Tuesday, November 15, 2016

Capital Theory

Only Austrian Economics describes the structure of production in the pragmatically intricate manner that Murray Rothbard does in his book Man, Economy and State.

Eugene Bohm-Bawerk sowed this theory coined Capital Theory. Mises subscribed to it, and Hayek built upon it. The Hayekian triangle may be a bit more abstract than Rothbard's transliteration, yet ultimately it is the same concept.

Austrian Economists tend to agree that Rothbard delineates it best.

Mainstream economists describe the structure of production numerically, having an exact number of stages. These categories they describe, to them, are absolute. They term this process, the Production function.

The mainstream economists reify the production function with mathematical designs and numerical symbols. One common description is seen in the form of a parabola.

This theoretical shape is depicted as a line that is rounded upward toward a point, the apex, and a repetition of this rounded linear pattern downward.

This pattern is abstract, prices in the real world do not make these shapes. Data scientists and model builders design them using averages.

For scholars, the demand of all consumers in the market aggregated together, can be controlled with monetary injections. This in turn would stimulate Savings and Investment.

Their assumption is that everyone does the same thing at all times. Presumably we are all mechanical. Hence, the term panphysicalism.

The Austrians explain what the mainstream calls the Production function, quite straight forward.

There are many stages of production. How many stages there actually are, we are unaware. We only know that there are a plethora, and they exist over a period of time. They represent the various markets.

The structure of production is theoretically explained by tracing money income from the consumer stage, final stage, which travels through the various higher order stages, and finally arriving at land and labor. At each stage the producers yield a rate of return, a monetary income.

Reversing the process, one can trace productive effort. At each stage capital goods of that order are produced with the aid of the cooperating factors of the previous stage. Land and labor are mixed to produce a capital good.

Capitalists are those whom advance factors of production to the various stages of the production process. All of this exists over a period of time, and this period of time is subjective.

To perform this task, capitalists use the savings that was withheld from being consumed. Capitalists are, in essence, entrepreneurs.

With more savings, the structure of production grows, more stages are added. When miscalculation occurs, and companies fail, some stages disappear. The market readjusts.

When certain sectors of the economy are distorted, meaning that certain prices are monopolized, the various stages that arise are built upon false price spreads. Nobody can see this, it is obscure. This is called inflation.

Clearly the market must be free of intervention so captialist-entrepreneurs can make better decisions, and less malinvestments take place.

Conclusively, one might understand why government monopolies are so dangerous in using hypostatization to guide human action.

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