Ludwig Lachmann

Capital and Its Structure

Preface

• In spite of protracted efforts it has proved impossible to find a quantitative expression for capital which would satisfy the rigorous requirements of economic thought. (p. 8)
  • Because capital also exists in configuration.revisit
• Knowledge is as refractory to quantification as capital is. (p. 8)
  • Refractory as in unimaginable, because knowledge creation is qualitative change (never quantitative).revisit
• The acquisition and diffusion of knowledge certainly take place in time, but neither is, in any meaningful sense of the word, a ‘function’ of time. (p. 8)
• The theory of capital is a dynamic theory, not merely because many capital goods are durable, but because the changes in use which these durable capital goods undergo during their lifetime reflect the acquisition and transmission of knowledge. (p. 9)
• The causes of certain phenomena do not lie in the ‘facts of the situation’ but in the appraisal of such a situation by active minds. (p. 9)
  • 13-4d2 There is no objective value
• Something is capital because the market, the consensus of entrepreneurial minds, regards it as capable of yielding an income. (p. 10)
  • 13-5d1 Capital goods per se are not productive
• The chief object of this book is to emphasize the transmission of knowledge, the interaction of minds, as the ultimate agent of all economic progresses. (p. 10)
• It is not impossible that at some time in the future the concept of capital structure, the order in which the various capital resources are arranged in the economic system, will be given a quantitative expression; after all, any order can be expressed in numbers. (p. 10)
  • But not everything will be quantified.revisit
    • Similar in spirit with how anything can be priced in principle, but how price cannot exhaust everything at any given time.

Chapter I: The Order Of Capital

• In equilibrium, where, by definition, all values are consistent with each other, the use of money value as a unit of measurement is not necessarily an illegitimate procedure. But in disequilibrium where no such consistency exists, it cannot be applied. (p. 14)
• All capital resources are heterogeneous. The heterogeneity which matters is here, of course, not physical heterogeneity, but heterogeneity in use. The real economic significance of the heterogeneity of capital lies in the fact that each capital good can only be used for a limited number of purposes. We shall speak of the multiple specificity of capital goods. (p. 15)
  • 13-4d2 There is no objective value
• For most purposes capital goods have to be used jointly. Complementarity is of the essence of capital use. For any given number of them only certain modes of complementarity are technically possible, and only a few of these are economically significant. (pp. 15-16)
  • 13-2a The supply of capital goods enforces narrower limits than knowledge
• Unexpected change will make possible or compel changes in the use of capital goods. It is because of these facts that it is impossible to measure capital. Capital has no ‘natural’ measure, and value will be affected by every unexpected change. (p. 16)
  • E.g., MVP doesn’t exist in reality—such conception ignores knowledge creation, the primary constituent of unexpected change.
• The stock of capital does not present a picture of chaos; its arrangement is not arbitrary; there is some order in it. (p. 16)
  • Hence the title of this chapter
• We must regard the ‘stock of capital’ not as a homogeneous aggregate but as a structural pattern. The Theory of Capital is the morphology of the forms which this pattern assumes in a changing world. (p. 17)
  • It’s about forms
    • 3-1c2f In tech, most of the value is in the ordering, in the useful configuration of zeroes and ones, which users click to pay for it
    • 6-3a2.1 How you achieve something matters as much as what you achieve
• A theory of investment based on the assumption of a homogenous and quantifiable capital stock is bound to ignore important features of reality. Owning to its very character it can only deal with quantitative capital change, investment and disinvestment. It cannot deal with changes in the composition of the stock. (p. 19)
  • 5-2 What counts cannot be counted
    • E.g., Murray Rothbard
  • Another implication is that this morphology approach challenges the DMU assumptionrevisit
    • E.g., 13-10 The law of the diminishing marginal utility of money applies only to the valuations of each individual person
    • It might be related to how more is differentrevisit
• If we cling to the view that all capital is homogenous, the new capital competes with the old and reduces the profitability of the latter. (p. 19)
• Once we allow for heterogeneity we must also allow for complementarity between old and new capital. The ‘inducement to invest’ will therefore often depend on the effect the new capital is expected to have on the earning capacity of old capital complementarity to it. In other words, investment decisions, as to their magnitude, and even more as to the concrete form they are likely to take, depend at each moment on the prevailing composition of the existing capital stock. (pp. 19-20)
• A real understanding of the investment pattern is therefore impossible as long as we cling to the homogeneity hypothesis. (p. 20)
• The main subject-matter of this book is the Capital Structure. When we turn our attention to the relationship between capital and interest we do it for the light that interest sheds on capital, not vice versa. (p. 20)
  • Rothbard was the opposite.
• The chief problem of the theory of capital is to explain why capital resources are used in the way they are. (p. 21)
  • 1-1a5b4.5 Truth is about correspondence with reality
• There are two broad answers. The first of which is rather trite, it is that capital goods must be used in such a way as to produce the goods and services consumers want at prices they are prepared to pay. But there is a second answer, it is that capital uses must ‘fit into each other’. The fact that capital goods which do not ‘earn their keep’ will be discarded warrants the belief that a tendency towards the integration of the capital structure really exists. (p. 21)
  • 6-3b2g No composability implies fragmentationrevisit
• All this has implications for the theory of investment. A number of investment opportunities actually owe their existence to the failure of past capital combinations to achieve the purposes for which they were designed. (p. 23)
  • Investment is a form of error-corrections
    • 1-2f1a Error-correction is the beginning of infinity. All jumps to universality occur in digital systems.
    • 1-2g2t3d Because creation (and growth) of knowledge is in essence error-correction, and because being wrong is way easier than being right, knowledge-creating-bearing entities will become more alike (and thrive) across the multiverse
    • 13-1a3a1d Money facilitates the maximum use of knowledge available, and accommodates error-corrections (the two are the same thing)
    • This might be why capitalism excels compared to other societal formsrevisit
  • This problem will be discussed also in Chapter III
  • 9-4b2a1d A group of people who doesn’t know who they are and where they came from won’t make it to the moon or Mars
  • 13-2a The supply of capital goods enforces narrower limits than knowledgerevisit
• The market compels the readjustment of those production plans which are inconsistent with either consumers’ plans or other production plans. (pp. 23-24)
  • Sovereignty of the consumer is challenged here. Whereas Rothbard reduces every capital formation down to the demand of consumers, Lachman argues that some formations are dictated by the available configurations that capital can assume. The latter is ultimately about the available knowledge at that point in time (which makes capital heterogeneous).
  • This will be discussed in Chapter IV
• A morphological approach must supersede purely quantitative reasoning (p. 24)
  • Put differently, Rothbardian sovereignty of the consumers makes sense only in the evenly rotating economy (ERE) framework.revisit
  • Available knowledge at that point in time is also a part of reality, and must be accounted for. This is why building only what people want isn’t enough. Knowledge is unpredictable. This is why you can build what people will want.revisit
    • 7-1 Create what people want or will want
• Capital = the (heterogenous) stock of material resources (p. 24)
• To us the question which matters is not which resources are man-made but which are man-used. Historical origin is no concern of ours. Our interest lies in the uses to which a resource is put. In this respect land is no different from other resources. (p. 24)revisit
  • Compare this with Rothbard
  • 1-2g2b5 The most significant universality is that of people. We are universal explainers, and possess the only kind of universality capable of transcending its parochial origins.
  • 13-1a3a2e3 Any prior money must necessarily trace its origin back to the original money
• 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. (p. 26)
• If the plan fails the capital combination will be dissolved and its constituent elements turned to other uses, each within the range permitted by its multiple specificity. (p. 27)
• To assume that entrepreneurial conduct in revising plans at the end of successive periods is, in any objective sense, determined by past experience and thus predictable, would mean falling into a rigid determinism which is quite contrary to everyday experience. (p. 28)
  • You must take into account our ability create knowledge and correct errors—in essence, knowledge creation is error-correctionrevisit
• Men in society come to learn about each other’s needs and resources and modify their conduct in accordance with such knowledge. But the acquisition of this knowledge follows no definite pattern, certainly no time-pattern. Knowledge is not acquired merely as time goes by. (p. 28)
  • 2-2a ‘Emergence’ - Knowledge can be created out of nothing and is unpredictable
  • 2-3b ‘Leverage’ - The effort put in and its utility-results doesn’t have to correlate at all. Use this to your advantage.
  • 3-1c3c3a2 Time spent doesn’t mean muchrevisit
  • 5-1b1a2d Knowledge is by definition unpredictable
    • This why you often have to take a leap of faith in liferevisit
      • 9-2a3 Be long volatility with people
• A method of dynamic analysis which fails to allow for variable expectations due to subjective interpretation seems bound to degenerate into a series of economically irrelevant mathematical exercises. (p. 29)
  • 5-2b5 Theories precede data
  • In Chapter II we start by establishing a few systematic generalizations about expectations
• The formation of expectations is a moment in the process of the acquisition of knowledge and has to be studied as such. (p. 29)revisit
  • 7-1 Create what people want or will want
• In Chapter VI we raise the question whether structural relationships exist in the sphere of property rights and claims as well as in that of physical capital resources, and if so, how the two spheres are interrelated. (p. 30)
  • Viz., Chapter VI explores the relationships between the portfolio structure and plan structure
• Capital owners, having delegated the power of specification to the entrepreneur, are ‘uncertainty-bearers’ in a sense in which workers are not. (p. 31)
  • 13-5b1 Without the capitalists, the income earned by the owners of land and labor fluctuates with consumer demand and is received at a much later date
  • The whole relationship between manager-entrepreneurs and capitalist-entrepreneurs will be taken up for discussion towards the end of Chapter VI
    • Warren Buffett: “I am a better investor because I am a businessman and a better businessman because I am an investor.”
      • 5-1b1b1 Become good at multiple things rather than being super good at one specific thing (the former is both easier and effective)
• Progress will not manifest itself in the capital sphere merely in the form of capital accumulation, i.e., purely quantitative growth. (p. 32)
  • 11-3.4a More is different
• The ability to turn failure into success and to benefit from the discomfiture of others is the crucial test of true entrepreneurship. A progressive economy is not an economy in which no capital is ever lost, but an economy which can afford to lose capital because the productive opportunities revealed by the loss are vigorously exploited. (p. 32)
  • In other words, capitalism progress via error-corrections
    • 1-2f1a Error-correction is the beginning of infinity. All jumps to universality occur in digital systems.
    • 13-1a3a1d Money facilitates the maximum use of knowledge available, and accommodates error-corrections (the two are the same thing)revisit
• All that matters is that new plans which take account of the change in environment should be made forthwith and old plans adjusted accordingly. If this is done as fast as the new knowledge becomes available there will be no hitch in the concatenation of processes, of plan and action, which we call progress. (pp. 32-33)
  • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
• Some capital gains and losses are inevitable as durable capital goods, in the course of their long lives, have to be used for purposes other than those for which they were originally designed. Such capital losses have been frequent concomitants of economic progress in the history of almost all industrial countries, and have on the whole done much good and little harm. (p. 33)
  • We learn from mistakes
    • 4-1a4b2b1 ‘One-of-those’ over one-off - Learn from history (not just from your ‘own’ experience)
    • RUL3 - Invert, always invert

