Capital and Finance Theory and History

List of Figures

List of Tables

Preface

Introduction

PART I

CAPITAL, PRODUCTION, AND TIME

1. Capital, Income, and the Time-Value of Money

1.1 Capital and Income

1.1.1 Ideas matter

1.1.2 Assets and liabilities, income and expenditure

1.2 The Time-Value of Money and the Money-Value of Time

1.2.1 The Time-Value of Money: Investment decisions

1.3 Investment decisions and the money-value of time – the important concept of duration

2. Discount rates and time

2.1 Duration

2.2 The uses and limitations of D

2.2.1 Modified duration and immunization

2.2.2 Convexity

2.2.3 Too many unknowns?

2.3 Using polynomial roots

2.4 Summary Conclusion

PART II

HISTORY OF CAPITAL THEORY

3. Menger and Böhm-Bawerk: Foundations of Austrian Capital Theory

3.1 Menger’s theory of capital

3.1.1 Value is subjective, all the way down

3.1.2 Production takes time

3.2 Böhm-Bawerk’s capital theory

3.2.1 Productivity, average period of production, and roundaboutness

3.2.2 Further issues: Is Böhm-Bawerk’s APP value free?

3.2.3 Further issues: A Böhm-Bawerkian production function?

3.3 Appendix

3.3.1 Böhm-Bawerk’s APP with simple and compounding interest

4. Hayek’s Capital Theory and Austrian Business Cycle Theory

4.1 Hayek’s Austrian Business Cycle Theory

4.1.1 Hayek’s triangle – a special case of Böhm-Bawerk’s special case

4.1.2 Introducing stages of production

4.1.3 The Legacy of Hayek’s Triangle

4.4 Hayek’s Capital theory

4.4.1 Hayek and the Average Period of Production

4.4.2 Beyond the APP, to what?

4.4.3 Capital Consumption and Maintenance when Capital Goods are Heterogeneous and the Future is Uncertain

4.4.4 Permanent Income, it depends on what is Foreseen and What is not Foreseen

5. Ludwig Lachmann and the Capital Structure

5.1 The Heterogeneity of Production Goods and the Austrian school

5.2 The macroeconomic implications of heterogeneity, investment and technological change 57

5.3 Lachmann’s contributions to Austrian Capital Theory in Relation to "Capital as Finance"

5.4 Problems with the Aggregate Production Function

6. Ludwig von Mises and Capital from a Financial Perspective

6.1 Mises’s Financial View of Capital

6.2 Capital as an Historically Specific Concept

6.3 Capital and Production

6.4 Conclusion

7. John Hicks and Capital in the Aggregate Production Function

7.1 John Hick’s Neo-Austrian Capital Framework: Time is Irreversible

7.2 Subjectivising Hicks’s Simple Conceptual Framework

7.3 A Simple Financial Formalization

7.4 Looking forward and looking backward

PART III

FINANCIAL APPLICATIONS

8. The EVA® Framework

8.1 From Free-Cash-Flow (FCF) to Economic Value Added (EVA®) – separating profit and loss results from investment decisions.

8.2 A Deeper Look: Value Drivers

8.3 What is Capital Intensity?

8.4 Duration, time, capital, and W

8.5 Appendix: The EVA® derivation

9. EVA and Microeconomics

9.1 Relative prices and economic profit in the EVA framework

9.2 International trade

9.3 Cantillon effects

9.4 EVA and the problem of economic calculation under socialism

10. EVA and Macroeconomics

10.1 The Austrian Business Cycle Theory (ABCT): A Credit Induced Business Cycle

10.2 Financial Foundations of ABCT

10.3 Rational Expectations and ABCT

10.4 Extensions of the ABCT

10.4.1 Exchange rates

10.4.2 Risk

10.5 Appendix

11. EVA and Institutions

11.1 Why are Institutions Important?

11.2 EVA and Macroeconomic Performance

11.3 Mapping economic freedom into an EVA analysis

11.3.1 EFW Area 1: Size of Government

11.3.2 EFW Area 2: Legal System and Property Rights

11.3.3 EFW Area 3: Sound Money

11.3.4 EFW Area 4: Freedom to Trade Internationally

11.3.5 EFW Area 5: Regulation

11.4 Conclusions and Summary

12. Concluding Remarks

13. References

Index

Biography

Peter Lewin is Professor of economics in the Naveen Jindal School of Management at the University of Texas at Dallas.

Nicolás Cachanosky is Associate Professor of economics at the Metropolitan State University of Denver.