The Freeman
vol. 47, no. 8 (August), 1997, pp. 511-13
THE UNDISCOUNTABLE PROFESSOR KIRZNER
Essays on Captial and Interest: An Austrian Perspective
by Israel M. Kirzner
Brookfield, MA: Edward Elgar, 1996, pp. 166
Reviewed by Roger W. Garrison
Eugen von Böhm-Bawerk,
whose name has come to be virtually synonymous with "roundaboutness" (of
capital-using production processes), penned the original Austrian perspective
on capital and interest. He wrote three volumes (History and Critique,
Positive
Theory, and Further Essays) over a span of a quarter of a century
(1884-1909). In 1959 the twelve-hundred-plus pages of Capital and Interest
were translated into English by Hans Sennholz and George Huncke. Ludwig
von Mises reviewed the new translation in the Freeman, where he
described this "monumental work" as "the most eminent contribution to modern
economic theory."(1) Mises went so far as
to suggest�as only Mises could�that no citizen who takes his civic duties
seriously should exercise his right to vote until he has read Böhm-Bawerk!
And now we have Israel Kirzner's
Essays
on Capital and Interest. There is no intent on the part of the author
or the reviewer to position this volume between the voter and the voting
booth. However, the position that this book occupies on the Austro-neoclassical
landscape is an eminently strategic one�so strategic as to warrant our
issuing a Mises-style taboo, not to voters, but to all economists who adopt
the Austrian perspective. But first we must put into perspective this new
offering by Professor Kirzner.
The significance of this
volume is not diminished by the fact that all its separate parts, except
for the twelve-page introductory essay, have been published before. With
greater accessibility and appearing now together, these Essays provide
a virtual history�and pre-history�of the modern Austrian resurgence. Three
decades ago, well before the resurgence began, Professor Kirzner wrote
An
Essay on Capital. The four parts of this book (on "Unfinished Plans,"
"Stocks and Flows," "Capital and Waiting," and "Measuring Capital") read
like the work of a lone scholar trying�succeeding in most instances�to
satisfy himself. The 1966 Essay, possibly the most underrated of
all his contributions, appears anew as the longest of the 1996 Essays.
In late 1974, Professor
Kirzner presented a paper titled "Ludwig von Mises and the Theory of Capital
and Interest" in a special symposium at the Southern Economic Association
meetings in Atlanta. At that time, a year after Mises's death, and the
year that the resurgence began (with a conference in Vermont at which Professor
Kirzner was a key participant), there was a small but eager audience for
his Austrian perspective. Professor Kirzner shows how Mises's theory differes
from Böhm-Bawerk's and how it compares favorably to the theories of
J. B. Clark and F. H. Knight. In part a stocktaking, in part a research
agenda for himself and for others, this paper was first published in 1976
along with other papers at the SEA symposium and published again in 1979
along with other writings by Professor Kirzner. Its appearance in the present
volume provides a perfect segue between his early work on the theory of
capital and his later work on the theory of interest.
The final essay, "The Pure
Time-Preference Theory of Interest," first published in 1993, is clearly
the work of a well-seasoned scholar. Professor Kirzner's good scholarship
shines though in all his writings, but here we see him as a veteran of
many symposia and conferences complete with their unyielding question-and-answer
sessions. His work now has a growing and challenging audience. He responds
to criticisms as if he has heard those criticisms many times in many different
forms�ecause he has. The exchanges with allies and critics over the years
have allowed him to clarify his own ideas and to offer them in the most
rhetorically effective ways.
Ralph W. Pfouts, who offered
a generally favorable assessment of the 1966 Essay in the American
Economic Review, suggested that the Austrian perspective is not "the
magic wand that makes all mysteries disappear." (2)
Professor Kirzner, with his newly published Essays, and especially
with his essay on the theory of interest, shows that it is very nearly
that. Interest is always and everywhere a matter of time preferences. The
primordial preference for the sooner over the later is the basis for a
unified treatment of intertemporal exchange�hether the exchange is with
nature or with other economic actors and whether or not it involves the
use of capital. Tracing out the consequences of the systemic discounting
of the future provides us with a Copernican account of an economic phenomenon
that otherwise would have to explained by what we might justifiably call
Ptolemaic interest-rate theory. Capital-productivity theories and waiting-as-a-factor
theories appear strained, partial, and oblique in comparison to the pure
time-preference theory�that magic wand so skillfully wielded by Professor
Kirzner.