Chapter II: On Expectations

• The subjectivism of interpretation <> The subjectivism of want
  • The former yields provisional judgements to be confirmed by later experience, imperfect knowledge capable of being perfected. (p. 36)
    • 5-2b6 Theories need data
    • The subjectivism of expectations is about interpretation of other beings capable of creating knowledge—they are inherently unpredictable hence our expectations of them will be necessarily imperfect.revisit
  • The latter can provide us with no new knowledge: we either have a want or do not have it. (p. 36)
    • 13-4d4 Value is subjectiverevisit
• In the world in which we are living change does not follow a convenient pattern. Many changes may happen simultaneously. Parts of our communications network may be ‘jammed’ and messages delayed. (p. 37)
  • This theme will be taken up again in Chapter IV
• In a market economy success depends largely on the degree of refinement of one’s instruments of interpretation. On the other hand, every act is a source of knowledge to others. (p. 38)
  • That is, ability to form theories from available data
    • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
    • 5-2b6 Theories need data
• The business man who forms an expectation is doing precisely what a scientist does when he formulates a working hypothesis. (pp. 38-39)
  • 1-1a5b2 Launch means criticism. It’s an equivalent to experimental testing in science.
• Each expectation does not stand by itself but is the cumulative result of a series of former expectations which have been revised in the light of later experience, and these past revisions are the source of whatever present knowledge we have. (p. 39)
  • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
  • 10-1a5 Digitizing history means explaining each fork as contingent points (the could’ve been) for the history around an idea. History is the Idea Maze, and must be created symbolically (never non-digitally nor indexically) by the individuals.
  • 10-1b4f Digitization implies displacement and composability
• The rationale of the method of process analysis is that it enables us to treat the ex ante ‘data’ of action as provisional hypotheses to be revised in the light of later experience (p. 39)
  • Viz., ex ante is never purely evaluated ex post because the process is never endingrevisit
    • 3-1a4b6 The importance of the monetarily accountable compared to the unaccountable increases indefinitely, although the former never exhausts the latter
    • 3-1c3c2d Any explanation, including the theory of physics, can be improved indefinitely
    • 10-2d The medium of expression, language, can also improve indefinitely
    • 12-1e0 Everything changes
    • 13-1a3a2g The specialization process continues indefinitely
  • As will be discussed in Chapter III
• Having stated our expectations at the start of a ‘period’, we test them at its end by comparing actual with expected results, attempting to infer therefrom whether our initial diagnosis of forces and their strength was correct. This process, like all verification of hypotheses, is indirect and therefore often inconclusive. Again, it requires interpretation and yields imperfect knowledge. We may have been right for the wrong reason. (p. 40)
  • 1-2g2j1b Accuracy in virtual reality = The relationship between theory and experiment in science. That is, you can never prove-experience-measure-certify that it’s accurate-true program.
    • The skeptical empiricism of Sherlock Holmes is grounded in the laws of physics.
      • 10-2g1f3 We can only figure out what they know by what they do (‘performance’), because we can never directly study what people know (‘competence’). To assert that we can is a common error in thinking.
• Expectations are thus phases of a never-ending process, the process by which men acquire knowledge about each other’s needs and resources. (p. 40)
  • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
• Three conclusions:
  • All our past expectations form a continuous sequence (p. 40)
  • There are problems of consistency, both interpersonal and intertemporal (p. 40)
    • But those whose expectations are never successful are likely to be eliminated by the market process—the market also tends to evolve institutions which mitigate interpersonal and intertemporal inconsistency. (p. 41)
      • 5-1b3a In particular, we underestimate how much we can change in the future during and after downturns. Things change.
      • 9-1a1 People who converge upon the truth converge with each other
      • 13-6a3 Value scales converge with knowledge—put differently, value scales differentiate without knowledge
      • As will be discussed in Chapter IV
  • In revising our expectations we not only have the knowledge of past mistakes to learn from, but also their physical counterpart, malinvested capital—which is still capital that can be adapted to other uses. (p. 41)
    • As will be discussed in Chapter III
• The function of the capital market is to allocate scarce capital resources amongst a number of alternative uses. This is simple where these uses are known, not so simple where they are not known. (p. 44)
• The need for a reserve stock will continue until the individual and specific needs are known. (p. 45)
  • Relate with Rothbardrevisit
• ‘Market’, in the true economic sense, means a process of exchange and allocation reflecting the transmission of knowledge. (p. 45)
• It does not simply mean that prices are quoted. The prices quoted may be what they are in order to prevent, and not to facilitate, dealings. Where this is the case we have a market in suspense, not a market in operation. (p. 45)
  • 1-2g1b What matters is the explanation, and not what you can see
  • 5-2 What counts cannot be counted
• As soon as the price moves beyond the limits of the outer range (of ‘the Practical Range’), the inadequacy of the diagnosis on which the ranges were based becomes patent. A new situation has arisen which requires a new diagnosis and thus a new mental effort. (pp. 50-51)
  • 1-2e You literally MAKE a decision by creating the best explanation that you can from the web of ideas that you have at the moment (i.e., abduction-guessing)
  • 5-1b2.3 Don’t be the turkey—the Black Swan might be a Grey Swan depending on your perspective
• By and large, price changes integrate a market economy by spreading new knowledge. But not all price changes are equally significant in this respect.
  • Price changes which bring about abduction is what matters—but this is also subjective.revisit
• Their significance has to be assessed with respect to a ‘given’ structure of expectations which finds its expression in a system of ranges. Their practical effect will depend on how quickly the men in the market come to understand what has happened and revise their expectations. To impede price change is therefore to withhold knowledge from the market. (p. 51)revisit
  • Relate with Soros
• It is possible to have ‘misleading’ price movements. (p. 51)
  • As will be discussed in later chapters.

