Vol. 2, No. 3, Summer
1980
Introduction to Modern Austrian Capital Theory
by Malte Faber
New York: Springer-Verlag, 1979, pp. x, 196
Six years ago, Sir John Hicks' third book on capital theory appeared,
bearing the title Capital and Time: A Neo-Austrian Theory. Critics
who consider the tenets of subjectivism and methodological individualism
to be central to the Austrian tradition questioned the validity of the
subtitle. Ludwig Lachmann, in particular, argued that Sir John's work was
inspired by Ricardo and Walras rather than by Menger and Hayek and that
his book is to be viewed as a specimen of formalism as opposed to subjectivism.
It seemed clear at the time that Lachmann's own Capital and Its Structure
and Hicks' Capital and Time were, methodologically speaking, at
opposite ends of the spectrum. We now have evidence that only half of the
spectrum was in view. In the book presently under review, which is part
of a series of "Lecture Notes in Economics and Mathematical Systems," Sir
John's subtitle is once again called into question. This time the objection
is not that the analysis is formalistic but that the formal analysis is
confined to the supply side of the market. Consumer preferences, time preferences
in particular, should be given similar treatment.
If we were to travel the
distance from Lachmann to Hicks and then continue in the same direction
beyond Hicks for a comparable distance, we would find Malte Faber. We can
also locate Faber's end of the spectrum with respect to other contemporary
authors who have contributed to the development of Austrian capital theory.
While there is only one reference to Lachmann, there is none to Mises,
Kirzner, or Rothbard. References to Hayek are limited to his Pure Theory
of Capital. Neo-Austrian capital theory owes its existence, in the
author's view, to such contributors as Bernholz, Fehl, Hicks, Jaksch, Reetz,
and von Weizsacker.
Faber's treatment of the
issues in capital theory is offered in the format of a textbook complete
with problem sets at the end of each of the book's nine chapters. The argument
builds from chapter to chapter, and continuity is maintained throughout.
References and cross-references are abundantly supplied. The organization
is remarkable, especially in view of the fact that several of the chapters
are reworked papers published earlier, some co-authored with Peter Bernholz
and others.
Although this review is
addressed to those uninitiated in mathematical economics, Faber's book
is not. The preface indicates that the only prerequisite is a familiarity
with Cramer's rule and the Kuhn-Tucker conditions. (Cramer's rule is a
procedure that yields a pro forma solution to a set of simultaneous
equations whose parameters have unspecified values. Kuhn-Tucker conditions
are a set of conditions under which some stipulated variable takes on its
maximum value.) But the author freely admits that some passages of the
book are mathematically demanding. For the mathematically trained economist
the problem is not one of following the sequence of manipulations of the
equations presented. As is typical of this literature, the problems are
those of understanding precisely what economic concepts are being symbolized
and understanding the full implications of all the simplifying assumptions
that were required to allow the issues to be cast in a mathematical mold.
If these problems are particularly telling in Faber's book, it is because
his methodic and meticulous presentation reveals that the problems are
inherent in the mode of analysis.
The limitations of mathematical
analysis of economic issues can be illustrated by considering Faber's own
introductory chapter. Two questions are identified which, according to
the author, are the main concerns of Austrian capital theory: What is capital?
Why is the rate of interest generally positive? That the book is aimed
almost exclusively at answering the second question is not just a matter
of taste. Given the techniques employed, an answer to the first question
is completely out of reach. Representing capital with a symbol does not
tell us what capital is. Constructing a model that allows for only one
capital good and theorizing in terms of units of the capital good serves
to skirt, rather than answer, the fundamental questions in capital theory.
In the second chapter, Faber
provided a short guided tour through that portion of the history of Austrian
capital theory which is relevant to his own contribution. The tour can
be easily put into perspective. Faber begins with Böhm-Bawerk and
follows those developments that gravitate toward the identification of
purely technological relationships between inputs and outputs. This takes
him from Böhm-Bawerk to Wicksell and then on to von Stackelberg, where
a "theoretical dead-end" stifles further developments. (Böhm-Bawerk
and Wicksell dealt only with continuous-input/continuous-output models.
Von Stackelberg's contribution consisted of developing additional models
characterized by alternative input-output configurations.)
