Peter Lewin

Capital in disequilibrium : the role of capital in a changing world

Drawing on the work of the Austrian School and its heirs, Capital in Disequilibrium develops a modern, systematic version of capital theory in order to suggest a new approach to the subject of economics. Original and provocative in his reflection, Lewin offers both a new approach and an accessible discussion of one of the most important, but also one of the most difficult, areas in economics.

An Austrian Theory of the Firm

The modern Theory of the Firm uses the concept of rent and makes implicit assumptions about equilibrium. An Austrian (Market Process) Theory of the Firm should have something to say about each of these. Two strategic perspectives are analyzed, the neoclassical microeconomic perspective (using the Ricardo-Marshall approach to rent) and the Market Process perspective (using the Fetter approach to rent). In a neoclassical world, rents indicate “unsolved” or unexploited “inefficiencies” as every hypothetical outcome is viewed against the standard of perfect competition. By contrast, in the Market Process world there is no single ideal standard by which to measure any particular outcome. All action takes place in an open ended universe in which the future is continually being created, in which competition is a “discovery process.”

ARRIVING AT A STRATEGIC THEORY OF THE FIRM

The theory of the firm seeks to explain the existence and boundaries of the firm in relation to the market. Since the pioneering work of Coase (The nature of the firm. Economica, 4, 386–405, 1937), economics has developed a whole family of theories that focus on the ability of firms to economize on certain costs of using markets. More recently, researchers in strategic management have published several theories of the firm that have tended to emphasize the benefits of incorporation rather than the costs of using the market. Although researchers in the strategy profession have tentatively labeled their work as ‘moving towards’ a strategic theory of the firm, economists have been very critical of existing approaches. This paper seeks to begin ‘arriving’ at a strategic theory of the firm by addressing these criticisms and offering an integration of the strategic and economic perspectives within an institutional framework. The paper concludes with future directions for research in the theory of the firm.

The Market Process and the Economics of QWERTY: Two Views

Since its publication in 1985 Paul Davids “Economics of QWERTY” has provided a paradigm case for the understanding and application of path-dependent processes in economics, some of which have been identified as yielding sub-optimal outcomes. The accuracy and relevance of this case, and this entire theoretical approach, has been subjected to critical scrutiny by Stan Liebowitz and Stephen Margolis in a series of articles and in a recent book. In this article I provide a wide ranging, and largely appreciative, review of the book and highlight, in some detail, the fundamental disagreements with which it deals.

Roundaboutness Is Not a Mysterious Concept: A Financial Application to Capital-Theory

We apply the EVA terminology to the concepts of roundaboutness and average period of production in capital theory. By doing this we show that these terms have a clear and well understood financial interpretation. A financial application to capital theory helps to clarify obscure and controversial economic terms.

Financial Foundations of Austrian Business Cycle Theory

In this paper we study financial foundations of Austrian business cycle theory (ABCT). By doing this we (1) clarify ambiguous and controversial concepts like roundaboutness and average period of production, (2) we show that it has strong financial foundations (consistent with its microeconomic foundations), and (3) we offer examples of how to use the flexibility of this approach to apply ABCT to different contexts and scenarios.

Rothbard and Mises on Interest: An Exercise in Theoretical Purity

The conventional wisdom in economics holds, with Irving Fisher, that interest is explained jointly by the forces of time preference (thrift) and productivity. One school of thought, however, has held stubbornly to the assertion that interest is best understood as a result of time preference alone, time preference as the essential determinant of interest. This is the pure time preference approach to interest. And while most economists are inclined to dismiss this approach out of hand, the pure time preference approach has proved remarkably resilient. Part of the explanation for the persistence of rival theories can be found, not surprisingly, in terminological confusions and ambiguities, for example in deciding among candidates for essential causation. I hope in this article to improve the case for the pure time preference approach to interest by clarifying the argument. It appears that some of the confusion can be attributed to the approach of two theorists, Ludwig von Mises and Murray Rothbard, and to their connecting the time preference approach to their particular a priori methodology.

Capital and time: Variations on a Hicksian theme

John Hicks has written extensively on capital. In addition to his three very influential books which have capital in their titles (1946, 1965, 1973b) he has published numerous articles. He was a scholar who returned many times in his life to the same questions, sometimes with different answers. In Value and Capital (1946, first edition 1939) he critically considered Bohm-Bawerk’s average period of production. His Capital and Growth (1965) was a series of exercises in growth theory. But, as with all of Hicks’s work, this book contains much discussion of an informal nature. These extended discussions show that he was thinking carefully about the implications of time for the theory of capital. We see it in his introductory remarks on methodology, particularly his discussion of equilibrium; we see it in his survey models of Smith and Ricardo and we see it in his concern about how to portray the transition from one equilibrium steady state growth to another, the problem of the ‘traverse’. And then in a series of contributions in the 1970’s, including his book Capital and Time (1973b, also 1976, 1979a and 1979b), he becomes very concerned with time as a topic in economics. Along with this concern came a revived interest in the Austrian theory of capital. Hicks called his new approach to capital a Neo Austrian approach. This label does not seem to have been auspicious for the acceptance of his approach. The modern Austrians did not embrace it (Lachmann 1973), and the mathematical Bohm-Bawerkians (Faber 1979) criticized it for other reasons. In this paper I reexamine this new approach. I find that it is quite revealing in a way that perhaps Hicks himself did not fully realize. Many of the traditional issues in capital theory come together nicely in Hicks’s final treatment.

The Development of Austrian Economics: Revisiting the Neoclassical Divide

Recent developments in Austrian-market-process economics are discussed, and, despite the continuing difficulties of communicating with mainstream economics, some causes for optimism are discerned. Looking to a useful future for Austrian economics will require that further empirical work in applying its insights be done. The question of placing the burden of proof in policy discussions is examined.

An empirical application of the EVA® framework to business cycles

Following financial concepts like duration and economic value added (EVA®) we estimate the impact of interest rate movements on firms that are more and less roundabout. We find that firms that are more roundabout, that is, work with expected cash-flows with higher duration, are more sensitive to interest rate movements. To the extent that monetary policy is able to move the discount rate used by investors, monetary policy changes the relative present value of any investment project and therefore affects resource allocation. We show evidence that this effect is present in the U.S. in the years prior to the subprime crisis.