Chapter III: Process Analysis And Capital Theory

On malinvested capital, and that preferences do not determine the constituents of capital structure.

• The theory of capital has to explain why capital goods are being used in the way they are. A theory which ignores regrouping ignores a highly significant aspect of reality. (p. 53)
  • 1-1a5b4.5 Truth is about correspondence with reality
  • 1-2 We are fallible
  • 1-2f1a Error-correction is the beginning of infinity. All jumps to universality occur in digital systems.
• Unfortunately the main trend of the traditional theory of capital treats capital as a homogeneous value magnitude expressed in money terms (p. 54)
  • 2-1a3 ‘Seeing the front’ - Incorporate what can’t be explicated
  • 13-5b2a Because of money, the concept of rate of return can be abstracted to the ratio between present goods exchanged against future goods in general
    • 13-5b2d Production processes in the evenly rotating economy are interchangeable, hence the analysis becomes scale-independent and substrate-independent
• One cannot earn a profit on capital without ‘investing’ it, and that means to de-homogenize money capital. (p. 54)
• The capital account within the precincts of which we reduce our capital resources to a common denominator is merely an institutional device for testing success or failure. (p. 54)
  • 5-2 What counts cannot be counted
  • 5-2a2.1 Know what you are measuring it with
• It is true that what happens during the ‘financing stage’ of an enterprise is not entirely irrelevant to what happens later on: the ‘control structure’ may well influence later decisions, for instance about expansion or reconstruction. (p. 54)
  • As will be discussed in Chapter VI
  • Relate with Warren Buffett’s notes on leveragerevisit
• The view which practically identifies progress with capital accumulation rests on at least three fallacies (p. 55)
  • The division of labor and changes in technical knowledge are other forces engendering progress
  • An increase in output is not the direct result of mere quantitative change, but of a concomitant change in the composition of capital
    • As will be discussed in Chapter V
    • 11-3.4a More is different
  • It completely disregards the facts of malinvestment
• The instruments may be either more or less profitable than in their designed uses. The cause of the phenomenon is unexpected change. Durable capital goods are more likely to be affected than those more short-lived. (p. 56)
  • This relates with Warren Buffett, in particular his combination of long-term holding and avoidance of tech companies.revisit
• In the case of buildings, the fact that capital goods are not used in accordance with the plans originally made for them, is the mere result of the passage of time (p. 56)
  • 4-1a4b2b3 Time will tell because time can de-contextualize seeming necessities
  • 10-2d2e9e Evolution of ‘other life-forms’ must evoke the influence of human existencerevisit
• In modern industrial economies, rapid technical progress and the growing predominance of durable capital equipment have brought a very large proportion of capital resources within the scope of our phenomenon (p. 56)
  • 3-1d4a What matters is if your tools-frameworks are universal
  • 5-1b1.1 Redundancy over premature optimization—especially against Black Swans
  • 10-2g2c0a Universal systems retain the capacity to represent knowledge that is not yet created, thus can be useful in the future.
• Equilibrium analysis can tell us whether courses of action are, or are not, consistent with each other. It cannot, except in rather special circumstances, explain how inconsistencies are removed. They require, in other words, downward-sloping demand curves, upward-sloping supply curves and a point of intersection between them. As we shall see, there is no reason to believe that such continuous functions can exist in the market for capital goods. (p. 57)
• To trace the process of changing capital use we shall have to apply the method of Process Analysis to the use of capital resources—it is a causal-genetic method of studying economic change, tracing the effects of decisions made independently of each other by a number of individuals through time, and showing how the incompatibility of these decisions after a time necessitates their revision. (p. 58)
• In equilibrium analysis our interest is confined to plans which are consistent with each other. Justification for this procedure is sought in the fact that inconsistent plans of individuals who stand in exchange relationships with each other cannot succeed, and that the resultant failures will necessitate continual revision of plans, until a consistent set of plans has been discovered. While the failure of each successive plan conveys significant additional knowledge to the individuals concerned, it does not affect the shape of the demand and supply curves. (p. 58)
  • The assumption is that the curves are “there”revisit
• In process analysis we take interpersonal inconsistency for granted and study its effects. The human mind is an instrument for reducing chaos to order—but beyond this sphere of manifestations of the individual mind no such agent exists. It is true of course that the market serves to produce interpersonal consistency, but it does so indirectly by modifying the conditions of action of the individuals. The market is no substitute for the decision-making unit. (p. 59)revisit
  • Relate with notes on relevant biasesrevisit
  • 9-1b You can’t really transfer your knowledge to others, because each knowledge has to be created individually
• Only those able to adjust themselves to existing conditions would continue to act (p. 60)
  • No masterplans
  • Changing yourself is usually easier and the most effectiverevisit
• In what follows we shall use the method of process analysis in order to elucidate the dynamic implications of decisions about the use of capital resources. (p. 60)
• Depletion of the reserves is a sure mark of failure. The cash reserve is capital in the same way, and for the same reason, as spare parts are. While such money is ‘idle’, its idleness is a condition of successful action. Success and failure are likely to be recorded by changes in the cash reserve before being recorded anywhere else. (pp. 62-63)
  • Relate with Warren Buffett and Henry Singleton
• There is no reason why among the large number of probably inconsistent plans there should be at least one set of plans which would be consistent (p. 66)
  • Viz., the curves are not “there”
  • Lachmann is arguing that the curves are not continuous. It’s similar in spirit with Elie Ayache who argues that price changes don’t happen in time. Nothing remains the same for us across time because we create knowledge. And nothing is shared objectively because knowledge is created individually.revisit
• Neglect of the heterogeneity of capital vitiates the theory of investment (p. 70)
• What has thus far been said in this chapter throws some light on certain problems in the theory of money (p. 70)
  • As will be discussed in Chapter VI
• The size of each firm’s cash reserve depends not on its liquidity preference but largely on what happens during the process of exchange. In a dynamic world, while the exchange of assets that might lead to an optimum position is still going on, other changes will supervene which drastically modify the situation. (p. 71)
  • 5-1b1.1 Redundancy over premature optimization—especially against Black Swans
• Attempts to reach an ‘optimum distribution’ of assets tend to be defeated by the unexpected gains and losses which accompanied the reshuffling of capital combinations, as a result of which some firms found themselves with less, others with more money than they had ‘preferred’. (p. 72)
  • 13-1a3.1a Praxeological analysis can supply some truths about time preferences, using ceteris paribus assumptions—i.e., by evoking the multiverse
    • Viz., the change in the cash reserve per se doesn’t mean anythingrevisit
  • 13-10 The law of the diminishing marginal utility of money applies only to the valuations of each individual person
  • Relate with Warren Buffett and Eric Voskuilrevisit
  • The change in the cash reserve doesn’t reflect the change in preference for money per se—it loosely reflects the ability to recalibrate to the changing environment.revisit
    • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
• The conclusions we have reached in this chapter:
  • Unexpected change makes frequent plan revisions necessary (p. 72)
  • The decision to reshuffle is subject to the same hazards as other plans: the reshuffle may fail (p. 72)
    • 1-2 We are fallible
  • The regrouping plan will result in a shift of the money holdings, and such shifts must not be regarded as necessarily reflecting ‘shifts in liquidity preference’—some of these shifts are among the undesired consequences of plan revisions (p. 72)
    • This is the case where created knowledge supersedes preference—the implication is that you have to recalibrate your knowledge because preference is knowledge-driven.revisit
      • 13-6a3 Value scales converge with knowledge—put differently, value scales differentiate without knowledge
• The view that all shifts in money holdings reflect shifts in liquidity preference presents just another case where the essential characteristics of a dynamic process are assumed away by static assumptions. (p. 72)
  • Lachmann’s criticism here should apply to both Keynesian and Rothbardian theoriesrevisit
• All unexpected change causes capital gains and losses. These, far more than ‘output’, ‘incomes’, or even profits, are the real motor of a dynamic market economy. They are mostly the result of failure of production plans; but often the result of the failure of regrouping plans to materialize in accordance with a predetermined pattern. (p. 73)
  • 3-1d4b Your tools-frameworks-systems must be error-correctable (i.e., digital)

