Capital and Entrepreneurship. A Subjectivist Exposition of

Roundaboutness and the Structure of Production

Antony MuellerAntony Mueller

UCS Graduate Business School UCS Graduate Business School

University Caxias do Sul, BrazilUniversity Caxias do Sul, Brazilantonymueller@yahoo.comantonymueller@yahoo.com

Variant Meanings of “Capital”

Capital as Financial CapitalCapital as Financial Capital Capital a Production GoodsCapital a Production Goods Capital as a StockCapital as a Stock Capital as a Production ProcessCapital as a Production Process Capital as a Productive ForceCapital as a Productive Force Capital as a Factor of ProductionCapital as a Factor of Production

Capital Theory

Heterogeneity vs homogeneity of capital Heterogeneity vs homogeneity of capital Structured vs. unitaryStructured vs. unitary Production process vs. fixed stockProduction process vs. fixed stock Separate productivity of factors of Separate productivity of factors of

production vs Coordination and production vs Coordination and SpecializationSpecialization

Permanence vs. Non-permanencePermanence vs. Non-permanence Absence of Entrepreneur vs. Pivotal Role Absence of Entrepreneur vs. Pivotal Role

of Entrepreneurshipof Entrepreneurship

Roundaboutness – Umweg-produktion

QQ

Roundabout Roundabout Production Production

Standard Standard

Production Production

Available TimeAvailable Time

RTP

S

to t1

New RoundaboutProduction

Standard Production

Q

B

E

SP

RP

RP’

RTP n

RTP m

SSmSn

RTP

Roundaboutness and Stages of Production (dAD = 0)

FP

DoR

-ΔD

+ΔD

dAD = Change in Aggregate DemandDR = Degree of RoundaboutnessFP = Final ProductdD = Change in Demand

Modeling capital as “Hayekian triangle”A simple Hayekian triangle – Stages of ProductionA simple Hayekian triangle – Stages of Production

Degrees of ConsumptionDegrees of ConsumptionMaturityMaturity Consumable Consumable

OutputOutput

SP1, ........ , SPx, .......... SPn ConsumptionSP1, ........ , SPx, .......... SPn Consumption

Stages of Production (SP)Stages of Production (SP)

Savings and economic growth in the Hayekian triangle

DD

A A CC B B

CC B B A A

Shortening of Production Structure

DR

FP

+dD

-dD

Unsustainable Production StructuresCentral Planning Distortions

DR

FP

+dD +dD

Soviet-Cuba Style Development Policy = Guns and Butter Policy+DR+DR

+dD+dD +dD +dD

SoPSoP

Imports-maintained Production Structure

DR

FP

+dD

+dIM

Growth-cum-debt development strategy in a three-stages model

FP

DR

+dD +dD

+dIM

Forced Savings

DR

FP-dD +dD

+dEX

Natural and cyclical production frontiers

PP NPF NPF AD AD

CPFCPF

PoPo

Q0 Q0 OutputOutput

Productivity-induced expansion

PP NPFo NPF’ NPFo NPF’

P0P0

P1P1

ADAD

Q0 Q1Q0 Q1 OutputOutput

Money-induced expansion in the loanable fund model i ICD/CCD i ICD/CCD

SS S + dM S + dM

dADdAD LF LF

Savings and credit supply and demand

CDS

TCSi

TC

S+ΔM =

in

im

En Em

Productivity gains and inflation targeting – recipe for a boom bust cycle?

P P NPF NPF’ NPF NPF’

AD AD CPFCPF

P3P3 CPF’CPF’

P0 P2P0 P2 AD’AD’

P1P1

Q0 Q3 Q1 Q2 OutputQ0 Q3 Q1 Q2 Output

Government and consumption credit-driven expansion i i I I+CC+GC S S + dM I I+CC+GC S S + dM

i0i0

I, C, G I, C, G

Effect on production frontier

P P NPF’NPF’ NPFNPF

CPF ‘CPF ‘ CPFCPF

AD’ AD’

ADAD

Q2 Q0 Q1Q2 Q0 Q1 Output Output

Credit expansion and credit crunch – financial markets ii S - dMS - dM

II S S S + dMS + dM i’’i’’

i0i0 i’i’

dAD’’ dAD dAD’dAD’’ dAD dAD’ LF LF

Austrian Disaggregation

PQ = Pc (Qc) + PPQ = Pc (Qc) + PII (Q (QII11 +...+ Q +...+ QIIxx + ... + Q + ... + QIINN)) Keynesian Disaggregation:Keynesian Disaggregation: PQ = Y PQ = Y Y= C + I + GY= C + I + G Monetarist Disaggregation:Monetarist Disaggregation: MV = PQMV = PQ MV = YrPMV = YrP M = MB x mM = MB x m

Money side and goods side

M x V = Q x P(MV/P) = Q

Q

MV/P

P

Q

Po

Money side and goods side – Change of QM x V = Q x P(MV/P) = Q

Qo

MV/P

P

Q

Po

Q1

P1

Money side and goods side –change of M and/or VM x V = Q x P(MV/P) = Q

Q

MV/P’

P

Q

Po

P1

MV/P

Equation of Exchange

Equation of ExchangeEquation of Exchange MV = PQMV = PQ Keynesian Model:Keynesian Model: MV = P (Qc + QI + QG)MV = P (Qc + QI + QG) Monetarist Model:Monetarist Model: MB x m x V = P x Yr MB x m x V = P x Yr Disaggregated ModelDisaggregated Model MB x m x V = Pc (Qc) + PMB x m x V = Pc (Qc) + PII (Q (QII11 +...+ Q +...+ QIIxx + ... + + ... +

QQIINN) + P) + PAA(Q(QAA))

Classical, Monetarist, and Keynesian View

Classical Position:Classical Position: Auto-Stabilization through interest rateAuto-Stabilization through interest rate

Keynesian Position:Keynesian Position: Destabilization through investment (paradox of Destabilization through investment (paradox of

thrift) – Stabilization through deficit spendingthrift) – Stabilization through deficit spending Monetarist Position:Monetarist Position:

Destabilization through money – Stabilization Destabilization through money – Stabilization through stable money supplythrough stable money supply

Problem and its Solution

Instability through money, banking and Instability through money, banking and governmentgovernment

Solution proposalsSolution proposals Gold standardGold standard Commodity standardCommodity standard Denationalization of moneyDenationalization of money Hundred per cent reserve requirementHundred per cent reserve requirement

Summary Causes of Instability in Keynesianism and Causes of Instability in Keynesianism and

Monetarism: I and MsMonetarism: I and Ms Realb Business Cycle: Shocks, mainly Realb Business Cycle: Shocks, mainly

externalexternal Instability in Austrian Economics: deviation Instability in Austrian Economics: deviation

of monetary rate of interest from natural of monetary rate of interest from natural raterate

Causes of instability in this model: Any Causes of instability in this model: Any kind of interventionism as to I, G, Ms, Md, ikind of interventionism as to I, G, Ms, Md, i

Cycle gets amplified because of Fractional Cycle gets amplified because of Fractional Reserve BankingReserve Banking

Main elements of this model

Time preferenceTime preference RoundaboutnessRoundaboutness Stages of productionStages of production Standard productionStandard production Roundabout productionRoundabout production CapitalCapital EntrepreneurshipEntrepreneurship