The Representational Theory of Capital : Property Rights and the Reification of Capital

This book proposes a “representational” theory of capital according to which there is a relation between capital goods in the real side of the economy and instruments representative of property claims on those goods in the abstract side. Financial instruments are treated herein as a particularly liquid form of property claim. The relation proposed between these two things is a loose rather than a direct one, and the causes for (and consequences of) the looseness are explored in the book. This book aims not merely to simplify our understanding of the relationship between “things” and “claims to things,” but to make explicit and precise what many current researchers assume implicitly and, consequently, imprecisely. This book will be a tool that researchers can apply to their own research, in the form of a standard by which inconsistencies in the literature on Capital Theory can be identified. Understanding what capital is requires delving into its nature on both the real and the abstract sides. In regard to capital goods, what they actually are is made clearer by the thesis that they exist on a spectrum with respect to consumer goods. In going back to the philosophical and economic basics, no claim is made of being comprehensive. The argument is that a crucial idea for our understanding of what capital is that actual capital goods (and processes, and knowledge) are represented in financial instruments and other property claims. A formal treatment that lays out the philosophical and economic basics is necessary to put this idea across, and the model proposed in the book is a first step in that direction. Further, by laying out the philosophical and economic basics of the theory, the book offers the reader the reasons why having a clearer concept of capital is an important tool for wealth creation, and why wealth creation is, more than never, necessary for our individual wellbeing and the flourishing of our civilization. Cover 1 The Representational Theory of Capital 2 The Representational Theory of Capital: Property Rights and the Reification of Capital 4 Copyright 5 Dedication 6 Contents 8 List of Figures and Tables 10 Figures 10 Tables 10 Preface 12 Acknowledgments 14 Part I 16 Chapter 1 18 Introduction 18 The Structure of the First Two Chapters 19 The Social Relevance of Capital Theory 19 On Whether Economic Growth Can or Should Be a Policy Goal 22 The Baleful Consequences of Robert Skidelsky’s Keynesianism 30 Inequality of Income and Redistribution 34 Can Capital Theory Be Abolished? 47 The Hybrid Nature of the Monetary System: Historical Origins, and Implications for Capital Theory 50 Three Banking Variables, and How Comparing Them Plays Out in Capital Theory 54 Monetary Theory Leads to Capital Theory—or at Least It Should 55 Some Heuristic Considerations Relevant for This Work 56 Epistemological Limitations 58 Joan Robinson, the Production Function, and the Theory of Capital 60 More Cambridge Controversies in the Theory of Capital 62 Fictitious Capital and Property in Marx 65 Notes 67 Chapter 2 72 Austrian Capital Theory, Legal Rights, and Capital Representation 72 Carl Menger on Capital Theory 75 Böhm-Bawerk on Legal Rights, Relationships, and Economic Goods 81 Hayek and the Pure Theory of Capital 86 Lachmann and the Capital Structure 89 Notes 109 Part II 112 Chapter 3 114 The Reification of Capital, the Representational Theory of Capital and Its Model 114 An Exercise in Abstraction 117 From What Starting Point? 119 A “Property Rights” Theory of Capital 121 The Inheritance from Roman Law 123 The Model 126 Two Simple Examples 126 What Do Stocks and Flows of Financial Instruments Actually Represent? 127 Monetary Disequilibrium and Capital Theory 128 A Theory of Capital As a Particular Sort of Property Claim 131 Is There a Relationship Between Certain Goods and Certain Financial Instruments? 132 If Not All Goods Are Represented by Financial Instruments, Are There Financial Instruments that Represent No Goods? 134 Putting These Issues in the Context of Modern Asset Pricing 135 Notes 138 Chapter 4 144 The Epistemological Problem of Capital 144 The Market Is Not a Phenomenon Open to Cartesian Analysis 146 Price Elasticity’s Implications for Money and Banking Arrangements, Bad and Good 149 Notes 150 Part III 154 Chapter 5 156 The Real Side 156 A Continuum of Use 158 A Reasonable Interpretation of Lachmann’s Concept of Capital 161 Capital Goods Have Different Levels of “Permutability” 163 Capital Goods Are Heterogeneous 165 Capital Goods Are Complementary 167 Notes 168 Chapter 6 170 The Spatial Dimension of Capital 170 Notes 173 Part IV 174 Chapter 7 176 The Abstract Side 176 Equity Claims and Their Derivatives 176 Things Owned by Political Entities 177 Notes 179 Chapter 8 182 Financial Instruments 182 Further Refinements, Including the Financial Instruments Issued by Sovereign Entities 183 What Would “the Treasury View” of Libra Be? 184 The Relation between Capital Goods and Financial Instruments 187 Notes 187 Chapter 9 190 A Dynamic Model 190 On the Importance of Time 192 Note 193 Chapter 10 194 The Relation between Money and the Structure of Production 194 Business Cycles and the Equilibrating Role of Interest Rates 196 The Keynesian Perspective on the Real and the Abstract Economy: A Critique 202 Inflation and the Structure of Production: Comparing the Austrian and the Monetary Disequilibrium Approaches 204 The “Suprasecular” Decline of Real Interest Rates 208 Notes 210 Part V 212 Chapter 11 214 Conclusion 214 Jacques Rueff's Theory of False Rights 214 Conclusion 219 Notes 221 Epilogue 222 The Consequences of the Chinese Coronavirus Pandemic 229 Note 231 Glossary 232 Glossary of Terms in the Model 236 Bibliography 240 Index 250 About the Author 264