Chapter IV: The Meaning Of Capital Structure

• Physical homogeneity is not incompatible with functional difference (p. 74)
  • 13-4d2 There is no objective value
  • 13-7.1a Prices can reveal differences between goods that appear identical
  • 13-9b1 The closeness of the substitution does not exist objectively, but only subjectively in the minds of consumers
• We must analyze the consequences of capital regrouping for the economic system as a whole (p. 75)
• Two types of capital complementarity: plan complementarity (of capital goods within the framework of one plan) and structural complementarity (of capital goods within the economic system) (p. 75)
  • This chapter is concerned with the second
• There also arises the complementarity of the Investment Portfolio which refers not to productive resources as such, but to the titles to their control, not to operating assets but to securities—where action has to be taken to safeguard the future control of productive resources without as yet making detailed plans for the future. (p. 76)
  • As will be discussed in Chapter VI
• The type of process analysis to which we are committed compels us to regard adjustment as essentially discontinuous—what matters to us is that once we have introduced the distinction between planned action and plan revision, factors may be complements in one and substitutes in another situation. (p. 77)
  • On complementarity and substitutabilityrevisit
    • 11-3.3a The law of returns—with the quantity of complementary factors held constant, there always exists some optimum amount of the varying factor
    • 13-9a All goods are somewhat substitutable for one another thanks to money
    • 13-9b1 The closeness of the substitution does not exist objectively, but only subjectively in the minds of consumers
    • 13-9e The emergence of new types of goods will bring about price decrease for old substitutes because of the shift in demand schedules, under the assumptions of constant supply schedules
    • 13-9g The substitutive effect will be mixed with the complementary effect, and the nature of each particular case determines which effect will be the stronger
• Factors are complements in so far as they fit into a production plan and participate in a productive process (p. 78)
• Substitution, on the other hand, is a phenomenon of change, the need for which arises whenever something has gone wrong with a prior plan. Factor substitution is a concomitant of plan revision, and can therefore only take place intermittently between our “periods”. And substitutability essentially indicates the ease with which a factor can be turned into an element of a plan. (p. 78)
• The central problem of this chapter: What do we mean by capital structure? (p. 78)
  • We cannot accept a definition of capital structure in terms of the constant composition of capital combination (p. 80)
• As the social world is inevitably a world of unexpected change, any concept of stability applicable to it must refer to internal coherence in the face of external change rather than to absence of the latter. (p. 79)
• If equilibrium means nothing more than consistency of a complex of relationships, it can be extended to the world of change if by ‘dynamic equilibrium’ we mean consistency of plans. (p. 79)
• There will have to be regrouping in the firm which starts the change as well as in those which are affected by it (p. 80)
  • 2-1d ‘Ecosystem’ & ‘Thermodynamics’ & ‘Double-entry bookkeeping’ - Everything is connected, there is no free lunch
  • 2-1e Everything is connected in a complex way
  • 10-2g2c0e Synechism - the idea that everything is connected and nothing can be understood in isolation
• In Chapter VII we shall speak of ‘intersectional maladjustments’ as a feature of industrial fluctuations. Without a concept of structure as the norm from which all maladjustments can be regarded as deviations such a notion evidently can make no sense. (p. 81)
• Confronted with the dilemma that in the theory of capital we cannot do without a central concept, but can find no such concept as could stand up to unexpected change, it seems that we must go back to fundamentals. (p. 81)
  • 12-1e0 Everything changes
• A structure is a complex of relationships which exhibit a coherent pattern. The relationships exist between entities. (p. 81)
  • Meaning is often in relation to other thingsrevisit
  • The notion of intertemporal or dynamic equilibrium
• Consistent capital change <> Inconsistent capital change
  • Structural maladjustment = Inconsistent capital change
• Of consistent capital change, we may speak where coincident expectations about the quantities and qualities of goods which will pass from one person’s possession into another’s will in effect co-ordinate all these different plans into one single plan, although this “plan” will not exist in any one mind. (p. 83)revisit
  • 2-2a ‘Emergence’ - Knowledge can be created out of nothing and is unpredictablerevisit
  • 5-1b1a2c0 No theory can exhaust realityrevisit
• Such forces do not operate in a vacuum—often they meet with obstacles and sometimes with counterforces tending to deflect them from their courses. Sheer stubborn ignorance and unwillingness to learn on the part of some producers or consumers may be such an obstacle. But a more frequent form of obstacle is to be found in institutional prohibitions of the full use of whatever knowledge is already available, for instance in certain forms of the Patent Law. (p. 83)
• The complementarity of factors of production employed in primary producing and manufacturing countries and in international transport is the cumulative result of a continuous succession of substitutions. Thus continuous substitution serves to promote universal factor complementarity. (p. 84)
  • Substitution → Complementarityrevisit
    • 13-9g The substitutive effect will be mixed with the complementary effect, and the nature of each particular case determines which effect will be the stronger
• Our next task is to assess the strength and describe the modus operandi of such forces—foremost among these forces is the price system (p. 84)
• Through price changes knowledge is transmitted from any corner of any market to the rest of the system (p. 84)
  • As discussed in Chapter II
• In reality the price system is not an ideal system—transmission is often delayed and sometimes faulty, the meaning of the messages received will lend itself to different (sometimes contrasting) interpretations. (p. 85)
  • Perfect signal cannot be achieved
    • 9-1b0 Knowledge (both explicit and inexplicit) is created individually. You don’t say “I took it from him.” You can’t blame “he took it from me.”
    • Also because perfect unbundling is impossible—as implied in the principle of ecology and legislation (see Buffett and Munger)revisit
      • 5-1b1a2c0.2 Analogue information (e.g., tones of voice, EQ) cannot be perfectly-exhaustively represented by digital systems (e.g., universal writing systems)revisit
• Inflexible prices characterize a market situation in which the transmission of knowledge from buyers to sellers and vice versa is at least temporarily impeded. (p. 86)
• In Chapter II we confined our analysis of the interaction of price change and expectations to a single market. We shall now extend it to price relationships between a number of markets. (p. 88)
• The effect of inconsistent capital change on incomes and employment will be discussed in Chapter VII (p. 89)
• History shows that whenever left sufficiently free from political interference to evolve its responses to challenges, the market economy has ‘grown’ the institutions necessary to deal with them—among these forward markets and the Stock Exchange call for our particular attention. (p. 90)
• Forward markets tend to bring expectations into consistency with each other—they are on the side of the stabilizers. (p. 90)revisit
  • 3-1a4b6 The importance of the monetarily accountable compared to the unaccountable increases indefinitely, although the former never exhausts the latter
  • 10-2e4 Other times (in ‘our universe’) are just special cases of other universes. There is no demarcation between other times and other universes in the multiverse.revisit
• A critical discussion of the Keynesian view of the economic function of the Stock Exchange:
  • All we can conclude from Keynes’ argument is not that the Stock Exchange cannot make yield expectations consistent, but that without forward trading it cannot do so. (p. 93)
  • The Keynesian view ignores progress through exchange of knowledge because the ones know already all there is to be known whilst the others never learn anything. The view stands in clear and irreconcilable contrast to the view of the role of knowledge in society we have consistently endeavoured to set forth in this book. (p. 94)
• Company directors who ignore the signals of the market do so at their peril, and that in the long run a market economy substitutes entrepreneurs who can read the signs of the times for those who cannot. (p. 94)
  • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape

