Monday, July 14, 2014

Capital goods: The produced means of production?

One of the few times I recall disagreeing with Israel Kirzner was when we discussed what should be considered a capital good. I took Lachmann's view: "When capital is defined, with Boehm-Bawerk, as the 'produced means of production' land is, of course, excluded. But to us the question which matters is not which resources are man-made but which are man-used. Historical origin is of no concern of ours." -- Capital and Its Structure, p. 11

For a general theory of capital, this seems to me exactly right. (I put it this way because I don't wish to deny that for special purposes, we might need to distinguish between produced and non-produced goods.)

Consider: I have a pile of fieldstones that I am using to build a stone wall. I pick one stone from the pile and carefully chip away at it with my stone hammer and chisel until it is the perfect shape I need for my wall. I put it in place and turn back to my pile.

To my pleasant surprise, the next rock I spy just happens to be, naturally, of the same shape that I worked so hard to achieve with the previous one. I simply pick it up and place it in my wall.

The point being that each of these stones now plays an identical part in my production plan, which is to build a finished stone wall. (We might even imagine that my wall is itself a capital good, as an element in my creating attractive grounds for my new bed-and-breakfast establishment.) Indeed, sometime later, I might not even be able to recall which stone I worked hard to shape and which I was lucky enough to find suitable as is. If one of them cracks, I will have to do identical work to repair it. If I must rebuild the wall, they will be equal candidates for inclusion in the new wall. So why should the first stone be considered a capital good, but the second one not?

But Kirzner did not agree: he accepted Boehm-Bawerk's distinction. However, it was not clear to me why he did so.

Any ideas?


  1. What exactly is a capital good?

    1. An element in a plan to produce a comsumer good.

  2. Possibly the work involved in choosing, picking up and placing a perfectly-shaped stone into your wall constitutes a form of production?

    1. Yes, Mr., but then Boehm-Bawerk's definition loses its bite: I also have to pick out and purchase a piece of land for my business! And he means to exclude land.

    2. yes, it seems to me that excluding land would only make sense if the land was unowned. As soon as you establish some sort of legal ownership of the land, you have produced something.

  3. Is there even a clear-cut distinction between capital goods and consumer goods? A saucepan is normally considered to be a consumer good, yet it is only used as a tool to produce food. Land itself could be considered as a consumer good if it is a park or a garden.

    1. First of all, keep accounting separate from economic theory: they use the same words differently. (E.g., "profit.")

      In econ theory, there is: a sauce pan is almost always a capital good, unless it is just hung on a rack for its beauty. And certainly land can be a consumer good. The difference is in the use, not the good!

  4. In this link

    Fetter lists Böhm-Bawerk's reasons for making this distinction:

    1. Land is immovable. Capital is, for the most part, movable.
    2. Land is a gift of nature. Capital is a result of labor.
    3. Land cannot be increased, capital can be.
    4. The social and economical position of the landlord is essentially different from that of the capitalist.
    5. Property in land and property in movables are justified on essentially different grounds, and they are commonly attacked by quite distinct people.
    6. Land is the special agent in a kind of production [agriculture?] that is economically distinguished by many important peculiarities.
    7. The income from land differs in many ways from income from capital.
    8. Using capital for all material means of acquisition leaves us no name for produced acquisitive instruments.
    9. Popular usage does not put land under capital, but opposes the two.
    10. Usage does not apply the term "interest" to the income from land

    Did Kirzner ever indicate if he shared some or all of these reasons for agreeing with Böhm-Bawerk categorization of land ?

    1. No he didn't.

      The reasons above strike me as good reasons why for some purposes we might want to differentiate these things. For general purposes I find Lachmann's argument decisive.


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