Eugen von Böhm-Bawerk, whose name has come to be virtually synonymous with roundaboutness (of capital-using production processes), penned the original Austrian perspective on capital and interest. He wrote three volumes (History and Critique, Positive Theory, and Further Essays) over a span of a quarter of a century (1884-1909). In 1959 the 1,200-plus pages of Capital and Interest were translated into English by Hans Sennholz and George Huncke. Ludwig von Mises reviewed the new translation in The Freeman, where he described this monumental work as the most eminent contribution to modern economic theory. Mises went so far as to suggest—as only Mises could—that no citizen who takes his civic duties seriously should exercise his right to vote until he has read Böhm-Bawerk!
And now we have Israel Kirzner’s Essays on Capital and Interest (Edward Elgar, 1996, 166 pages, $59.95). There is no intent on the part of the author or the reviewer to station this volume between the voter and the voting booth. However, the position that this book occupies on the Austro-neoclassical landscape is an eminently strategic one—so strategic as to warrant our issuing a Mises-style taboo, not to voters, but to all economists who adopt the Austrian perspective. But first we must put into perspective this new offering by Professor Kirzner.
The significance of this volume is not diminished by the fact that all its separate parts, except for the 12-page introductory essay, have been published before. With greater accessibility and appearing now together, these Essays provide a virtual history—and prehistory—of the modern Austrian resurgence. Three decades ago, well before the resurgence began, Professor Kirzner wrote An Essay on Capital. The four parts of this book (on Unfinished Plans, Stocks and Flows, Capital and Waiting, and Measuring Capital) read like the work of a lone scholar trying—and succeeding in most instances—to satisfy himself. The 1966 Essay, possibly the most underrated of all his contributions, appears anew as the longest of the 1996 Essays.
In late 1974, Professor Kirzner presented a paper titled Ludwig von Mises and the Theory of Capital and Interest in a special symposium at the Southern Economic Association meetings in Atlanta. At that time, a year after Mises’s death, and the year that the resurgence began (with a conference in Vermont at which Professor Kirzner was a key participant), there was a small but eager audience for his Austrian perspective. Professor Kirzner shows how Mises’s theory differs from Böhm-Bawerk’s and how it compares favorably to the theories of J. B. Clark and F. H. Knight. In part a stocktaking, in part a research agenda for himself and for others, this paper was first published in 1976 along with other papers at the SEA symposium and published again in 1979 along with other writings by Professor Kirzner. Its appearance in the present volume provides a perfect segue between his early work on the theory of capital and his later work on the theory of interest.
The final essay, The Pure Time-Preference Theory of Interest, first published in 1993, is clearly the work of a well-seasoned scholar. Professor Kirzner’s good scholarship shines through in all his writings, but here we see him as a veteran of many symposia and conferences complete with their unyielding question-and-answer sessions. His work now has a growing and challenging audience. He responds to criticisms as if he has heard those criticisms many times in many different forms—because he has. The exchanges with allies and critics over the years have allowed him to clarify his own ideas and to offer them in the most rhetorically effective ways.
Ralph W. Pfouts, who offered a generally favorable assessment of the 1966 Essay in the American Economic Review, suggested that the Austrian perspective is not the magic wand that makes all mysteries disappear. Professor Kirzner, with his newly published Essays, and especially with his essay on the theory of interest, shows that it is very nearly that. Interest is always and everywhere a matter of time preferences. The primordial preference for the sooner over the later is the basis for a unified treatment of intertemporal exchange—whether the exchange is with nature or with other economic actors and whether or not it involves the use of capital. Tracing out the consequences of the systemic discounting of the future provides us with a Copernican account of an economic phenomenon that otherwise would have to be explained by what we might justifiably call Ptolemaic interest-rate theory. Capital-productivity theories and waiting-as-a-factor theories appear strained, partial, and oblique in comparison to the pure time-preference theory—that magic wand so skillfully wielded by Professor Kirzner.