Chapter V: Capital Structure And Economic Progress

Classicists and neoclassicists don’t consider the effect the configuration of capital goods have on those very capital goods

• The forces inherent in a market economy tend to operate towards consistent capital change and a coherent pattern of service streams flowing into and out of capital combinations; a capital structure is always in the process of being formed, a process continually interrupted by unexpected change (p. 97)
  • As discussed in Chapter IV
• In this chapter we are concerned with the changes which the capital structure undergoes as capital is accumulated—with the specific forms the capital structure assumes in an ‘expanding economy’ (p. 97)
• We must see Boehm-Bawerk’s thesis in its proper setting (p. 104)
• Like Adam Smith’s Division of Labour, the principle of roundabout production is (correctly interpreted) a theorem about economic progress (p. 104)
• For Adam Smith the division of labour was the most important source of progress. The same principle can be applied to capital. As capital accumulates there takes place a ‘division of capital’, a specialization of individual capital items, which enables us to resist the law of diminishing returns. As capital becomes more plentiful its accumulation does not take the form of multiplication of existing items, but that of a change in the composition of capital combinations. (p. 105)
  • Proper theory of capital must account for the relation among capital goods—capital goods per se are not exhaustive.
    • 11-3.4a More is different
    • 3-1c2d Human knowledge is hierarchically structured. It’s a list but also about how things on the list relate to one another. The sum of what we know is greater than all things put together.
    • 3-1c2e 情報は関係性の中にある - Meaning is often in relation to other things
    • 3-1c2e1 Connecting-relating ideas is a way of creating knowledge
    • 13-4d6 The economist must take account of all the interrelations in the economy and recognize that money costs are determined by final prices reflecting consumer demands and valuationsrevisit
• Continuous investment will destroy the capital character of some resources for which the new capital is a substitute, while increasing the incomes from labour and capital resources complementary to it. (p. 107)
• There is no a priori reason to expect that a sufficient number of exploitable indivisibilities will always present itself, but the history of industrial countries over the last 200 years goes to show that they usually do. (p. 107)
• Boehm-Bawerk’s thesis thus clearly applies to those cases in which it is possible to invest capital, yet to escape diminishing returns. (p. 108)
  • Just like Adam Smith’s division of labor escapes the Invisible Hand, here the division of capital escapes the diminishing returns.revisit
    • 11-3.1 ‘Equilibrium’ - Anything innovative escapes the Invisible Hand
    • 11-3.4 ‘Utility’ (marginal, diminishing, increasing) - Specialization beats the Invisible Hand
    • 5-3b Knowledge creates new frontiers (and new markets)
• A higher degree of the division of capital, as it accompanies the accumulation of capital, will thus be reflected in an increasing specialization of the processing function, in ‘vertical disintegration’ of the capital structure. (p. 109)
  • Vertical integration doesn’t exhaust the relevant capital goods, as it can only integrate the pre-planned configuration of those capital goods.revisit
    • 2-1c2b Forced vertical integration made Tesla intimately familiar with the complex supply chain required to build a car. Good counter-argument to outsourcing everything.
      • See Henry Singleton
    • 5-1b1a7 Technology’s ‘function’ consists of many parts, and you have to have an explanation for how each contributes to the whole (i.e., ‘vertically-integrated’)
      • 5-3a Knowledge via new explanations is inherently creative and its effects are positive-sum, because it begets new problems to be solved
• Time by itself is not productive, nor is human action necessarily more productive because it takes longer. (p. 110)
  • 2-3b ‘Leverage’ - The effort put in and its utility-results doesn’t have to correlate at all. Use this to your advantage.
  • 3-1c3c3a2 Time spent doesn’t mean much
• We conclude that the accumulation of capital renders possible a higher degree of the division of capital; that capital specialization as a rule takes the form of an increasing number of processing stages and a change in the composition of the raw material flow as well as of the capital combinations at each stage; that the changing pattern of this composition permits the use of new indivisible resources; that these indivisibilities account for increasing returns to capital; and that these increasing returns to the use of capital are, in essence, the ‘higher productivity of roundabout methods of production’. (p. 111)

Chapter VI: Capital Structure And Asset Structure

An asset structure = the Plan Structure + the Portfolio Structure + the Control Structure

