A Capital Approach

7 July 2011 at 2:06 pm 1 comment

| Peter Lewin |

My thanks to Peter Klein (we have to be careful now to indicate which Peter is being addressed :-) ) and to O&M for this wonderful opportunity to participate in this forum. Though I have commented infrequently I have followed its musings with interest and profit. I am delighted to be here.

Perhaps, for my opening post, I might just mention a few areas of my past and current research that might be of interest.

  • As part of the Routledge series on the Foundations of the Market Economy I wrote a book entitled Capital in Disequilibrium which was published in 1999. It is still available, but it is very expensive ($200) — certainly not worth that price! Routledge recently released their copyright to me exclusively and I have just got through revising the book for a second edition to be published very soon by the Mises Institute. I had hoped to have some copies available at the upcoming AOM meetings in San Antonio, but this seems very unlikely now. Still, it will be easily available on their website and an open source version will also be there. The price of the book will be $15 I believe. Based on inquiries I have received, this will be welcome news for a few interested scholars.
  • I have made very few changes to the book — mainly stylistic improvements and corrections — but I have added a few references to relevant work that appeared after the first edition. For those who don’t know the work, it is basically an evaluative survey of capital theory Austrian-style. Capital theory has often been feared or avoided by economics students, never mind other interested scholars. I hoped and still hope that this book will provide them a comprehensive, sophisticated, yet accessible course in the subject. Of course, the amazing thing is the timing. The relevance of capital theory has, all of a sudden, burst upon the field of management and organization studies. Having discovered and digested Schumpeter and Kirzner, management scholars have now, in turn, discovered Lachmann. How delightful it is for me to see Lachmann’s insights being applied in this kaleidic, digital world. I know this would have pleased him beyond words. (A real paradox of sorts, because I cannot imagine he would ever have mastered the technology for his own personal use :-) ).
  • Regarding the book, of course the material is at least twelve years old. Yet, those wishing to understand the recent work using concepts like radical subjectivism, capital heterogeneity, capital complementarity and subsititutability, etc. would probably find it useful — and need not pay attention to the every page. Chapters 2 and 3 seem to me particularly important for an understanding of the concept of equilibrium and disequilibrium about which so much confusion is evident in the literature. Chapter 9, and less so Chapter 10, address specifically the question of capital combinations in business organizations. The final part of the book is about human capital and creates a bridge between the work of Lachmann and Gary Becker.

Thinking about things from the “capital point of view” is both a tool and a constraint — I have a hammer and everything looks like a nail. I have worked and am working on other things, but to round out this post let me mention some recent work along the same lines.

  • Let me state dogmatically that I believe that an understanding of the nature of capital is indispensable to an understanding of production and business activity. I am continually struck by the mistakes that eminent scholars make for lack of this understanding. A somewhat pedantic but fairly well-cited article that addresses this can be found here (written with Steve Phelan; it is a slightly different version of the chapter in  the book Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization edited by Foss and Klein, the form in which it is usually cited).
  • An article for which I have great hope is entitled “The Capital-Based View of the Firm” and can be found here. It is co-authored with Howard Baetjer. At the time I wrote Capital I knew of Howie’s work subsequently published in his book Software as Capital, and there is a brief mention of the basic idea in the book, but, clearly, this is the most glaring omission from my book. This article hopefully rectifies that. I believe it is very important.
  • Here is a quick take: One cannot understand the nature of capital without understanding its connection to knowledge. Howie brilliantly showed that capital goods are basically embodied productive knowledge – knowledge of how to get certain things done. It is this knowledge-aspect of capital goods that makes them, in combination with other capital goods and with human capital, valuable. Fundamentally, there is no categorical difference between physical capital and human capital in this regard. To be useful they must both embody potentially useful knowledge. And we all know (from Hayek and Polanyi, and from Lachmann) the problems associated with the management and creation of useful knowledge. The only relevant difference between human and physical capital as instruments of production to be organized and managed, is that the former is alienable (ownership of it can be transferred) and the latter is not. Managing human capital involves relationships. This leads to insights about the firm management, boundaries, organization, etc. (In some ways it is an extension of the Knowledge Based View of the Firm).
  • Finally, I am busy on a paper (at least one) provoked by the interesting work of Todd Chiles and co-authors in a half dozen or so recent articles, specifically addressing Lachmann’s (and sometimes Shackle’s) concept of radical subjectivism. I am reexamining this concept and this work in the hope of providing greater clarity as to what it implies, and more importantly, what it does not imply. In doing so I have had to use Lachmann’s work on social institutions, in The Legacy of Max Weber — rereading it with great interest and seeing how amazingly relevant it still is or has become.
  • This work is connected to and arises out of the growing field of study into the nature of entrepreneurship. Indeed the connection between capital and entrepreneurship is clearly addressed by Lachmann. I have a recent paper, in need of revision, a link to which appeared recently on this site: “Entrepreneurial Paradoxes” — here.

I look forward to participating in the discussions on this blog and will be happy to answer any questions.

Entry filed under: Austrian Economics, Entrepreneurship, Former Guest Bloggers, Strategic Management, Theory of the Firm.

Introducing Guest Blogger Peter Lewin Organizational Charts

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).