devoted toemphasising what is lost in abstraction from the complexitiesof the capital structure. Hayek's efforts were not excluded from Lachmann's criticism. 03 Hayekwas aware of what was lost in his abstract model-building for the sake of isoparticular aspects of the capital structure, and inserted appropriatecaveats throughout The Pure ' h e o ~ y qfCapital. But he would not have written thebook as he did had he not felt that something can be gained from such abstractions, namely useful explanations of real-world phenomena. It is thussomething of a surprise to read the following statement by Hayek in his interview with Jack High:

T hink the most useful conclusions drayvn from what I did are in Laehmann's book on capital. Like so many things, I am afraid, which I have attempted in economics, this capital-theory work more shows a barrier to howfar we can get in efficient explanatioIl than sets femh precise explanations. Allthese things I've stressed-- the complexity of the phenomena in general, theunknown character of the data, and so o n ~ r e l l y much more point out limits to our possible knowledge than [are] contributions that make specific predictions possible. 84

P e ~ h a p s we can attribute this statement to Hayck's being in a pessimistic moo dat the time. While The Pure Theory qfCapital does not enable prediction of specificm a g n i t u d e 5 ~ it does (unlike Lachmann's work) endeavour to predict battems ofresource allocation.

Israel Kirzner's insightful Esso} on Capital drew on The Pure Iheory qfCapitalextensively, citing it at least two dozen times.se, Given Kirzner's aim of providinga critical discussion of the r6le of capital as a 'prologue' to capital theory,80 it isnot surprising that he mostly drew on the first seven 'introductor y' chapters ofThe Pure Theory qf Capital, rather than from the technical chapters engaged inequilibrium analysis of various temporal production patterns. More recentworks in the 'American Austrian' tradition by Garrison and Lewin, like thejust-noted works by Mises, Lachmann, and Kirzner, have been largely thematic discwsions about capital theory and its implications rather than exercises incapital theory for comparative-equilibrium analysis.HI

pp.59 62.Ort Hayek, p. 142.

Es.9lJ on Capital.p.2.'''Roger W Garrison, A Subjectivist Th('ory of a Capital-using Economy", in Mario Rizzoand Gerald P. O'Driscoll, Jr., The EcrlrtomuJ f Time and /glllm/1tce, 2nd ed. (London: Routledge,

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EDITOR'S INTRODUCTIO:-l!

In applying Hayekian c apital theory to the analysis of business cycles, Garrison has consciously gone back to the more tractable mode l of Prices and Pro-duction. As Hayek and Maehlup noted in the interview statements used as ourepigraph, no one has attempted further to elaborate or apply the analyticaltools specifically developed in I7ze Pure Theory

If "time and money" are "the universals of macroeconomic theorising", asGarrison has put it83 , then I7ze Pure 'I7zeory Capital in the form Hayek left itfalls short of macroeconomics. It focuses on time product ion) to the exclusion of money. Garrison, who ha s done more than anyone else to keep Austrianbusiness cycle theory a live research project, argues that t he three-dimensionaldiagrams of The Pure Theory are more elaborate than is suitable for macroeconomic analysis, whereas the simple triangle of Prices and Production 'is justright'.H On this view it is no accident that neither Hayek nor anyone else hasused The Pure l7l.eory gfCapital (rather than Prices and Production) in work extending or empirically applying Austrian cycle theory.1996), pp. 160-87; and Lewin, Capital in Disequilibrium. The doctrine-historical literature onHayek's research programme in business cycle and capital theoty is too large to survey here, butincludes Gerald P O'DriscoJl, .It:, EConomics as a Coordination Problem: The Contributions ofFticdrich A. Hqyek (Kansas City: Sheed, Andrews, and McMeel, 1977) and G. R. Steele,Hqyek: the Money Economy (London: Routledge, 2001). 'Two useful collections of essays are IvlarinaColonna & Harald Hagemann, cds., Afon' Y and Business Ivycles: The Ewnomus If/EA Hayek, Vol. 1,

Edward Elgar, 1994), and Marina Colonna, Harald Hagemann, and OmarHamouda, eds., Capitalism. Socialism and Knowledge, The EConomics Hayek, Vol. 2,Edward Elg-ar, 1994).

VV Garrison, "Time and Money: The Universals of lVlacroeconornic Theorizing",iV1acroecorlUmu:s, vol. 6, Spring 1984, pp. 197-213.

""Garrison, TWlt and l\1un' Y, p. I

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F A. HAYEKThe Pure Theory of Capital

the pure theory of capital - introduction

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