Economics Dictionary of ArgumentsHome
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| Capital structure: In economics, capital structure refers to the mix of debt, equity, and other financing sources a company uses to fund its operations and growth. It influences a firm's financial stability, cost of capital, and risk profile, balancing returns for investors with the ability to meet financial obligations. See also Capital, Capital Value._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Ludwig Lachmann on Capital Structure - Dictionary of Arguments
Coyne I 15 Capital structure/Lachmann/Coyne/Boettke: Heterogeneity of Capital means heterogeneity in use; Heterogeneity in use implies Multiple Specificity; Multiple Specificity implies Complementarity; Complementarity implies Capital Combinations; Capital Combinations form the elements of the Capital Structure. We are living in a world of unexpected change; hence capital combinations, and with them the capital structure, will be ever changing, will be dissolved and re-formed. In this activity we find the real function of the entrepreneur. (1) >Production, >Production structure. Coyne I 16 Menger: Raw materials do not have inherent objective value, but instead derive their value from what they contribute to the production of other, value-added capital goods in the structure of production. These Iower-order goods likewise derive their value from their contribution to the production of the final consumer good. What ultimately drives this process is the expected value of the final consumer goods (the first-order goods) as determined by consumers. Market: On the market, these subjective valuations are captured in the market prices of capital goods as discussed in the prior chapter on economic calculation. Lachmann: Taking Menger's framework as a foundation, Ludwig Lachmann further developed the Austrian understanding of capital. He emphasized that capital was characterized by heterogeneity, multiple specificity, and complementarity. Heterogeneity implies that capital goods are different. This might seem obvious, but standard economic theory treats capital as a homogeneous blob that can be used interchangeably and does not require any kind of careful planning or coordination through time. If capital goods were indeed homogeneous, they could be used interchangeably to produce whatever final products consumers desire. From this perspective, capital is analogous to a ball of Play-Dow.The same capital can be shaped into whatever output is desired by the designer. And if mistakes are made, capital resources can be reallocated quickly and with minimal cost by quickly reshaping the ball of Play-Dow. Austrian School: Scholars working in the Austrian tradition, in contrast, emphasize that capital is not homogeneous. All capital is not the same and cannot be used interchangeably. A pair of pliers is not the same thing as a pickup truck. >Capital goods. Capital goods: Each capital good can be used to achieve different purposes. Appreciating the heterogeneity of capital is also important because production plans vary from one individual to the next. >Capital/Lachmann. Coyne I 17 Capital structure/Lachmann: This structure is characterized by a complex set of relationships with a coherent pattern of order. The capital structure is not fixed. Instead it is in a constant state of change as a result of three factors. 1) The first is human error, whereby decisions made about the use of capital goods are revealed to be mistaken. 2) Second, innovations in production technologies - machinery, techniques, and organizational forms - may make portions of the prior capital structure ineffcient. Advances make old ways of producing goods and services less effcient compared to new alternatives. When this occurs, entrepreneurs will need to adjust how capital is allocated within the broader structure of production. 3) Finally, consumer desires might change so that what was previously produced is no longer valued compared to alternatives. In this case producers will need to revise their production plans, and the associated capital, to satisfy the new consumer wants. In fact, improvements in economic well-being require changes to the capital structure in response to changes in economic conditions, more accurate knowledge of those conditions, and improvements in technology and organizational forms. The result is the need for ongoing capital substitution and re-grouping in the face of changing circumstances. The problem with traditional neoclassical methods of studying the capitalist production process lies in either treating capital as a homogeneous blob, or relying on a momentary snapshot of the capital structure at some period of time. In contrast to either the blob method or period analysis, Austrian economists emphasize that we need to focus on the process by which combinations of heterogeneous and specific capital are shuffled and reshuffled in the broader context of the capital structure. Capital stock: The concept of the capital structure stands in contrast to the idea of a "capital stock," which refers to an aggregate measure of all capital at a point in time. >Capital/Austrian School. 1. Ludwig Lachmann (1956), Capital and Its Structure. London. Bell & Sons. pp. 12–13._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Lachmann, Ludwig Coyne I Christopher J. Coyne Peter J. Boettke The Essential Austrian Economics Vancouver 2020 |
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> Counter arguments against Lachmann
> Counter arguments in relation to Capital Structure
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