The Theory of Capital as a Theory of capitalism

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The Theory of Capital as a Theory of capitalism

Before economists and sociologists came up with their own definitions of the term ‘capital’, it was commonly understood as money invested in businesses by their owners or shareholders, and it continues to be understood this way in everyday business practice and common parlance. In this view, capital is specific to capitalism with its profit-oriented enterprises. Geoffrey Hodgson (2014) argues that economists have disregarded the nature of capital as a historically specific feature of capitalism by employing a notion of capital that refers to physical activities related to the production process rather than to acquisitive activities of business enterprises. In this way, they have shuttered a promising way of understanding the system we actually live in. He suggests a return to the business usage of the term capital which was dominant in economics in the time before Adam Smith. Hodgson (2015) and Deakin et al. (2016) show that similar terminological differences also apply to the definitions of money, property rights, the firm, and other institutions. Economists have divested these institutions of their concrete, historical role and instead defined them as universal phenomena. In this way they hampered the proper analysis of capitalism. The present paper takes up Hodgson’s (2014) challenge and develops a historically specific theory of capital. In this, it exploits Austrian capital theory which, perhaps surprisingly, is able to contribute several useful elements and arguments. After some reinterpretation, it becomes obvious that the Austrian capital theory is consistent with the business notion of capital and therefore conforms to Hodgson’s demand in many ways.

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