Thursday, July 22, 2010

Austrian Capital Theory

From Steve Horwitz @ FEE:
Capital is not like a bucket of water from which we scoop identical cups. Instead, capital goods, including human capital, have a limited number of specific uses to which they can be put. As Peter Boettke puts it, capital is not like Play-Doh, which can be formed into any shape, but like Legos, the versatility of which is limited by the sizes, shapes, and interconnections of the pieces.

Austrians speak of the need for capital to be “complementary” to other capital in order for it to help create an integrated production plan. A producer must have the “right” capital, that is, capital that “fits together.” An important implication here is that “more” capital isn’t always better. What firms need are pieces that fit, not just duplicates of what they already have.

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