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Source link: http://archive.mises.org/10955/the-austrians-versus-the-mainstream-potter-and-his-wheel/

The Austrians versus the Mainstream Potter and His Wheel

November 2, 2009 by

Capital is not some mass that can be modified free form.If an entrepreneur wants to change the current structure of capital, he will wield dynamite and dozer, not water and wheel. FULL ARTICLE by Jim Fedako

{ 4 comments }

Sean November 2, 2009 at 9:02 am

So well written, and in addition casts the Austrian ‘capital’ picture into sharper relief for me. A pleasure to read. Have promtply favorited Mr. Fedako’s daily articles archive page.

Ryan November 2, 2009 at 11:09 am

I think the idea of capital as clay can be criticized more clearly by noting that the shaped clay is only useful once it is baked into pottery. Then once it is baked, it cannot be easily reshaped so that more clay is needed for additional or alternate capital formations. Thus, the proper analogy may be to relate clay to savings and baked pottery to capital.

craig Howard November 2, 2009 at 6:45 pm

Very, very well written. Articles such as this are a great help for those of us non-economists who are struggling to understand more completely the theory of capital. I am fascinated by the theory, but real-world examples such as the rusting steel mills help to close a lot of synapses.

Autolykos November 3, 2009 at 12:12 pm

It seems to me that the mainstream view of capital is driven by financial instruments, including money.

Being (relatively) liquid, financial capital is more likely to have willing buyers and sellers. However, an increased likelihood does not translate into certainty. Therein lies the problem with mainstream economics. It seems to view all forms of capital as always being liquidatable — it’s just a matter of the price. Under that assumption, capital can be treated as essentially homogeneous.

Mainstream economics breaks down under what we in the software business call “boundary conditions”. A major boundary condition here is when there isn’t a willing buyer or seller. Since mainstream economics seems to assume that there will always be a willing buyer and seller for everything (at a certain price), it literally cannot handle this situation, especially when it becomes widespread.

Austrian economics is hence more “robust” than mainstream economics because it overcomes this boundary condition. It recognizes that capital is inherently heterogeneous, not only with respect to physical characteristics but also with respect to time. This recognition directly stems from the recognition that values are subjective — i.e. they can differ both among individuals and within the same individual over time.

In the end, it’s a question of being grounded in physical reality versus floating in the clouds of abstraction. Mainstream economists, with their emphasis on (abstract) financial instruments, tend to put the cart before the horse. Austrian economists, emphasizing the ground rules of human action, do not.

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