Liberty Matters

Capital Goods versus Production Goods: What’s in a Name?


Peter Lewin's reply addresses some important problems regarding the relationship between the physical and value concepts of capital and in so doing makes a critical remark about a point I raised previously. Fortunately, with a little clarification I think I can show that we are actually in agreement.
The apparent tension appears partly because my original argument was unclear and partly because I think Lewin and I are reasoning about the same problem from different directions. To clarify, I do not reject Fetter's value approach to capital as I understand it, and I do not believe that adopting it necessarily means giving up the idea of capital heterogeneity (though my wording mistakenly suggested that). What I do believe is that it is possible to apply the value definition too hastily, in a way that overlooks key aspects of the production process, e.g., by ignoring technical facts that are relevant to production and making it easier to assume away some problems related to heterogeneity.
My original claim was that "a complete rejection of the physical-capital approach would carry a heavy cost, namely, giving up key insights into capital heterogeneity." As Lewin explains though:
[H]aving come to a good understanding of the heterogeneous nature of capital goods (production goods) one cannot avoid the realization that the only way to deal with the bewildering variety of productive resources is in terms of value as calculated by those making decisions as to their use.
Lewin is quite correct about this. However, I don't think the two ideas contrasted here are mutually exclusive: it's possible to think that the value definition is necessary and enriches our understanding of production goods while also holding that it can be applied in misleading ways that overlook aspects of heterogeneity. My comment referred to the second possibility, albeit clumsily.
I agree with Lewin that if we conceive of heterogeneity in the right way, we can avoid many problems. But that's just it: how do we come to "a good understanding" of heterogeneity to begin with? In my view, we begin by acknowledging the existence of empirical differences between physical and human resources; these help us to appreciate the problem of production that entrepreneurs need to solve and the necessity of economic calculation to do so. In this reasoning, heterogeneity is a problem and economic calculation using some version of the value definition of capital is the solution.
My discussion should be read, then, as a plea for economists to consider all aspects of this process rather than only part of it. (We could say that the post-Smithian error was to look only at the beginning of it.) I believe Lewin does take the broader, more-complete view: my initial comment was directed at more-mainstream discussions that take the underlying entrepreneurial problems for granted.
The question remains, though: what we should call the physical goods used in production? As I explained in my earlier essay, I think our exact terminology is less important than clarity and consistency. Mises's "production goods" is a natural enough term and may help to avoid the confusion of capital goods.