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Capital in Disequilibrium: The Role of Capital in a Changing World
Capital in Disequilibrium: The Role of Capital in a Changing World
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From the Ludwig Von Mises Institute:
Peter Lewin here undertakes a difficult task and carries off his mission with notable success. He studied with the late Ludwig Lachmann, by whose thought he has been greatly influenced. But to carry on the work of his mentor, as Dr. Lewin in this book endeavors to do, prima facie raises a difficulty.
Lachmann famously argued that uncertainty pervades economic action. Action aims to achieve a result in the future, and future knowledge is by definition now inaccessible. Our author succinctly states Lachmann's central theme: "He [Lachmann] considers it axiomatic that the passage of time cannot occur without the arrival of new knowledge. Each moment in time is unique and time is irreversible. `As soon as we permit time to elapse, we must permit knowledge to change.'. . . I have referred to this as Lachmann's axiom" (p. 24).
Here the difficulty arises. If economic actors always act in the face of radical uncertainty, can the theorist say anything useful about action at all? Is he not reduced to playing endless variations on the theme of uncertainty? Lachmann's critics have not hesitated to speak in this connection of theoretical nihilism. Is economics in the style of Lachmann possible?
Dr. Lewin decisively meets this challenge. He convincingly shows that stress on uncertainty, far from dissolving economics, often promotes theoretical insights. To support his contention, he adduces a wide variety of topics in capital theory, including Hicks's view of capital and time and Becker's concept of human capital. One example must here suffice to show the power of our author's approach.
He argues that in the battle of the Cambridges, both sides relied on a false premise. The celebrated controversy pitted Joan Robinson and her acolytes at Cambridge University against Robert Solow and Paul Samuelson of MIT (located in Cambridge, Massachusetts). Mrs. Robinson devised ingenious counterexamples to the capital and growth theory that Solow and Samuelson had set out. This theory took capital to be part of a "production function"; like land and labor, it earns a fixed rate of return. "Because capital, like any other input, is subject to diminishing returns, it will be accumulated up to the point where the value of its marginal product just repays the opportunity cost of its employment" (p. 81).
The critics found this growth model beset with indeterminacy. How can one assume a fixed rate of return to capital, when the amount of capital cannot be measured apart from prices and the distribution of income? "It is not possible to separate the value and the quantity of capital" (p. 81). The thrusts of the Cambridge Neo-Ricardians forced Solow and Samuelson to execute a strategic retreat. They admitted some of the enemy's points but claimed that these were of dubious relevance to the actual world.
Dr. Lewin, putting to good effect what he has learned from Lachmann, indicts both groups for a common failing. Both assume equilibrium conditions; but this is precisely to ignore Lachmann's foremost lesson. Because economic actors face radical uncertainty, equilibrium models distort reality. "Neither side in the debate raises any questions relating to the availability or use of knowledge or expectations regarding production techniques. . . . Neither side wondered about the relevance of their framework to the market process as we know it" (pp. 82-83).
Our author's stress on time and uncertainty leads him to adopt the pure time preference theory of interest, and he brings to light a convincing argument from Lachmann against the possibility of negative rates of time preference (p. 106). But in one respect his laudable desire to convey the insights of his mentor betrays him. So anxious is he always to bring uncertainty to the fore that he advances fallacious arguments against Mises and Rothbard for daring to derive time preference as a pure category of action.
He charges Mises with logical contradiction: "he assumed the absence of uncertainty in order to `prove' the necessity of time preference as an implication of action, where action in a world without uncertainty is, by his own definition, logically impossible" (p. 104). But action under conditions of certainty is possible.
The argument to the contrary proceeds in this way: if you knew with certainty that something would happen, action would be pointless. Why attempt to bring about the inevitable? But suppose that you know both that an event will occur if and only if you act and that you will act. I know that I shall take in the mail if and only if I go to the mailbox and I know that I shall go there. Here action and certainty are quite compatible, Dr. Lewin to the contrary notwithstanding.
