An Essay on Capital

Israel M. Kirzner's An Essay on Capital, published by Augustus M. Kelley in 1966, treats each capital good as the interim result of an unfinished multi-period plan, so its economic character depends on the uses its owner and prospective buyers foresee. Kirzner calls the book a prologue to capital theory, and it supplies concepts that theories of interest and growth need without offering an investment rule. The Foundation for Economic Education hosts a scan of the first edition as a direct PDF, and its book page adds a separate 2017 foreword by Peter Lewin.

Kirzner's hypothetical oven maker overestimates demand and sells his ovens at disappointing prices. Those prices may spell losses and still make continued baking worthwhile, so the ovens go to bakers as planned. Had every entrepreneur foreseen market conditions, bread baking would now be a smaller industry, and by that standard the investment remains an error. Because the ovens existed before anyone perceived the mistake, competent entrepreneurs put them to the best available use, and completing the original plan answers the new situation without vindicating the first decision. With the same knowledge, Crusoe faces the same prospective choices whether he continues a plan already begun or starts afresh from the goods on hand, although their history still explains what they were built to do.

In a later passage, once a producer has invested in specific, immobile equipment, his choice of a current capital-labor mix need not count that equipment's cost insofar as it is sunk, irretrievable investment, and time depreciation and interest charges on that investment are equally irrelevant there. Other inputs still cost resources, and whatever resale or scrap can recover remains an alternative to further use. Payments owed to creditors remain owed without deciding that combination. When heavier use shortens the equipment's life, the resulting user cost enters the calculation. Before acquisition, comparing multi-period projects requires weighing how fast each stock will deteriorate and what maintenance or replacement will keep it intact. Kirzner retains capital as a stock and the capital-income line as a sound accounting tool.

Waiting, too, is prospective: the stretch that enters a decision runs from the present choice to the expected output, while time already spent producing equipment belongs to history. Finished intermediate goods shorten the remaining wait for a given product and bring longer projects within reach, so the book sets out no universal law that more waiting yields more output. A planner can treat futurity as a quality that lowers an output's present desirability, and a footnote grants that the same disutility can equally count as a separate sacrifice. Another footnote leaves unresolved how to date the output corresponding to a given input when production is joint.

Kirzner accepts that historical money outlays plus accrued interest can be added, while denying that the sum gives a cardinal total of subjective sacrifices made at different dates and judged by the value rankings of those dates. Every purchase or holding of a capital good at a market price is a forward valuation resting on a plan and on expected prices of complementary goods. Plans can conflict: if one firm equips for a warm summer and another for a cold one, their valuations need not add up to productive potential the economy could realize jointly, a difficulty that output measurement does not automatically share. A figure for total capital becomes useful once it openly states its assumptions of an integrated plan and a social scale of values, and Kirzner grants that Denison's cost-based measure serves a practical purpose distinct from his own.

The closing pages take up writers who would remove from capital measures the premium the market places on the more durable of two otherwise identical machines. Kirzner replies that the adjustment leaves a count of machines and sets aside the prospective economic histories that account for their difference. Whether such a count suits a practical task depends, as with Denison, on what its user wishes to measure. The book ends as a conceptual prologue, leaving index construction to explicit practical aims, having argued that a capital figure must state which plans it assumes and whether durability belongs to the quantity it reports.