• The importance of capital goods lies not in their physical qualities but in the service streams to which they give rise. (p. 114)
  • As discussed in Chapter IV
• We came to see in the Stock Exchange, which is a market not for physical capital goods but for titles to them, an instrument for promoting consistent capital change. (p. 114)
• We have to ask whether capital complementarity exists outside the sphere of physical capital goods, and how such forms of capital complementarity are related to the structure of physical capital hitherto studied is the main question to which this chapter is devoted (pp. 114-115)
• Variations in the cash balance are our primary criterion of success or failure of the plan. In a world sufficiently dynamic to permit of unexpected change there must be at least one variable to register failure and success. (p. 115)
  • 1-1a2e11 Nothing objectively represents the represented
• Money is largely a capital good ‘by proxy’ (p. 116)
• Money and other assets ≠ Consumer goods and services
  • In the case of the latter our system of preferences is the ultimate datum behind which we cannot go (p. 116)
    • 13-9a3 Praxeology is concerned with preference as revealed through choicerevisit
  • In the case of assets relative preferences are the explicandum (p. 116)
• We have to ask why at certain times certain people prefer one kind of asset to another—the composition of asset holdings and its changes make sense only as a response to change, expected and unexpected. (p. 117)
• Monetary change is sometimes the concomitant, and sometimes the ulterior consequences of other asset changes, unexpected and, as often as not, undesired. (p. 117)
  • I.e., ‘liquidity preference’ wouldn’t explain it (as discussed in Chapter III)
• A Theory of Business Finance based on our knowledge of entrepreneurial action in response to change, expected and unexpected, is what we need. To set out at least the elements of such a theory, couched in terms of plan and process, is the main task of this chapter. (p. 117)
• Since our interest is in assets qua instruments of action and the structural relationships between them as channels for the transmission of knowledge, our mode of classification is governed by the relevance of our classes to planning and action. (p. 117)
  • Lachmann’s classification is centered around knowledge
• Operating assets ≠ Securities
  • In the same way as the technical exigencies of production planning reflect past experience and its interpretation in the form of expectations presently held, and are continuously changing as the latter are tested and present becomes past, asset preferences change and holdings are reshuffled as experience and new knowledge direct. (p. 118)
    • I.e., asset preferences are driven by knowledgerevisit
  • To understand how the two spheres of action interact is to understand how a market economy works (p. 118)
    • Warren Buffett: “I am a better investor because I am a businessman and a better businessman because I am an investor.”
• Operating assets = first-line assets + second-line assets + reserve assets
  • Reserve assets are held against unforeseen contingencies just like the cash reserve or reserve stocks, and are not meant to be brought into operation at a definite time (p. 118)
    • 13-8a2 The demand for money stems from fundamental uncertainty about both the future environment and the future-self
  • As we said above (p. 42), reserve assets are supplementary, not complementary to the first- and second-line assets. Whether they ever will become complementary to them depends on chance. (p. 118)revisit
• Securities = debt-titles + equities
  • Debt-titles embody the right to an income in terms of currency units
  • Equities embody the right to participate in control and in residual income
• The various modes the relationship between debt and equity may assume—its control structure—is of considerable importance in determining the response to success and failure. (p. 119)
• There are three kinds of structure—and these three structures are not independent of each other
  • The Plan Structure based on technical complementarity
  • The Control Structure based on high or low gear of the company’s capital
  • The Portfolio Structure based on people’s asset preference
• ‘Asset preference’ is dependent of expectations regarding managerial competence and conduct in making and carrying out plans—it is very different from consumers’ preference, since a cigarette smoker in his choice is confined to what is available in the shops with no need to ponder the managerial efficiency of the makers of the various brands. (p. 120)
  • The existence of flow-driven approach to investing implies that the relationship between the Plan Structure and the Portfolio Structure is not the one of necessityrevisit
    • But since you want to avoid ruin, and since the relationship has a loose correspondence (especially between incompetent companies and bankruptcy), you should avoid incompetent companies (see Carlo Cipolla)
  • If the consumer cannot find what he wants, he has to either give up, or become the producerrevisit
• We shall study the forces which ‘integrate’ our three structures into an over-all asset structure, i.e., the forces bringing the decisions which shape them into consistency with each other—this they do, and can only do, by transmitting knowledge. (p. 120)
  • 13-4d4e All the consumer has to do is to think about himself—in contrast, the entrepreneur (e.g., producer, investor, operator) is primarily about others
• What happens in conditions of expected success
  • As long as success is achieved ‘according to plan’ the structural relationships remain undisturbed. Reserve assets neither increase nor decrease, operating cash balances and stocks are being replenished out of gross revenue. (p. 121)
    • However, the amount which constitutes the reserve must be guessedrevisit
      • 1-1a2e11 Nothing objectively represents the represented
  • The picture is that of stationary conditions with a ‘steady income stream’ flowing year after year, giving no incentive to anybody to modify his conduct. (p. 121)
    • You are getting what you paid for
• What happens in conditions of unexpected success
  • The surplus profits may be used for higher dividends or be ‘ploughed back’ or serve to pay off debts. (p. 121)
    • There are actually five options. The other two include buyback and M&A. See The Outsiders (p. 110)
• What happens in conditions of unexpected failure
  • Sooner or later the need for a reshuffle of operating assets will present itself. (p. 122)
• Both expansion following on success as well as reconstruction following failure cause the ‘demand for money’ to increase. (p. 122)
  • In the case of former, you can take advantage of higher valuation to financing (e.g., see Henry Singleton’s financing approach to M&A when the valuation of his company’s stock was high)
    • 13-8a2.1 Money is the present good par excellence
• A successful enterprise will not ordinarily experience great difficulty in finding new money capital for expansion, though the new capital may alter the control structure. (p. 122)
  • By either tapping internal cash flow, issuing debt, or raising equity. See, again, The Outsiders (p. 110)
• The value of the existing common stock of unsuccessful enterprise under financial reconstruction will have declined, not as a result of any decline in ‘asset preference’, but as the result of events outside the control of the asset holders. (p. 123)
  • I.e., via created knowledge
    • This is why Buffett and Munger stay away from tech companies—unless they have brand
      • I think Berkshire’s stake in Google and Apple is an extension of their previous investment thesis for newspaper companies and See’srevisit
• Capital gains and losses accompany the success and failure of production plans—consumption will be strongly stimulated by capital gains and discouraged by losses. (p. 123)
  • Put differently, the Portfolio Structure and the Plan Structure influence each other.
• Capital losses may give rise to a demand for capital to finance reconstruction (p. 123)
  • The Portfolio Structure can influence the Plan Structure and the Control Structure.
• For our purpose in this chapter capital gains and losses are of importance mainly in that they reflect within the portfolio structure the success or failure of production plans, and thus record within one sphere the events that have taken place, or are about to take place, within another sphere. (p. 123)
  • That is, the Portfolio Structure can reflect the Plan Structure.
• Relative preference for different classes of assets are not given to us as a ‘datum’, but merely reflect other economic processes and their interpretation by asset holders (p. 123)revisit
  • It’s not preference, but knowledge (to the extent that they constitute expectations) that drives everything.revisit
    • In preferences, one’s want takes precedence (“I want this”)
    • In expectations, the reality takes precedence (“This and that will likely happen”)
      • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
      • 2-1b2g ‘Margin of safety’ - Be redundant and resourceful
      • 3-1c3c3a1 Don’t be so attached to anything because almost everything is contingent. Assume no self.
• Four conclusions (from this fragmentary survey of interrelationships in the capital sphere):
  • The changes in the size of reserve assets (particularly of cash reserve) serve as primary criteria of success and failure. (p. 124)
    • Relate with Singleton and Buffett’s emphasis on cash flowrevisit
  • Capital gains and losses are changes in asset values reflecting changes in other elements of the asset structure—revaluation of securities by the market plays a vital part in bringing the various constituents of the asset structure into consistency with each other. (p. 124)
  • It is impossible to treat the demand for securities as though it were a demand for consumption goods. (p. 124)
    • All the consumer has to do is to bring a number of ‘urges’ into a logical and coherent order—a value scale. (p. 125)revisit
      • 13-9a1 A value scale consists of goods with which the individual is familiar—the good will not be on the value scale if the individual does not know about that good
    • The asset holder has to interpret and apply the facts he learns about in the light of his knowledge. (p. 125)revisit
      • 1-1a5 We always reason abductively
      • 1-1a5b4.4 Real-time calibration (i.e., recalibration) lets you adapt to the changing landscape
      • 13-4d4e All the consumer has to do is to think about himself—in contrast, the entrepreneur (e.g., producer, investor, operator) is primarily about others
  • Replenishment of cash has to be accompanied by a reshuffle of other capital goods (p. 125)
    • This fact has some important consequences for ‘cheap money’ and similar policies—as will be discussed in Chapter VII
• In the modern world of large-scale enterprise the typical objects of reshuffling are as often as not whole subsidiary companies. (p. 126)
  • E.g., a conglomerate
  • This fact is of some significance in business fluctuations—as will be discussed in Chapter VII
• If equity ownership has nothing to do with control and the making of decisions, the whole structural scheme we have presented would fall to the ground. (p. 127)
• The manager and the capital owner are each active in his own distinct sphere, but their spheres of action are interrelated by virtue of mutual orientation. (p. 127)
  • For either the other’s action is a datum of his own action. (p. 127)
    • Lachmann uses ‘datum’ to mean something external to oneself and hence uncontrollablerevisit
• It is true that the modern shareholder rarely takes the trouble of opposing managerial decisions with which he happens to disagree at the company meeting. But this is so because he has a more effective way of voting against these decisions: He sells. (pp. 127-128)
  • Viz., mutual checks are at work
    • 13-1a3a1d Money facilitates the maximum use of knowledge available, and accommodates error-corrections (the two are the same thing)—because “the changes in the size of cash reserve serve as primary criteria of success and failure”revisit
• Our main argument in this chapter has been based on a simple division of assets into operating assets and securities. But we saw in the case of the holding company controlling a number of subsidiaries that it is sometimes impossible to draw such a clear dividing line. In such cases it often becomes impossible to say when, for instance, a certain sale or purchase of securities involves a ‘managerial decision’ and when it does not. In the same way it becomes impossible to disentangle profits and capital gains. (p. 128)
  • E.g., Berkshire Hathaway
  • 1-1a2e11 Nothing objectively represents the representedrevisit
• If by entrepreneurial decisions we mean decisions involving the making and revising of plans, there is no difference between changing a production plan and changing the composition of an investment portfolio. They are both exactly the same type of action. (p. 128)
  • There is no substantial difference between businessmen and investors—an entrepreneur should embody bothrevisit
    • Warren Buffett: “I am a better investor because I am a businessman and a better businessman because I am an investor.”
• An entrepreneur = the capitalist-entrepreneur + the manager-entrepreneur
  • The capitalist-entrepreneur’s decisions are of a ‘higher order’ since the manager-entrepreneur’s decisions presuppose and are consequent upon the decisions of the capitalist
    • This is to an extent—because someone like Buffett can fund himselfrevisit
• All the decisions are specifying decisions (p. 129)
  • Turning something into non-contingent form

