Liberty Matters

Capital, Heterogeneity, and Momentary Equilibrium


I am happy to accept Matt McCaffrey's clarification as removing any disagreement between us. It appears that he, Geoffrey Hodgson, and I agree on the most desirable meaning of capital. Further, if a better terminology had been or were now adopted to distinguish capital goods from capital, there would be much less confusion and ambiguity. Thinking of capital in value terms also invites an appreciation of the indispensable role of accounting and finance conventions in everyday economic life.[16]
While we agree on the importance of heterogeneity, we should underline the equal importance of the heterogeneity of labor and the important economic implications that flow from that. Labor specificity is an incredibly significant aspect of labor markets and of observed macroeconomic phenomena. This falls out naturally from a view of capital that includes the capitalized value of labor services, such as in the human-capital framework. And the institutions of modern economies facilitate the evaluation of human capital in individual decisionmaking. For example, educated people get lower mortgage interest rates.
Geoffrey Hodgson is no doubt correct to bristle at the large list of "capitals" that now proliferate in the literature – as a response, I imagine, to the perceived opportunity for theoretical innovation by scholars hungry for achievement. Fetter's (and Mises's) approach suggests to me that only those categories which actually play a discernable role in individual decisionmaking should count – and in proportion to the significance they have in such decisions. For example, "reputation capital" is a real thing and plays a large role in the valuation of a business for purchase (brand name), while "erotic capital" should get the lack of attention it deserves. Looking at the list, it seems to me that most, if not all, of the categories collapse into aspects of human capital or social capital, the latter being the value to the individuals involved of the amenities in the environment available to them. For further discussion on capital as value, see Lewin and Cachanosky 2018b.
Fetter's approach is at once very concrete and subjectivist, as so well explained by Joe Salerno, and we should not lose sight of Fetter's broader contributions beyond capital, rent. and interest. Salerno shows how Fetter's conception of price is a "practical" one focusing on real-world trading individuals in real-world markets. A price is a real-world exchange rate between buyers and sellers. And the advent of such a transaction defines a market. The exchange rate reflects the valuations of the transactors, but price is not value. Value is subjective. Price is at its most precise in indicating value at the margin, the value to the marginal trader of the good in question. And at any moment, the fact that the market has one price indicates a momentary equilibrium of the "meeting of the minds" of the buyers and sellers.
Salerno wonders about the relationship between Fetter's work and the Austrians who were contemporary or came later, mentioning Böhm-Bawerk, Mises, and Rothbard. As I read Salerno's  description of momentary equilibrium, the meeting of minds, and the role of time in human affairs -- suggesting that we should think of separate markets succeeding each other in time as price and other things change, etc. -- I could not help thinking of Ludwig Lachmann's vision of the market process and momentary and market (Marshallian) equilibrium. Fetter's description of changes in markets in a dynamic economy, as conveyed by Salerno, sounds a lot like a description of social institutions à la Lachmann – for example, Lachmann's description of the role of the middleman. While I doubt that Lachmann was influenced by Fetter, it seems his vision would have been congenial to Lachmann.
[16.] In Fisher's The Nature of Capital and Income (1906) at least, such accounting and finance conventions were articulated to produce a view of capital very much like Fetter's.