Saturday, October 5, 2019

In The General Theory, Keynes Is Puzzled by the Austrian School's Use of the Term “Capital Consumption”

The matter was relevant to the Keynes–Hayek debate as well. As Horwitz (2011) notes: “In the only real mention of the Austrian view of capital in The General Theory, Keynes (1936) says:”
It seems probable that capital formation and capital consumption, as used by the Austrian school of economists, are not identical either with investment and disinvestment as defined above or with net investment and disinvestment. In particular, capital consumption is said to occur in circumstances where there is quite clearly no net decrease in capital equipment as defined above. I have, however, been unable to discover a reference to any passage where the meaning of these terms is clearly explained. The statement, for example, that capital formation occurs when there is a lengthening of the period of production does not much advance matters.
Horwitz continues:
Keynes’s dismissiveness aside, this passage reveals much about the differences in approaches. Keynes seems puzzled by the Austrian claim that capital can be “consumed” even though there is no net decrease in physical capital. The answer to the puzzle is that capital, for the Austrians, is about value, not about the physical object itself. If we build a machine in anticipation of some specific future demand and then discover our expectations were wrong, the machine will drop in value (which is a form of capital consumption), but it does not crumple into dust. Capital goods are valued in terms of the (discounted) value of the future consumption goods they will produce. If consumer demand changes, the value of the capital good changes (assuming it is insufficiently versatile to produce whatever new product is now in demand) and capital-value is lost, thus capital has been consumed even though the physical stock of capital has not changed. This [is important in any] discussion of the business cycle. (Horwitz, 2011)
—Peter Lewin and Nicolas Cachanosky, Austrian Capital Theory: A Modern Survey of the Essentials, Cambridge Elements in Austrian Economics (Cambridge, UK: Cambridge University Press, 2019), 31.


Wednesday, October 2, 2019

Governments Are Themselves Always, and Without Any Exception, the Greatest Spendthrifts in the Society, According to Adam Smith

Smith also wrote of the dangers of government spending with the kind of insight that the years since have done nothing to diminish the relevance of. The propensity of governments to profligate waste was recognized by Smith in ways that every generation has had to learn over again for itself:
It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people … They [governments] are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
—Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.