Liberty Matters

A Research Agenda for Fetterian Economics


The response essays by Hodgson, Salerno, and Lewin are united by a common, but troubling theme: they are far too kind to me. However, in the spirit of charity I am willing to overlook this shortcoming. In all seriousness, though, I am grateful for their replies, each of which admirably teases out a vital thread of Fetter's economic system: Salerno focuses on core elements of price theory, Hodgson on capital, and Lewin on capital and the theory of rent. In doing so, they not only flesh out Fetter's views but provide a good deal of additional food for thought. À table!
I will use this response to reflect on their replies and to pose several further questions for discussion both within this forum and in future research. In general I approach my replies in conceptual order, beginning with price theory and continuing to problems of a "higher order," to use Menger's term.[12]
Prices: Real and Imagined
Joseph Salerno makes several important observations about the foundations of Fetter's price theory. The crucial one, in my view, relates to the realist aspects of pricing and the market process. The idea that a price is "an event occurring at a specific moment in time as the outcome of interaction among specific persons" is not incidental or trivial for Fetter. He was already thinking along these lines in his 1912 article, and his views became more explicit in subsequent years as he privately debated the definition of price with Maffeo Pantaleoni, Herbert Davenport, E.W. Kemmerer, and others.
In replying to critics, Fetter explained that a price is not an abstraction or a psychological estimate and is not equivalent to subjective value. Instead, it is the realization of value through exchange. A price is not, for instance, "a purely subjective estimate" of "what the individual hypothetically stands ready to give." Price presupposes willingness to pay, of course, but psychological estimates of value by themselves should not be conflated with actual prices paid, nor do they influence real markets. As Fetter explained, "I have had a growing conviction that it would be better to distinguish [subjective estimates] from price and to say that if no trade takes place there is no price." (Fetter 1913) He maintained this view of price throughout his career. (Fetter 1936, 482)
Later writers have taken the distinction a step further to argue that without action, discussion of valuation is speculative and lacks concreteness. This carries major implications for the economic analysis of welfare, as it shifts attention away from hypothetical preferences and toward "demonstrated" ones. (E.g. Rothbard 2011) In this way, we begin with a definition of price and find ourselves moving toward a distinct conception of "welfare economics": the same transition Fetter wanted economists to make by further developing subjectivist theory and transforming it into a genuinely social or humane science that "ultimately must center around human welfare." (Fetter 1923b) The field of welfare economics remains a controversial one for Austrians, especially regarding the question of exactly how Austrian views diverge from the mainstream,[13] but I suggest that there is much to be learned by returning to these kinds of fundamental questions.
Capital, Entrepreneurship, and Economic Calculation
Geoffrey Hodgson's essay focuses on Fetter's monetary-accounting definition of capital, its historical context, and its implications for future work. By doing so, Hodgson turns our attention to one of the most debated questions in the history of economics: how should we define capital?
Fetter and Hodgson are critics of the conventional produced-means-of-production approach for several reasons, but mainly on the grounds that it is ahistorical and diverges from common business usage. In some ways, it appears natural for Austrians and other subjectivists to likewise reject this objective, physical view of capital pioneered by classical economists. After all, the subjectivist revolution was nothing if not the overthrow of these kinds of concepts and theories.
However, a complete rejection of the physical-capital approach would carry a heavy cost, namely, giving up key insights into capital heterogeneity. Contrary to the "shmoo" approach of mainstream theory, Austrians maintain that capital represents a complex, delicate, and heterogeneous structure of production. This distinctly Austrian notion remains a foundation for many of the tradition's other contributions, including theories of entrepreneurship, economic calculation, and the business cycle. It also hints at a possible drawback of the monetary-accounting view, namely, that it strips away richness and explanatory power and risks transforming capital into a mere "K."