Chapter VII: Capital in The Trade Cycle

I

II

III

• In the realm of human action there is no such thing as an ‘adjustment mechanism’ (p. 153)
  • Viz., the Invisible Hand exists because humans create and transmit knowledgerevisit
• A market economy has great resilience and can adapt itself to many needs, sudden as well as long foreseen. But this is not because of any automatic mechanism ‘built-in’ but because it serves in general to put the right man on the right spot. Successful adjustment to new conditions no less than whatever ‘stable progress’ there might exist, depend ultimately on the entrepreneurial qualities of mind and will which manifest themselves in response to challenge. (p. 153)
• What is the principle governing capital regrouping on the morrow of the collapse of a strong boom? (p. 154)
• The owners of a factory are unlikely to close it and let their plant lie idle merely because their liquid capital could earn a higher rate of interest elsewhere—here the Control Structure is of some importance (p. 156)revisit
• In any case there will be enough resistance to all attempts to mobilize resources and disintegrate existing combinations to make the withdrawal of mobile factors a slow and precarious business. (p. 156)
  • 2-1a6c1 ‘Tendency to minimize energy output’ - Align your incentives properly, then (almost) everything will follow
  • 4-1e1 Loss aversion - e.g., the prospect of competitor buying you, and having have to acquire you later at higher cost, are the two biggest concerns which motivate potential acquirers
• The problem of surmounting intersectional maladjustment must not be viewed exclusively as falling within the narrow context of the firm and tis internal complementarities—it is impossible to have change and to maintain all existing relationships of complementarity. Those changes which are necessary to rectify the inconsistent capital changes of the boom must not be expected to leave incomes and asset values intact. (pp. 157-158)
  • 2-1d ‘Ecosystem’ & ‘Thermodynamics’ & ‘Double-entry bookkeeping’ - Everything is connected, there is no free lunch
  • See Warren Buffett and Charlie Munger (p. 214)
• It follows that any policy designed merely to restore the status quo in terms of ‘macro-economic’ aggregate magnitudes, such as incomes and employment, is bound to fail. (p. 158)
  • Because the same capital may give rise to service streams of very different kinds (as discussed in Chapter IV).
    • And the general condition of the multiverse is change
• What is needed is a policy which promotes the necessary readjustments. (p. 158)
  • 1-2f1a Error-correction is the beginning of infinity. All jumps to universality occur in digital systems.revisit
• It is clearly impossible to maintain all those asset values which were based on inconsistent plans—somebody has to take the consequences (p. 158)
  • 2-1d ‘Ecosystem’ & ‘Thermodynamics’ & ‘Double-entry bookkeeping’ - Everything is connected, there is no free lunch
• A policy endeavouring merely to ‘maintain effective demand’ by stimulating consumption will simply defeat the very purpose of readjustment by making it profitable for those who should deflect the flow of their services elsewhere. (p. 158)
• The strong boom is the result of plans involving inconsistent capital change, and this inconsistency is the result of the fact that where prices are inflexible they convey misleading information about available resources. (p. 158)
• As it is clearly impossible to have completely flexible prices in reality, or even an equal degree of flexibility throughout the economic system, investment decisions based on erroneous assumptions about the future availability of resources cannot easily be avoided. (pp. 158-159)revisit
  • There is always some analog element in anything—nothing can be represented completely digitally
    • 1-1a2e11 Nothing objectively represents the represented
    • 3-1a4b5 Anything can be priced in principle. But not everything will be.
    • 5-1b1a2c0.2 Analogue information (e.g., tones of voice, EQ) cannot be perfectly-exhaustively represented by digital systems (e.g., universal writing systems)revisit
• Even if all prices were completely flexible and sensitive to all present changes in demand and supply they would, in the absence of a fairly comprehensive system of forward markets, not necessarily reflect future scarcity of resources. (p. 159)
  • Market cannot exhaust reality (e.g., see Elie Ayache’s argument on slip):
    • 3-1a4b7 The monetary account will increasingly explain the world—especially as it pertains to the human actions—though never exhaustively
    • 5-1b1a2c0 No theory can exhaust reality
• The strong boom is thus an almost inevitable concomitant of an expanding industrial economy, and the system-wide regrouping of capital is its necessary consequence and corrective. (p. 159)
  • Boom is inevitable because we are fallible—free market per se cannot do away with booms. What matters is how we correct the errors.
    • 1-2a3 Errors will occur, but have to be solvable-correctable.
    • 1-2f1a Error-correction is the beginning of infinity. All jumps to universality occur in digital systems.
    • 3-1d4b Your tools-frameworks-systems must be error-correctable (i.e., digital)
    • 13-1a3a1d Money facilitates the maximum use of knowledge available, and accommodates error-corrections (the two are the same thing)
• There is one price in particular which, owing to its strategic importance, we should attempt to make as flexible as possible: the rate of interest (p. 159)
• Where a weak boom has ‘petered out’ before ‘hitting the ceiling’ capital regrouping is just as necessary. (p. 160)
• Even in a weak boom, the new capital combinations will change the capital structure and the new products modify the market structure. Here again price inflexibility will for a time tend to hide the facts from the entrepreneurs, but the inconsistencies will show themselves in the end. This situation is best viewed in terms of Schumpeter’s model in which the ‘innovating’ new firms expand into ‘new economic space’ but also restrict the range of action of the older firms. (p. 160)
  • See p. 156 as to why price inflexibility exists
  • 5-3b Knowledge creates new frontiers (and new markets)
  • 13-2a The supply of capital goods enforces narrower limits than knowledge
• At the end of a weak boom, excess capacity (of the ‘real kind’) may make its appearance. The notion that in such a case we could simply restore the status quo by ‘maintaining incomes’ is just as futile as in the case of the recession following the strong boom. (pp. 160-161)
  • This is why companies with high-turnover short-production-time product can be great hedge against inflation (e.g., Buffett’s purchase of See’s) as they are exposed to constant recalibration with realityrevisit
• A budget deficit may help—but such a policy would have to be supplemented by strong pressure for the necessary capital regrouping to take place (p. 161)
  • Error-correction >>>>> Making errorsrevisit
    • 1-2 We are fallible
    • 3-1d4b Your tools-frameworks-systems must be error-correctable (i.e., digital)
• Attempts to ‘stabilize’ prices will, by reducing consumers’ real incomes, simply make adjustment more difficult. The best remedy for the excess capacity mentioned is to make it unprofitable for the owners of such resources to maintain them. (p. 161)revisit
  • Stabilize here means supporting the prices of inventories e.g., via intervention
• The significance of capital regrouping transcends the phenomena of the strong boom. The Austrian theory, as most other models except Schumpeter’s, ignores the effects of innovation and technical progress. (p. 161)
• Technical progress may cancel some of the effects of ever greater division of labour and specialization of capital by making some specialized skills and other specific characteristics redundant. In a world in which the forces of progress are manifold there are more, and not fewer, forces abroad which make the regrouping of capital an ineluctable task. (pp. 161-162)
  • Error-correction >>> Progress per serevisit
    • More precisely, error-correction is necessary for technical progress to occur continuously
      • Problems are inevitablerevisit
• Technical progress means unexpected change. Plans have to be revised, new capital combinations are formed, and old combinations disintegrate. Without the often painful pressure of the forces of change there would be no progress in the economy; without the steady action of the entrepreneurs in specifying the uses of capital and modifying such decisions, as the forces of change unfold, a civilized economy could not survive at all. (p. 162)
  • 5-1b1a2d Knowledge is by definition unpredictable
  • 5-1b2 Don’t invest in prediction, because knowledge is inherently unpredictable

Personal thought:

