Non-Material Austrian Capital Theory and Loan Markets

This paper explores the non-material definitions of capital that were used by Carl Menger and especially Ludwig von Mises. Menger introduced the idea that capital is a businessperson's net worth devoted to earning income. Mises appears to have copied this definition, with added emphasis on the role of the entrepreneur. Mises also integrated this definition with a theory of loan interest. In the latter, he stressed time preference and the time structure of interest rates; entrepreneurship and economic calculation; how injections of money affect decision making; and the problem of aggregating the separate, private net worth of different individuals. It is argued that this notion of capital is superior to that of the material definitions used by other Austrian writers. It is superior because (1) it directs one's attention to higher order goods and time, (2) it avoids all possibility of confusing Austrian capital theory with the classical notion that interest is the price of capital goods, (3) it neutralizes any concept of “social capital,” and (4) it places the focus on entrepreneurship, the entrepreneur point of view, and the entrepreneur process.