In the mid thirties von
Neumann provided a way out of the theoretical dead-end by developing a
model of general equilibrium based on the work of Walras and Cassel. This
is explained in Faber's third chapter. The von Neumann model differs from
those of Walras and Cassel in several respects. It recognizes, for instance,
the possibility of "circular production," e.g. while coal may be used in
the production of steel, steel is used in the production of coal. The model
also allows for joint production, for the production of intermediate goods,
and for the existence of several different production techniques for each
good produced. But if the von Neumann model represents a high-water mark
in technique, form, and generality, it represents a low-water mark in substantive
economic content. The model contains no primary factors of production and
permits no consumption! At the end of each period all outputs are employed
as inputs for the next period. As Faber recognizes, the von Neumann model
represents a "slave economy with an incessive [sic] increase in
production as its only goal." The complete lack of any consumption activity
strikes Faber as being "peculiar." The ultimate assessment, however, is
that von Neumann's analysis is "clear, concise, and consistent." Faber
does note that Koopmans, with support from Champernowne, is on record with
the judgment that von Neumann's model is "rather poor economics."
Faber seeks to preserve
the technique while correcting for the deficiencies in substance. The core
chapters of his book (Chapters 4, 5, and 6) are directed toward this end.
Matrix algebra is used to construct a "modified special case of the generalized
von Neumann model." The modification consists of introducing a demand for
consumption goods; the speciality derives from restricting the model to
a single capital good and a single consumption good; and the generalization
is achieved by relaxing the assumption of a steady state. Summarizing the
payoff of the core chapters, Faber states that the von Neumann model as
modified allows us to "demonstrate that superiority, roundaboutness and
impatience or neutrality of time preference are sufficient conditions for
the interest to be positive. (This can be compared with the positions of
Mises, Fetter, Rothbard, and Kirzner that (positive) time preference alone
is both a necessary and a sufficient condition for a positive rate of interest.)
Chapter 7 discusses the
"Schumpeter-von Böhm-Bawerk controversy on the rate of interest in
the stationary state" in terms of the modified von Neumann model. The final
two chapters compare the author's own work with other approaches to capital
theory. Chapter 8 deals with neoclassical capital and growth theory, and
Chapter 9 considers Hicks' neo-Austrian theory of capital. The most significant
differences stem from Faber's treatment of demand.
While we should applaud
Faber for introducing demand into the analysis, we should applaud with
one hand only. For he treats demand (as well as supply) in terms of a centrally
planned economy. Even in the short section at the end of Chapter 4 entitled
"Decentralizing the Decisions," he finds it necessary to assume that there
is only one consumer or that there is a "ministry of consumption," and
whoever is pulling the demand strings is a price-taker. This highly stylized
formulation draws attention to other features of Faber's analysis which
will undoubtedly trouble the reader who learned his Austrian capital theory
from Mises and other Austrian subjectivists. There are no market processes
in Faber's model. There are no money prices that convey market information.
In fact, there is no money in the model. Expectations about the profitabilities
of alternative investments (or about anything else) play no role at all.
Each investment is immune from risk and uncertainty, and all investments
are assumed to be perfectly coordinated. Thus, the model has no use for
entrepreneurs. And despite all the discussion about multiple periods, the
temporal structure of production, and roundaboutness, Faber is actually
offering us a timeless model. It is timeless in the sense that there is
no analytical distinction between the past, the present, and the future.
This is sometimes called "meta-static" analysis. Production and consumption
may take place over time, but all the economic decisions about what to
produce and how to produce it are made on the seventh day of creation by
the central planning authority and the ministry of consumption.
What leads an economist
to produce such a model? Observers of the economics profession, who have
witnessed the emergence in recent years of technique-bound theorists, will
recognize Malte Faber as the paradigm case. Throughout his book, Faber
has allowed the applicability of the mathematical method to define the
scope of his study. As a result, almost all the economic issues traditionally
considered important have remained a good distance out of his reach. The
willingness to forsake subject matter in order to preserve technique, we
should note, has been the hallmark of formalism for some time. It was the
profession's formalistic tendencies in the mid thirties that provoked Hayek
to remark, "[F]rom time to time it is probably necessary to detach one's
self from the technicalities of the argument as ask quite naively what
is it all about."
Roger W. Garrison
Auburn University
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