Capital in Disequilibrium: The Role of Capital in a Changing World

Capital in Disequilibrium, Peter Lewin's study first published in 1999 and reissued by the Mises Institute in a 2011 second edition with few changes, asks what gives a lathe or a trained engineer its value as capital. Lewin's answer is a production plan: heterogeneous goods become capital because someone has fitted them together in pursuit of an expected result, and their value moves whenever that expectation is revised. The full text is available as a Capital in Disequilibrium, Mises Institute PDF.

Lewin borrows an illustration from Ludwig Lachmann. A delivery company runs several vans over different routes, and while the plan runs the vans complement one another. When one breaks down, another can be diverted to its route, and in that contingency the same vehicles become substitutes. From this illustration Lewin infers that complementarity and substitutability describe how goods fit a plan, so the relation between two goods shifts with the plan. An unforeseen technical change can leave a plan worthless, and its goods must then be regrouped into another combination, often at a loss, or scrapped.

That fragility underlies Lewin's case, developed through the Austrian and Cambridge capital debates, against treating capital as a homogeneous stock. Present-value arithmetic is indispensable to an individual deciding whether a combination is worth assembling. Entrepreneurs discount incompatible futures, however, and values resting on futures that cannot all occur do not add up to one quantity the economy could realize. Accounts and capital statistics remain computable and useful, and prices formed in disequilibrium keep their meaning as the terms on which people trade and budget while plans diverge.

Those prices give a firm's accounts their footing. Profit measured as the residual after every contractual obligation has been met rests on market prices and so has an objective basis from the firm's standpoint. Splitting true profit from the user cost of owned machines and buildings requires judgment, because the firm must estimate what using its own equipment costs. Firms make the split anyway, and the institution of the firm, together with money and accounting, supplies the conventions for making it. Misjudgment surfaces in cash when understated user cost reappears as spending on repair and replacement. Lewin separates that persistent, unplanned drain from the deficits a new venture plans in advance, and projects passing the test count as viable, a deliberately weaker claim than global optimality.

The same reasoning about plans governs where firms draw their boundaries. Lewin argues that systemic change, in which several stages must move together and the needed capabilities are hard to buy, can favor integration, while modular products with standardized interfaces can favor disintegration, so the best size for a firm depends on the change it faces. His interest chapter rejects the claim that positive time preference follows deductively and universally from action while defending a qualified empirical version tied to uncertainty. A separate chapter, on organizations, money and calculation, considers how policy bears on a firm's capital calculation and observes that a policy rate cut need not lower the rate investors apply to their projects, since investors who read the cut as inflationary may apply a higher one. The traditional Austrian business cycle theory he leaves unevaluated.

Human capital follows the same logic. Measured returns to education are historical results that inform a choice without guaranteeing a future, and much useful knowledge is tacit, though learnable through practice and apprenticeship. The conclusion turns this into a claim about development: equipment can be bought and experts hired, while respect for property and a working money must grow within a society along with the skills that use them. Lewin treats the equilibrium world as an illuminating contrast and concedes that the superior performance of capitalist economies cannot be logically proved. He argues that the discovery displaced by government action is unmeasurable. That claim concerns forgone knowledge, while budget outlays remain countable, and the argument yields no universal guarantee about any current policy.

Lewin marks a limit of his own: the 2011 preface judges the book's treatment of knowledge embodied in machines insufficient, and a footnote on the firm points to later work with Howard Baetjer that this edition does not fully absorb. The framework explains why firms reorganize and why accumulation changes the shape of capital, while forecasting the next firm boundary or innovation would require additional industry-specific evidence. It suits readers at ease with present-value algebra and conceptual argument, and its central point applies to anyone who values equipment: the figure on the books records a judgment about a plan, and it moves when that plan is revised.