Edited by Peter J. Boettke
Chapter 9: Some Implications of Capital Heterogeneity
Benjamin Powell* 9.1 Introduction A tractor is not a hammer. Both are capital goods but they usually serve different purposes. Yet both can be used to accomplish more than one goal. A tractor can be used to plow a field, pull a trailer, or any number of other tasks. A hammer could be used by a carpenter to build a house or by an automobile mechanic to fix a car. The fact that a tractor and hammer serve different purposes but yet each is capable of serving more than one single purpose should seem obvious. Yet the consistent application of this observation to economic theory is one of the unique aspects of the Austrian school and it has led the Austrian school to come to unique conclusions in areas ranging from socialist calculation, to business cycles and to economic development among others. Capital goods are those goods that are valued because of their ability to produce other goods that are the ultimate object for consumption. Because these capital goods are heterogeneous and yet have multi-specific uses we must coordinate economic activity to best align the structure of capital goods to most efficiently produce consumer goods without leaving any higher valued consumption wants unsatisfied. The coordination of consumption plans with the billions of ways the capital structure could be combined to satisfy those consumption plans is one of the major tasks any economy must accomplish. Yet, often formal economic models reduce capital to a single homogeneous stock “K” and by doing...
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