I was unaware of this excellent 2011 paper by Steve Horwitz. Steve sent it to me yesterday as elaboration on my recent mention of the familiar fact that Keynesians’ focus on aggregates (and, especially, on aggregate demand) blind them to nearly all of the germane phenomena – phenomena that are today conventionally called “microeconomic” – whose arrangements relative to each other, whose trajectories, and whose changes determine how well or how poorly an economy performs. Here’s a key slice (from page 15) of Steve’s capital essay:
Keynes’s aggregative view of capital is also clear in a brief footnote in The General Theory that discusses the work of Frank Knight. Hayek and Knight had long sparred over their own contrasting conceptions of capital, with Hayek strongly criticizing the Knightian view that capital was best understood as an undifferentiated, homogenous aggregate out of which “dollops” could be applied to the production of particular consumer goods. This was quite the opposite from the Austrian view of capital as differentiated, heterogeneous, and embodied in specific goods. In the chapter on “The Classical Theory of Interest,” Keynes (1936, p. 176) footnotes approvingly a 1932 article of Knight’s that Keynes claims “confirms the soundness of the Marshallian tradition as to the uselessness of the Bohm-Bawerk analysis.” In the appendix to that chapter, Keynes has an explicit discussion dismissing Mises and Hayek’s theory of interest as linked to the relative prices of capital goods and consumption goods. Keynes admits that “it is not clear how this conclusion is reached” and tries to reconstruct the argument. He eventually accuses Mises of “confusing the marginal efficiency of capital with the rate of interest” (1936, p. 193). However, the concept of the “marginal efficiency of capital” would have been foreign to the Austrians precisely because treating capital as a whole that has a “marginal efficiency” ran against their conception of the capital structure. The question is always about the value productivity of specific assets given their place in the structure of production.