Liberty Matters

Two Comments on the Conception of Capital


1. I am in profound agreement with Peter Lewin and Geoffrey Hodgson that the long-entrenched use of the terms capital and capital goods for two completely distinct categories of phenomena has bred much confusion and error in capital theory since Adam Smith's day. Given that these terms are tightly lodged in the vocabulary of economists, however, and very unlikely to be changed, I think it prudent to try to surmount the semantic problem by insisting on absolute clarity in conceiving of the referents of these terms.  Here, I think the use of Mises's vivid rhetoric to describe the "accounting" concept of capital may aid us in our common endeavor.  Thus Mises (1998, 511) writes:
The idea of capital has no counterpart in the physical universe of tangible things. It is nowhere but in the minds of planning men.
Following Mises, we can explain the difference between the two concepts in the following way. The concept of a stock of capital goods is, like an actual price paid, a first-order abstraction of an observable and concrete outcome of valuation and action that is "out there" in the world. Capital is, by contrast, from the standpoint of the economist-observer, a second-order abstraction that refers to unobservable mental categories used by the actors under analysis in evaluating and planning the use of concrete objects of action, that is, the stock of heterogeneous capital goods. These concepts are complementary in explaining the role of entrepreneurship in production. Here, I agree with Rothbard (1977, 6): "Fetter's idea of capital as a fund of capital and the Austrian view of capital as concrete capital goods are not inconsistent; they play roles in different areas of capital theory." 
2. I wholeheartedly concur with Geoffrey Hodgson's clarion call to battle against the seemingly endless proliferation of concepts designated by the term capital. We should be unrelenting in our insistence that the term capital goods refers to more-or-less durable and reproducible producers' goods that are the sources of services actually exchanged on the market for monetary rents and that these "rent-bearers" (to use Fetter's felicitous term) themselves are alienable items of property that are also exchangeable on the market for the capital value of their prospective rents.
Peter Klein (2009) has given a trenchant critique of "the expansive use of 'capital' to describe any ill-defined substance that accumulates and has value," and I take the liberty of quoting him at length:
Hence knowledge, experience, and skills become "human capital" or "knowledge capital"; relationships become "social capital"; brand names become "reputation capital"; and so on. I fear this terminology obfuscates more than it clarifies.I don't mind using these terms in a loose, colloquial sense: By going to school I'm investing in human capital or diversifying my stock of human capital; if this gets me a high-paying job I'm earning a good return on my human capital; as I get old I forget new things, so my human capital is depreciating rapidly; and so on.But we shouldn't take these metaphors too literally. In economic theory, capital refers either to financial capital or to a stock of heterogeneous alienable assets, goods that can be exchanged in markets and analyzed using price theory. Their rental prices are determined by marginal revenue products and their purchase prices are given by the present discounted value of these future rents. Knowledge is not, strictly speaking, capital, because it is not traded in markets and does not have a rental or purchase price. What markets trade and price is labor services, and it is impossible to decompose the payments to labor (wages) into separate "effort" and "rental return on human capital" components. Some labor services command a higher market price than others because they have a higher marginal revenue product [MRP]. Some of this wage premium may be due to intelligence or experience, some due to complementarities with other human or nonhuman assets, some due to hard work, and so on. But these are all determinants of the MRP, and hence the wage, not different kinds of factor returns.Moreover, the entrepreneur needs cardinal numbers to compute the value of his capital stock, to know if it is increasing or decreasing in value, and so on. I can't measure my stock of human capital, I don't know for sure if it is increasing or decreasing over time, I can't calculate the ROI [return on investment] of a specific human-capital investment, etc., because there are no prices and no measurable units. Knowledge may be "like capital," in the sense that it lasts, that you can add to it, that you benefit from it, etc., but it isn't literally a capital good like a machine or a refrigerator.