Happily, I do not believe we need to make a strict choice between one definition and the other; in fact, this may be the rare case in economics where we can have the best of both worlds. What's more, I suggest that the two views, properly conceived, are complementary and both are needed to make sense of production and distribution. The key point as I see it is to distinguish between capital and capital goods (or, perhaps, capital assets)[14] and to understand the role that each plays in entrepreneurial decisionmaking. This approach also echoes Fetter's research, which raised a similar distinction. (Fetter 1927)
The main point about heterogeneity is simple, yet powerful: it is an empirical fact that not all production goods are equally well suited to all production processes. Entrepreneurs as decisionmakers must therefore choose different combinations of factors in the hope that they will make profitable use of scarce resources. Entrepreneurs bear the uncertainty of the future and earn profits or losses depending on whether their initial appraisals were correct. All of this happens within the context of the price system. Money prices provide entrepreneurs with the indispensable means of economic calculation: the cardinal numbers required to compare alternative production choices. This is why Mises stressed the connections between capital, economic calculation, and the price system:
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 1998 [1949], 262]
At the end of this passage, Mises cites a single economist: Fetter.
What the above summary shows is that there is a theoretical chain that begins with capital in one sense (physical goods appraised by entrepreneurs) and ends with capital in the other (the monetary value of a firm's assets). The first gets at the fundamental problem entrepreneurs must solve, while the second explains the social process by which they do so and the complex economic system that emerges as a result. I suggest that as long as we are clear about which sense we are speaking of—and keep our terminology similarly clear—both can be used as appropriate.
Before moving on, I would like to draw attention to a subtler point that is reinforced by this discussion. As Peter Lewin observes, the capital concepts of Fetter and Mises stand out from others in the broader Austrian tradition. Such differences over fundamental concepts help to show that "Austrian economics" has never been a monolithic body of doctrine, but has and does consist of a diverse and dynamic collection of ideas.
Whither Capital?
Hodgson and Lewin each raise another vital issue with respect to capital: the way that the term has come to be used as "a general and historical concept referring to any durable asset or form of wealth" and how in turn this usage has generated a wide range of alternative capital concepts. The crown prince of these is human capital, but there are many other examples, including social capital, political capital, knowledge capital, reputation capital, and public capital. (In theoretical research it's almost a rite of passage for a concept to be translated into a type of capital.)
The rise of these terms raises many interesting questions for economists. Two in particular come to mind in light of this discussion:
Do the proposed flaws of the classical definition of capital apply to the newer concepts based on it?Could the proposed advantages of alternate definitions of capital (like Fetter's) apply to the newer concepts?
I will not pretend to answer either question definitively, but I will offer a few suggestions.
As to the first, note that many new capital concepts are metaphors for physical capital rather than varieties of it. Social capital, for example, is intangible and may even be immeasurable. It certainly seems difficult to describe it as a means of production in the same sense as plant and equipment, for instance. My point is that it is unclear how strong the connection is between the classical and more recent concepts and therefore whether the faults of one carry over to the other.
Lewin asks why Austrians have devoted relatively little attention to human capital. I suspect that part of the answer lies in the difficulty of integrating ideas like this into price theory, especially into accounts of entrepreneurship and economic calculation. The Fetterian approach would be to ask: can alternative forms of capital actually be capitalized? Or, what unique rents do they generate and how can we identify them? Some critics argue that there are no positive answers to these questions because human, social, etc. capital cannot be isolated and priced on markets, which only price labor services, not distinct components of marginal productivity. (Klein 2014)
A related challenge is to make sense of other types of capital in light of Fetter's definition. For example, are knowledge and skills "legal rights as claims to uses and incomes" that are inextricably tied to "private property and to the existing price system"? Literally they are not, but that only shows that human capital is not capital as such. This brings us back to metaphors and only invites further questions. For example, what would Fetterian definitions of human or social capital look like? Would they include psychic income, money income, or both?
All of this hints at a much larger question, namely, whether we need secondary capital concepts at all. (Hodgson 2014, Klein 2014) It is my hope that Fetter's work and our discussion of it can help point the way toward a satisfactory answer.
[12.] I am being partly ironic, as below I explain that using these metaphors too loosely can create confusion.
[13.] See, for example the March 2017 Liberty Matters discussion on "Israel M. Kirzner and the Entrepreneurial Market Process"; <>.
[14.] Though this does invite further confusion given that these terms have also been criticized. (Hodgson 2014).