If interest is to be understood
in terms of time preferences, capital is to be understood in terms of multiperiod
plans. An Austrian subjectivist perspective on capital features the plans
of individual entrepreneurs�plans that are subject to revision as the attempts
to carry them out reveal conflicts with reality and with the unfolding
plans of other entrepreneurs. As Professor Kirzner demonstrates time and
again, the forward-looking, plan-oriented account of a capital-using economy
wins out over the alternative accounts that focus on some isolated slice
of time or on the physical productivity of the produced means of production.
Professor Kirzner's Essays
occupy a strategic position on the Austro-neoclassical landscape. His perspective
on capital and interest constitutes the essential difference between Austrian
economics and neoclassical (particularly Chicago) economics and the essential
bridge between Austrian microeconomics and Austrian macroeconomics. The
book itself contains much about the essential difference but contains little
about the essential bridge. The reason for this lacking is not difficult
to explain. While contributing importantly, along with F. A. Hayek and
Ludwig M. Lachmann, as a bridge builder, Professor Kirzner has never actually
crossed the bridge himself. The short introductory essay includes a brief
explanation of his reluctance to cross over into macroeconomics. According
to Professor Kirzner (p. 2), "recent Austrian work on Hayekian cycle theory
[and presumably on Austrian macroeconomics generally] seems, on the whole,
to fail to draw on the subjectivist, Misesian, tradition which the contemporary
Austrian resurgence has done so much to revive."
We can guess what he has
in mind here. Austrian macroeconomics features the intertemporal structure
of production, the structure being defined as a temporal sequence of stages
of production. For concreteness, the sequential stages are commonly identified
with broadly defined industries, such as mining, refining, manufacturing,
wholesaling, and retailing. Too quickly, all the multiperiod planning that
goes on within and between these stages are allowed to gel into a simple
Hayekian triangle�with its summary representation of the relationship between
the time element in the production process (the roundaboutness of production)
and the market value of final output.
The right triangle, which
Hayek introduced in his Prices and Production,(3)
gave him a leg up on Keynes, who paid no attention to production time.
Consumer spending was represented by one leg of the triangle. This macroeconomic
magnitude had the attention of both Keynes and Hayek. The other leg tracks
the goods-in-process as the individual plans of producers transform labor
and other resources into the goods that consumers buy. The Hayekian triangle
allows us to show that (1) Increased saving can make for more output but
only in the more-distant future and (2) Monetary expansion can spoof the
market and derail the process that would otherwise keep production plans
on track with intertemporal consumption preference. All this is well and
good. But once the theory has been recast as a Hayekian triangle that can
be reshaped by preference changes and distorted by policy activism, it
is all too easy for the Austrian subjectivist to become a not-so-Austrian
geometrician. This is Professor Kirzner's lament.
And so now it is time for
our Mises-style taboo: No Austrian economist who takes his subjectivism
seriously should draw a Hayekian triangle until he has read Professor Kirzner's
Essays!
There is no inherent clash between the macroeconomic theorizing that the
Hayekian triangles facilitate (including the Austrian theory of the business
cycle) and the Kirznerian perspective that keeps the triangle adequately
subjectivized. Quite to the contrary, it is precisely our understanding
of the process that Professor Kirzner elucidates, the ongoing attempts
on the part of many entrepreneurs to carry out their individual multiperiod
plans (as guided by market rates of interest or as misguided by the central
bank's rate of interest), that breathes subjectivist life into those otherwise
meaningless triangles.
Professor Kirzner may well
believe that if our Mises-style taboo keeps would-be macroeconomists from
crossing the bridge without first reading the Essays, then the book
itself will dissuade the readers�as it has dissuaded its writer�from crossing
the bridge at all. Others, however, may believe that even the fullest compliance
with the taboo will allow�even facilitate�some subjectively respectable
bridge crossings. Austrian macroeconomics is not the oxymoron that some
have long suspected it of being. While those practitioners among us will
quickly forgive Professor Kirzner for never crossing over into macroeconomics,
they can offer nothing but praise for the job of bridge building that he
has done so well.
Notes:
1. Ludwig von Mises, "Capital and
Interest: Eugen von Böhm-Bawerk and the Discriminating Reader,"
Freeman,
vol. 9, no. 8 (August) 1959, p. 52.
2. Ralph W. Pfouts, Review of An
Essay on Capital, American Economic Review, vol. 58, no. 1 (March)
1968, p. 98.
3. Friedrich A. Hayek, Prices and
Production, 2nd ed., Clifton, NJ: Augustus M. Kelley, Publishers, 1967
[originally published, 1935].
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