If interest is to be understood in terms of time preferences, capital is to be understood in terms of multiperiod plans. An Austrian subjectivist perspective on capital features the plans of individual entrepreneurs—plans that are subject to revision as the attempts to carry them out reveal conflicts with reality and with the unfolding plans of other entrepreneurs. As Professor Kirzner demonstrates time and again, the forward-looking, plan-oriented account of a capital-using economy wins out over the alternative accounts that focus on some isolated slice of time or on the physical productivity of the produced means of production.
Professor Kirzner’s perspective on capital and interest constitutes the essential difference between Austrian economics and neoclassical (particularly Chicago) economics and the essential bridge between Austrian microeconomics and Austrian macroeconomics. The book itself contains much about the essential difference but contains little about the essential bridge. The reason for this lacking is not difficult to explain. While contributing importantly, along with F. A. Hayek and Ludwig M. Lachmann, as a bridge-builder, Professor Kirzner has never actually crossed the bridge himself. The short introductory essay includes a brief explanation of his reluctance to cross over into macroeconomics. According to Professor Kirzner (p. 2), recent Austrian work on Hayekian cycle theory [and presumably on Austrian macroeconomics generally] seems, on the whole, to fail to draw on the subjectivist, Misesian, tradition which the contemporary Austrian resurgence has done so much to revive.
We can guess what he has in mind here. Austrian macroeconomics features the intertemporal structure of production, the structure being defined as a temporal sequence of stages of production. For concreteness, the sequential stages are commonly identified with broadly defined industries, such as mining, refining, manufacturing, wholesaling, and retailing. Too quickly, all the multiperiod planning that goes on within and between these stages are allowed to gel into a simple Hayekian triangle—with its summary representation of the relationship between the time element in the production process (the roundaboutness of production) and the market value of final output.
The right triangle, which Hayek introduced in his Prices and Production, gave him a leg up on Keynes, who paid no attention to production time. Consumer spending was represented by one leg of the triangle. This macroeconomic magnitude had the attention of both Keynes and Hayek. The other leg tracks the goods-in-process as the individual plans of producers transform labor and other resources into the goods that consumers buy. The Hayekian triangle allows us to show that (1) increased saving can make for more output but only in the more-distant future and (2) monetary expansion can deceive the market and derail the process that would otherwise keep production plans on track with intertemporal consumption preference. All this is well and good. But once the theory has been recast as a Hayekian triangle that can be reshaped by preference changes and distorted by policy activism, it is all too easy for the Austrian subjectivist to become a not-so-Austrian geometrician. This is Professor Kirzner’s lament.
And so now it is time for our Mises-style taboo: No Austrian economist who takes his subjectivism seriously should draw a Hayekian triangle until he has read Professor Kirzner’s Essays! There is no inherent clash between the macroeconomic theorizing that the Hayekian triangles facilitate (including the Austrian theory of the business cycle) and the Kirznerian perspective that keeps the triangle adequately subjectivized. Quite to the contrary, it is precisely our understanding of the process that Professor Kirzner elucidates, the ongoing attempts on the part of many entrepreneurs to carry out their individual multiperiod plans (as guided by market rates of interest or as misguided by the central bank’s rate of interest), that breathes subjectivist life into those otherwise meaningless triangles.
Professor Kirzner may well believe that if our Mises-style taboo keeps would-be macroeconomists from crossing the bridge without first reading the Essays, then the book itself will dissuade the readers—as it has dissuaded its writer—from crossing the bridge at all. Others, however, may believe that even the fullest compliance with the taboo will allow—even facilitate—some subjectively respectable bridge crossings. Austrian macroeconomics is not the oxymoron that some have long suspected it of being. While those practitioners among us will quickly forgive Professor Kirzner for never crossing over into macroeconomics, they can offer nothing but praise for the job of bridge-building that he has done so well.
- Ludwig von Mises, Capital and Interest: Eugen von Böhm-Bawerk and the Discriminating Reader, Freeman, vol. 9, no. 8 (August) 1959, p. 52.
- Ralph W. Pfouts, Review of An Essay on Capital, American Economic Review, vol. 58, no. 1 (March) 1968, p. 98.
- Friedrich A. Hayek, Prices and Production, 2nd ed. (Clifton, N.J.: Augustus M. Kelley, Publishers, 1967 [originally published, 1935]).