Entrepreneurship and Capital Theory

16 February 2008 at 2:05 pm Nicolai Foss 23 comments

| Nicolai Foss |

Suppose all capital were what Robert Solow called “Shmoo” (after a Lil’ Abner cartoon; check this for some Shmoo info), that is, a homogenous substance. In such a world, the (intertemporal) coordination problem deals only with selecting the intensity of the input services that must be supplied over time to match consumer preferences. All capital assets are substitutes, so there is no path-dependence. Asset prices are presumably instantaneously equilibrated. In such a world, there are no coordination problems and no Misesian “calculation” problems. Many decision problems disappear as there are no costs of inspecting, measuring, and monitoring the attributes of capital assets. Decision makers do not reach the bounds of their rationality. In sum, a world of homogeneous capital is a world where there nothing (or very little) for entrepreneurs to do.

However, as Ludwig Lachmann stated in Capital and Its Structure (1956: 16): “We are living in a world of unexpected change; hence capital combinations . . . will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.” However, for the notion of “capital combinations” to be non-trivial, it must involve capital heterogeneity. In other words, entrepreneurship and capital heterogeneity are closely connected.

In a recent paper, imaginatively titled “Entrepreneurship and Heterogenous Capital,” Peter and I spell out this theme. The paper will appear (sufficiently revised) as a chapter in our forthcoming book, Organizing Entrepreneurship: Judgment and the Theory of the Firm (Cambridge University Press). We are grateful for comments! Here is the abstract:

Entrepreneurship is ultimately about the arrangement of resources into productive activities. Much of the entrepreneurship literature, however, has focused on the demand side of the market. While resource heterogeneity is a feature of many theories of the firm, such theories are not built on a systematic theory of capital. We show how the approach to capital developed by the Austrian school of economics provides a natural bridge between theory of entrepreneurship and the theory of the firm. We refine Austrian capital theory by defining capital heterogeneity in terms of subjectively perceived attributes, the functions, characteristics, and uses of capital assets. Such attributes are not given, but have to be created or discovered by means of entrepreneurial action.

Entry filed under: - Foss -, Austrian Economics, Entrepreneurship.

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23 Comments Add your own

1. Joe Mahoney | 16 February 2008 at 2:34 pm

Although Lachmann’s (1976) Journal of Economic Literature paper on Austrian economics and the kaledic society is well known, it seems that, overall, Lachmann is under-appreciated in the history of economic thought. Do you and/or Peter have any insights on why this is so?
2. Rafe Champion | 16 February 2008 at 4:29 pm

Possibly he went a bit far along the line towards depicting the world in terms of clouds rather than clocks. The allusion is to a paper “On clouds and clocks” that Popper wrote to explore the way that human plans and intentions work in a universe that is supposed to be based on deterministic mechanical laws. He developed an idea of “plastic control” where the degree of order (control by the rules of the system) runs from one extreme (clouds or a school room) to the other (clocks and the solar system). But even the most rigid systems have a degree of slack (he was a physical indeterminist) and so there is scope for novelty and change, and with the evolution of human brains and language there is the opportunity for further change and novelty in traditions, organizations and markets, and also the elimination of error using the higher (critical) level of language in addition to the lower levels of expression, signalling and description. The point is that Lachmann overplayed the indeterminism card, even though he was aware of the role of plans in providing a degree of order and continuity. He probably played down the other kind of order that comes from the rules or laws that praxeology seeks to specify.
3. Rafe Champion | 16 February 2008 at 5:01 pm

More on “Clouds and Clocks” and the role of intentions and plans here, plus an early call on situational analysis for the human sciences. http://www.the-rathouse.com/2008/Popper-1960s-Papers.html
4. Nicolai Foss | 16 February 2008 at 5:14 pm

Rafe,
I think Knight and Mises could have agreed with this particular Lachmann quotation.
Thanks for the pointer to the Popper piece. I know it quite well. Spiro Latsis has a nice paper from the 1980s where makes a bit use of Popper’s distinction and the notion of plastic control (I am working on a paper with Teppo Felin where we discuss this notion).
5. Rafe Champion | 16 February 2008 at 5:50 pm

I wondered what Latsis did after the 1970s with his paper on situational determinism which completely overlooked the elements of choice and discretion in decision-msking. And his active role in the Lakatosian diversion (aided by funds from his father)!
6. spostrel | 16 February 2008 at 9:49 pm

I would be concerned that “arrangement of resources” is a rather bloodless way of talking about the management effort needed to get resources combinations to do useful things. Talk more about exploiting new interactions among resources to create new surplus, or whatever locution gets at that best, and you’ll focus your thought on the active work of management and entrepreneurship. It isn’t just flower arrangement.
7. Peter Lewin | 19 February 2008 at 11:31 am

I think the neglect of Lachmann’s contributions is attributable to a couple of things.

1. His work on capital theory and radical uncertainty was insightful, but its implications were not obvious. Instead, at the time that he wrote, he could easily be interpreted as a depressing nihilist – telling us what we could not say but not what we should do. He work is pretty much devoid of policy strategy implications – or at least as it was read then. In retrospect, he may have been ahead of his time. The advent of the knowledge economy has rekindled interest in his work – mostly in the management sub-fields (and most recently in entrepreneurial studies – which is fitting since, as I have argued Lachmann was most influenced not only by Hayek, but also by Schumpeter). This is very gratifying and seems to have enormous potential – for empirical cases and applications of his insights.

2. The second reason is related. I think Lachmann misunderstood the breadth of the heterogeneity of resources. So he missed its application to all aspects of human capital (including social and intellectual capital). He did deal with the nesting of capital structures within institutional structures – but this could have been and is now being taken much further.

PL.
8. Joseph Mahoney | 21 February 2008 at 7:02 am

Thank you Prof. Lewin for sharing your insights. I went to your home page on the web and I enjoyed reading several of your writings on your teacher Professor Lachmann. When I was an undergraduate at the University of Pennsylvania I was inspired by economists such as Arthur Bloomfield, Irving Kravis, and Sidney Weintraub.
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