Yesterday, Pieria published a piece by John Aziz on “savings and the capital structure,” and Aziz conducts a comparison between Ludwig Lachmann and Ludwig von Mises. He argues that Mises’ capital theory “is grossly simplistic” when compared to Lachmann’s, writing,
Von Mises seems to see capital as something physical and concrete that can only come about through saving from past production. That is, the first agriculturalists might produce a bushel of wheat a year, consume three-fourths of that, and save the rest for future use — for barter, for emergency consumption, for replanting. Hunter-gatherers might chop down one hundred trees, use twenty for firewood, and use eighty more to manufacture spears, boats or homes. To Mises the saved product is the origin of capital. But this raises the question of whether or not the initial resources that were used to produce were capital or not. If capital is the means of production, this must surely include non-human means of production — sunlight, rain, hydrocarbons, soil, bacteria, animals, metallic elements cooked up in the heart of stars that went supernova. Production certainly has human factors, but humans — ourselves the product of billions of years of evolution — work capital that is precisely a “free gift” of God or nature. Von Mises’ definition of capital simply pays no attention to the vast and sprawling heterogeneity of factors of production. Certainly, saving the fruits of production may be a good idea — not least as insurance against rainy days — yet it is entirely fallacious to ignore the immeasurably vast pools of capital that are not a product of saving.
In the older capital theory literature (and relatively modern literature that keeps the same terminology), capital is not the same as factors of production. This is true whether you read Mises, Hayek, and/or Lachmann. Capital goods,* rather, are a specific subset of the whole range of factors of production, to which we add the “original factors of production.” These are the goods that Aziz accuses Mises of ignoring. Of course, Mises did no such thing — the entirety of chapter 22 of Human Action is dedicated to “the nonhuman original factors of production.”
One reason this differentiation is made is laid out by Hayek in The Pure Theory of Capital. At a sustenance level, these “original factors of production” are all that humans have. The complex topic of capital arises when we consider all the factors of production that humans build to increase their productivity beyond the capabilities of the “original factors of production” (including being able to use a greater quantity of these original factors with the same amount of labor). And these capital goods are built with inputs that otherwise would have gone towards the production of consumers’ goods, and thus these potential consumers’ goods are an opportunity cost (i.e. they are sacrificed). So we see that, indeed, capital goods do require savings. (Of course, the “harvesting,” for lack of a more general term, of the “original factors of production” requires time, at the expense of leisure.)
Beyond this terminological confusion, Aziz writes (quoted above) that “Mises’ definition of capital simply pays no attention to the vast and sprawling heterogeneity of factors of production.” Anybody who has read Mises knows that this isn’t remotely true. In none of his writings on capital theory did Mises assume the homogeneity of capital, and in fact he explicitly assumes the opposite throughout Human Action. Mises, like Hayek, was influenced by Carl Menger and Eugene von Böhm-Bawerk, both of which stressed the heterogeneity of capital (the latter did so in a debate against J.B. Clark, which would mirror the later debate between Hayek and Frank Knight). In fact, one of Mises’ favorite articles of Hayek’s was the latter’s 1936 piece, “The Maintenance of Capital.” In this article, Hayek, contra Knight, emphasizes the heterogeneity of capital and what this implies with regards to changes in the capital stock — this, against the notion of capital as some kind of fund of constant size.
Apart from the “original factors of production” and “capital goods,” Aziz also mentions money. Mises’ first major treatise was The Theory of Money and Credit, where he differentiates money from other factors of production. Namely, he argues that the main function of money is as a medium of exchange, different from the factors of productions we would consider inputs into some technique. (Walter Block and William Barnett argue that we should consider money a capital good.) Aziz talks about money within the framework of savings and consumption, arguing (perhaps rightly) that modern money bears no obvious relationship to savings. But, I think this is a somewhat misleading approach. What we want, as argued by Hayek (based on a theory of imputation heavily influenced by Mises’ work on socialism), is a “neutral money,” which is defined as one that maintains a structure of prices that helps direct the allocation of capital relatively efficiently.
When there is, say, an increase in the demand for money, where various prices fail to clear, an increase in the quantity supplied of money to restore equilibrium does not distort the structure of production precisely because it’s neutral, in the Hayekian sense. All money held is money unspent, which implies that that fraction of your income is definitely not going towards present consumption. If new money is issued to restore monetary equilibrium, there’s no conflict between present consumption and present investment precisely because an increase in the demand for money implies that value of foregone consumption.
But, non-neutral money, again in the Hayekian sense, does matter. I like to illustrate this point with a simple production possibilities illustration,
If we look at the production possibilities frontier (PPF), which is in the first (right-hand) quadrant, there is one “sustainable” point the economy will sit at in equilibrium. This point is determined by relative opportunity costs; that is, it represents an efficient allocation of inputs. In a money using economy, where these opportunity costs are communicated by means of prices, a non-neutral money will fail to accurately communicate the relevant information. As a result, the allocation of inputs leads to production at a point on the PPF that is not that “sustainable equilibrium” (on the graph, this is represented by a downward movement on the PPF, and a lengthening of the structure of production shown by the simple Hayekian triangle in the second quadrant).
So yes, savings do matter. Mises, Hayek, and Lachmann were right, and Aziz is wrong. Are there any differences between Hayek/Lachmann and Mises? I think so. Lachmann’s Capital and its Structure is a simpler, less technical, less formal version of Hayek’s The Pure Theory of Capital. In this latter book, Hayek develops a forward-looking theory of capital. Mises’ exposition, which is closer to the original Mengerian and Böhm-Bawerkian theories (before expectations were a “big thing” in economics), is more backwards-looking. But, in no way does Mises ever make the egregious errors Aziz accuses him of. And, of course, in many ways Mises’ exposition was superior to Hayek’s, since Mises — staying truer to Menger — avoided some of the objective concepts in Böhm-Bawerk’s theory of capital, including the notion of an “average period of production” (which Hayek would also move away from).
* In Mises’ writing, capital goods are distinguished from capital, the latter taking on the financial definition.