Re: Capital Theory?

Bogart — Mon, 18 May 2009 18:19:20 GMT

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The best source is Robert Murphy and his articles and podcasts available at this website.

My view:

Austrian Capital Theory is the idea that capital investments do not appear instantly to satisfy human desires. They are the product of savings (Deferred Consumption) by entrepreneurs who collect savings and then use them to start businesses in order to satisfy human desires in the future. The entrepreneur is risking this capital to generate future profits BASED upon their best guess at future demand. So the best way to promote future savings and the development of capital resources allocated most in line with consumer preferences is to have lots of entrepreneur taking lots of risks. The idea here is that some/most will fail but a small portion will not and will be able to make profits in the future thus improving the lives of consumers.

Contrast this with the non-existent view of capital by the current crowd of people running the Federal Reserve and the government. These folks think that business attract capital and create capital goods out of the same stuff that money comes from: NOTHING (Known as inflation). So they feel that because entrepreneurs can create capital goods with little effort then they only need to "stimulate demand" and the capital resources will just appear.

You can see that the later is a significant part of the creation of business cycles. That is: Entrepreneurs have to invest real resources to make the stuff demanded by consumers. The inflation sends signals to entrepreneurs that the future demand is different than it would be. So the entrepreneur makes investments in real capital goods and processes. When the results of the inflation become apparent in the forms of higher prices or whole sectors of the economy not being able to pay off debt, these businesses fail making the problems worse. The ultimate example of this a builder of homes who sells to people using adjustable rate mortgages. When the mortgage rates bottomed the borrowers had not problems paying them off. But as the central bank increased interest rates to combat inflation, the increases in mortgage payments proved too much for a large number of folks who defaulted causing the whole bubble to burst.

Capital Theory?

Schmitto2121 — Mon, 18 May 2009 15:28:21 GMT

Can someone give me a quick summary of the Austrian Capital theory? I am using this in my paper on the Fed by stating 'The Federal Reserve makes many Americans believe wealth can come out of nowhere when they resort to their disastrous counterfeiting" something like that then goin on, on how capital actually comes about.

Economics Questions

Re: Capital Theory?

Capital Theory?