Value and capital: Austrian capital theory, retrospect and Prospect

The time is right for a reexamination of Austrian capital-theory. We attempt to capture the essence of Carl Menger's approach to capital, highlighting the important distinction between goods and the valuable services they yield (implying that goods are valuable only because they yield valuable services) and highlighting also the importance of money in facilitating exchange and production and in providing the means to value them. We look at the capital-theory of Bohm-Bawerk and suggest that, in many respects, this was a wrong turn, although it did set in motion valuable efforts to clarify the importance of the heterogeneity of productive-resources and their growing complexity over time. We examine the production-function, micro and macro, and show that it is logically untenable and useless as an instrument for empirical investigation, and that this has been known for decades. Of the Austrians after Menger, only Mises followed Irving Fisher in focusing on valuation. He did so in the context of explaining the importance of calculation. Mises's approach to capital has been insufficiently understood and appreciated. By way of conclusion we draw from our considerations to provide a research agenda in Austrian capital theory.