Capital and Its Structure

Economic models treat capital as one quantity that grows, earns a return and adds up to a money figure. Ludwig M. Lachmann's Capital and Its Structure, first published in 1956 by Bell for the London School of Economics, argues that this habit hides the problem capital theory exists to solve. In his account, capital is a pattern of heterogeneous goods whose uses must fit together inside entrepreneurial plans. The theorist's task is to explain why resources are combined as they are, and how those combinations are dissolved and rebuilt after unexpected change. Read it for that vocabulary of complementarity, specificity and regrouping.

Heterogeneity, for Lachmann, lies in use. A machine or a building can do only a limited set of jobs, a condition he calls multiple specificity, and the complements on hand decide which job it does. Equipment that fits into no combination stops earning its keep and is scrapped, which gives the economy a tendency toward an integrated capital structure. That tendency meets resistance. Owners who expect conditions to change may keep idle plant alive, and cheap maintenance or a second-best use can postpone the reckoning. New investment can complement existing capital or compete with it, raising or destroying the value of what is in place.

Knowledge receives the same plan-centred treatment. Under continuing change, price messages arrive together, some of them late, and speculators who anticipate tomorrow move the prices others consult today. Prices still carry information, Lachmann insists, though it is incomplete and must be interpreted before anyone can act on it. Expectations are interpretations of experience, shaped by evidence without being fully determined by it. A forecast can succeed for the wrong reasons, and a refuted hypothesis leaves its replacement unnamed. Equilibrium remains useful as a standard of consistency and in quasi-stationary conditions; his target is the assumption that once the data are given, the path toward equilibrium needs no explanation.

A capital account, in the same spirit, reduces buildings, machines and stocks to a money sum, and Lachmann treats it as a legitimate device for testing how a plan turned out, one that registers success or failure the way a thermometer registers fever while leaving the disease undiagnosed. Cash supplies a related test. Some of a firm's money is deliberately planned to stay unused: like spare parts, this reserve waits for contingencies, and its idleness is a condition of successful action. Unplanned variations in the reserve tend to record success or failure before anything else does, while the balance sheet as a whole stays the ultimate measure. When old and new capital are complements, cheap existing equipment can raise the return on new investment. Lachmann credits Keynes with considering the prices of existing assets, though only as substitutes for new ones, and he traces the gap to treating capital as homogeneous.

Lachmann makes the point concrete with a hypothetical store running four identical delivery vans, one for each quarter of town. While the plan is being drawn up, any van can take any route, so the vans are substitutes. Once the plan is running they become complements, and a single breakdown defeats the plan for the whole town even though three vans still work. Complementarity belongs to means within a plan; substitution belongs to the moment of revision. Across firms, markets supply a looser structural complementarity; forward markets and stock exchanges help reconcile expectations, though capital changes can still turn out inconsistent.

Lachmann then reworks Böhm-Bawerk's claim about roundabout production. As capital accumulates, it can be split into more specialized items and more processing stages, letting producers use indivisible equipment that a smaller stock could not employ, and those indivisibilities yield increasing returns. He calls this an empirical generalization drawn from industrial history, conceding that no a priori rule guarantees enough fresh indivisibilities. More stages need not take longer in calendar time, since a different mix of capital can shorten each stage. The gain carries a cost: a dense web of specialized complements is more productive and more exposed, because stable growth would require many kinds of capital goods to expand in matching proportions.

Finance belongs to the same structure. Debt, equity and control arrangements shape how a firm responds to its results, and a well-funded older firm can attempt projects that a young, leveraged rival cannot. Managers regroup operating assets; owners regroup portfolios, and a shareholder who disagrees with management usually votes by selling. Lachmann counts both as entrepreneurs, since revising a production plan and revising a portfolio are the same kind of act. After a failure, rebuilding cash has to go with a reshuffle of other assets, except where bad timing was the cause. Cheap money therefore earns a part in a depression as a companion to business reconstruction.

The trade-cycle chapter applies the framework with deliberate eclecticism. Lachmann presents the Austrian theory of Mises and Hayek as an account of the strong boom, in which particular scarcities tighten. Weak booms that end when demand fails need a different model, he grants, citing America from 1929 to 1932 as an example. The theory assumes some resources are scarce while others sit idle; full employment was never among its premises. Because complementarity allows input ratios to vary, spare power or transport capacity can help the economy adapt. A strong boom can arise from limited knowledge of the future even when present prices are flexible.

After a strong boom, capital has to move toward the sectors whose shortages capped the expansion, and the move takes entrepreneurial action; sometimes it means turning the same plant to a different product. Lachmann makes preventing secondary deflation the primary aim of monetary policy in a recession. Demand support may help after a weak boom, and a budget deficit may stop a cumulative depression if strong pressure for regrouping accompanies it. For the credit squeeze that regrouping requires, the book finds no general answer and sees much to be said for a selective policy that reflects each firm's past record in the capital market. The book's limitation follows from the same caution: it offers a diagnostic lens and leaves the next viable combination and the right policy mix to the facts of each case.

Expect a short, demanding book that assumes familiarity with price theory and the mid-century capital debates, uses occasional symbolic notation and offers no investment guidance. It suits readers tracing how malinvestment spreads through networks of complementary capital. The Mises Institute PDF reproduces the unrevised 1978 reprint of the 1956 text; its scan omits the January 1977 second preface, which the Online Library of Liberty edition supplies.