Capital theory

I discovered today this debate on Coordination Problem regarding capital theory. Don't miss my wondrous comments, of course, but it is a much better idea to ponder prof. Koppl's.

The fact that general equilibrium models which includes even a moderate amount of complexity can have absurdly complex dynamics is, in my opinion, the tombstone of positive economics: general equilibrium theory yields no positive restrictions on the empirical predictions of economic models. This is not a problem of Austrian economics only to the extent that the problem had been already recognized decades ago, as it is the rationale for Mises's distinction between theory (although an emasculated notion of theory indeed) and history (a realm in which we can cast only limited restrictions). Now everybody is clearly stuck in the same mud.

Strangely enough, many Mises's followers are convinced that economic theory can yield relative positive predictions, on purely apriori grounds, but this is not Mises's message: it's wishful thinking. Theory is the logical analysis of the structural properties of economic concepts, it can yield nothing regarding the real world unless it is coupled with some a posteriori proposition regarding the real world. Sometimes these additional hypotheses are so obvious that a priori theory can yield relevant results, but as a rule this is not true.

However, given that it is likely that a deep bath in the ocean of capital theory yields limited and difficult to evaluate insights, and Hayek's late '30s and early '40s writings are the definite proof of the untractable complexity of the subject, what shall we learn out of capital theory, except that we all are too ignorant to grasp it?

Well, I think that the core of capital theory as applied in the Austrian theory of business cycles is the notion of structural unsustainability: the economy may reach an unsatisfactory state from which it can move only by experiencing a recession.

This insight is typical of Austrian economics, and possibly also of Postkeynesian economics. It is remarkably neglected, on the other hand, both by Neoclassical and by Neokeynesian theorists.

I thus need to ask two questions, and divide macroeconomic theories in four classes depending on the answer to the two questions.

1. Is the economy capable of reaching dead ends, i.e., structurally unsustainable states which make a subsequent recession necessary?
2. Can government policies solve the problem or make it less severe, or, on the contrary, is the government a relevant factor in making things worse?

From these two questions we derive four different macroeconomic Schools.

• If the answers are "structural problems don't exist" and "governments shouldn't do anything", it's Neoclassical macroeconomics.
• If the answers are "structural problems don't exist" and "governments can improve upon the results of the market", it's Neokeynesian macroeconomics.
• If the answers are "structural problems exist" and "governments can improve upon the results of the market" it's Postkeynesian macroeconomics.
• If the answers are "structural problems exist" and "governments shouldn't do anything", it's Austrian macroeconomics.
  

The proper domain for Austrian macroeconomics is thus the notion of structurally unsustainable market dynamics driven by policy-induced market miscoordination. All the theories with this logical structure are to be considered a variant of the more standard Austrian theory of business cycles.

Policy-induced miscoordination is usually due to monetary factors, but it need not be so in general: most likely, however, money is the only factor which has sufficient scope to cause market-wide distortions.

Capital-structure problems are the usual notion of structural unsustainability in Austrian theory, but it need not be so: the financial structure is likely to be capable of the very same dynamics that Austrian economists traditionally impute to capital malinvestment.

Thus spoke Pietro M. (it's my research agenda for the next three or four centuries, depending on my spare time)