• inspired by Lachmann (Ch. III)
  • value is subjective because knowledge is created subjectively
    • knowledge supersedes preferences
      • and knowing the extent of other people’s knowledge forms a part of accurate and complete information, because other human beings are part of the reality with which your theory must be concerned
• my thoughts on lachmann (ch. vi)
  • his focus on the Control Structure somewhat anticipates activists and their influences
• my thoughts on lachmann (ch. vii)
  • the invisible hand doesn’t exist independently—it exists because of humans and to the extent of their knowledge—and since knowledge is created subjectively ex nihilo, and to the extent that the capital consistency is not achieved by any single mind, it’s not one hand but many and it literally changes hands

Expectations and the Meaning of Institutions

From Mises to Shackle

• Mises: “Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct” (1949: 92)
• Shackle: ‘Economics, concerned with thoughts and only secondarily with things, the objects of those thoughts, must be as protean as thought itself” (1972:246)
• “Action is guided by plans, i.e. by thought, and all action has to be interpreted as the outward manifestation of such plans, which must be coherent if they are to have a chance of success. In fact all economic phenomena are intelligible only as the outcome of planned action”
• Shackle: “If the world is determinist, then it seems idle to speak of choice” (1972:122)
  • 13-1a Humans have problems because we have to choose because we could be otherwise because of the multiverse
• Mises: “What counts for praxeology is only the fact that acting man chooses between alternatives. That man is placed at crossroads, that he must and does choose is…due to the fact that he lives in a quantitative world and not in a world without quantity” (1949:126–7)
• “Both our authors emphasize that the mathematical notion of time as a continuum, a dimension in which events take place, does not fit the requirements of a science of human action.”
• Mises: Case probability has nothing in common with class probability but the incompleteness of our knowledge. In every other regard the two are entirely different… “Case probability is a peculiar feature of our dealing with problems of human action. Here any reference to frequency is inappropriate, as our statements always deal with unique events which as such—i.e. with regard to the problem in question—are not members of any class… Case probability is not open to any kind of numerical evaluation” (1949:110-113)
• Professor Hayek, to be sure, dealt with expectations in 1933 in his Copenhagen lecture on ‘Price Expectations, Monetary Disturbances and Mal-investments’ (1939) and in ‘Economics and Knowledge’ (1948), but not with the causes and consequences of their divergence. In fact, expectations were here regarded as being of analytical interest only to the extent to which they converge. They were, on the whole, treated as a mode of foresight, a rather unfortunate but inevitable consequence of imperfect knowledge. Mises hardly ever mentions expectations, though entrepreneurs and speculators often enough turn up in his pages. Thus from 1939 onwards Shackle had to take on expectations more or less single-handedly without much benefit of support from the Austrian side.
• “Professor Hayek, to be sure, dealt with expectations in 1933 in his Copenhagen lecture on ‘Price Expectations, Monetary Disturbances and Mal-investments’ (1939) and in ‘Economics and Knowledge’ (1948), but not with the causes and consequences of their divergence. In fact, expectations were here regarded as being of analytical interest only to the extent to which they converge. They were, on the whole, treated as a mode of foresight, a rather unfortunate but inevitable consequence of imperfect knowledge. Mises hardly ever mentions expectations, though entrepreneurs and speculators often enough turn up in his pages. Thus from 1939 onwards Shackle had to take on expectations more or less single-handedly without much benefit of support from the Austrian side.
• “Nobody can profitably exploit his knowledge without conveying hints to others. But can the market process diffuse expectations in the same way as it diffuses knowledge where this exists?”
• “What is being traded there are titles to (in principle) permanent income streams, which have no date that could ‘move nearer’…There is here no question of a gradual approach towards long-run equilibrium”
• “Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians ‘logical’ and neoclassicals ‘mathematical’ economists, wrote: ‘Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease’ (1949: 352).”

How I found Lachmann

20250701

• In the evenly rotating economy, businesses somewhat become interchangeable.
  • But are people interchangeable in the ERE?revisit
• Mises and Rothbard are both theorists, and I am sure that Sherlock (and likely Deutsch and Taleb) would criticize their treatment of government intervention, saying it doesn’t explain how it came about in the first place.

20250704

• me doubting the concept of evenly rotating economy
  • money is demanded because there is change, but in the ERE there is no change, but the ERE assumes money
    • I can convince myself that this makes sense if the ERE is the end state towards which the reality tends toward
      • but yet another question—is it really?
  • ludwig lachmann and bohm-bawerk argued otherwise (vs Rothbard and Mises)
    • capital is not homogenous
      • every capital good is a function of a plan—relate this with how you cannot predict how people will use technologyTODO

20250705

• 5-1b1a2—the problem with the ERE (evenly rotating economy) is the problem I encountered with Deutschean concept of universality—what is specifically universal is subjectivity
  • Also 9-1b2
  • For Lachmann, there is no such thing as mispricing, at least in the objective sense
  • Price as it would be in free market is not the same one as it would be in free market with knowledge creation.
    • Knowledge creation can negate difference between free market and one with intervention
      • E.g., ケマルアタテュルク (an intervention which facilitated knowledge creation)

20250707

• embedding error-correction in capital theory, that’s what Lachmann did

20250708

• The evenly rotating economy framework is useful because it clearly shows economic theory which disregards knowledge creation

20250710

• Lachmann’s focus on capital configuration is similar in spirit to constructor theory of David Deutschrevisit

20250713

• Lachmann vs Rothbard
  • MPP is knowledge-dependent—it changes
    • and although knowledge goes from private to public, some knowledge are kept hidden forever unless it is created in the mind
  • rothbard: time preference → interest → cap structure
    • time pref → capital
  • lachmann: knowledge → cap structure → coordination (which includes interest)
    • inverted: no capital → no demonstrated choice → no revealed time pref
      • rothbard would’ve reached the same conclusion, had he taken his praxeological stance thoroughlyrevisit
    • knowledge → capital → revealed time pref

20250714

• expectations are not fully capturable in a price
  • because perfect replication is impossible
    • rothbard assumes price can exhaust something other than itself—e.g., in the ERE, he assumes that prices exhaust MPP and MVPrevisit
• “Homogeneous capital” in Rothbard’s use assumes a shared valuation of capital goods (same MVP), because everyone sees the same MPP.
  • Lachmann challenges this by showing that MPP is subjective, and hence valuation is fragmented—depending on each actor’s knowledge, expectations, and purpose
    • and this is the meaning of heterogeneous capital
    • this is evident in rothbard arguing how different goods cannot be aggregated, but the “same” goods can be aggregatedrevisit
• that capital is heterogenous is implied in the multiverserevisit
• homogenous capital theory ignores culture
  • it ignores the fact that we are and will be always shifting from anti-rational to rational memes

20250715

• MES Ch. 7-1 ~ 9-2E
  • Real-income (MPP/d) doesn’t rise or fall—because commensurable MPP doesn’t exist where there’s knowledge creation—it just becomes different.
    • The more is different to the extent that more creates knowledge.
    • This means that MPP curves change rather than shift.
      • The latter assumes constant environment but since knowledge is unpredictable, what happens in reality is the former.
        • This clearly shows how knowledge creation is not a function of time (Lachmann), which is also related with how there’s no beginning or end in our perception of reality, which further relates to why we always adjust to the facts of reality.
          • The book doesn’t have to be read in order, you can discover the meaning as you read (which means, you can read the way you like)—in fact, this is how we go about life (including scientific discoveries).
  • If there’s no additional saving, then profit must be made out of other people’s losses (by other people’s mistakes).
    • Facilitated via market
  • Optimal level of anything assumes constant environment.
  • We can discuss productivity in marginal terms, but only with conjunction in terms of knowledge held by those who are related to the productivity at hand.
    • That is, the factor’s marginal productivity doesn’t exist objectively—it exists only to the extent of the knowledge held by the producer who uses that factor.
      • This is why MPP curves cannot be aggregated—they are subjective just like any other preferences.

20250726

• there is no beginning or end because there is no commensurable unit (e.g., time)
  • as Lachmann said, knowledge is created in time, but not a function of it
    • relate with there’s no tracing the origin notes