Peter Lewin here undertakes a difficult task and carries off his mission with notable success. He studied with the late Ludwig Lachmann, by whose thought he has been greatly influenced. But to carry on the work of his mentor, as Dr. Lewin in this book endeavors to do, prima facie raises a difficulty.
Lachmann famously argued that uncertainty pervades economic action. Action aims to achieve a result in the future, and future knowledge is by definition now inaccessible. Our author succinctly states Lachmann's central theme: "He [Lachmann] considers it axiomatic that the passage of time cannot occur without the arrival of new knowledge. Each moment in time is unique and time is irreversible. `As soon as we permit time to elapse, we must permit knowledge to change.'. . . I have referred to this as Lachmann's axiom" (p. 24).
Here the difficulty arises. If economic actors always act in the face of radical uncertainty, can the theorist say anything useful about action at all? Is he not reduced to playing endless variations on the theme of uncertainty? Lachmann's critics have not hesitated to speak in this connection of theoretical nihilism. Is economics in the style of Lachmann possible?
Dr. Lewin decisively meets this challenge. He convincingly shows that stress on uncertainty, far from dissolving economics, often promotes theoretical insights. To support his contention, he adduces a wide variety of topics in capital theory, including Hicks's view of capital and time and Becker's concept of human capital. One example must here suffice to show the power of our author's approach.
He argues that in the battle of the Cambridges, both sides relied on a false premise. The celebrated controversy pitted Joan Robinson and her acolytes at Cambridge University against Robert Solow and Paul Samuelson of MIT (located in Cambridge, Massachusetts). Mrs. Robinson devised ingenious counterexamples to the capital and growth theory that Solow and Samuelson had set out. This theory took capital to be part of a "production function"; like land and labor, it earns a fixed rate of return. "Because capital, like any other input, is subject to diminishing returns, it will be accumulated up to the point where the value of its marginal product just repays the opportunity cost of its employment" (p. 81).
The critics found this growth model beset with indeterminacy. How can one assume a fixed rate of return to capital, when the amount of capital cannot be measured apart from prices and the distribution of income? "It is not possible to separate the value and the quantity of capital" (p. 81). The thrusts of the Cambridge Neo-Ricardians forced Solow and Samuelson to execute a strategic retreat. They admitted some of the enemy's points but claimed that these were of dubious relevance to the actual world.
Dr. Lewin, putting to good effect what he has learned from Lachmann, indicts both groups for a common failing. Both assume equilibrium conditions; but this is precisely to ignore Lachmann's foremost lesson. Because economic actors face radical uncertainty, equilibrium models distort reality. "Neither side in the debate raises any questions relating to the availability or use of knowledge or expectations regarding production techniques. . . . Neither side wondered about the relevance of their framework to the market process as we know it" (pp. 82-83).
Our author's stress on time and uncertainty leads him to adopt the pure time preference theory of interest, and he brings to light a convincing argument from Lachmann against the possibility of negative rates of time preference (p. 106). But in one respect his laudable desire to convey the insights of his mentor betrays him. So anxious is he always to bring uncertainty to the fore that he advances fallacious arguments against Mises and Rothbard for daring to derive time preference as a pure category of action.
He charges Mises with logical contradiction: "he assumed the absence of uncertainty in order to `prove' the necessity of time preference as an implication of action, where action in a world without uncertainty is, by his own definition, logically impossible" (p. 104). But action under conditions of certainty is possible.
The argument to the contrary proceeds in this way: if you knew with certainty that something would happen, action would be pointless. Why attempt to bring about the inevitable? But suppose that you know both that an event will occur if and only if you act and that you will act. I know that I shall take in the mail if and only if I go to the mailbox and I know that I shall go there. Here action and certainty are quite compatible, Dr. Lewin to the contrary notwithstanding.
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