Review of Austrian Economics, 13: 147–174 (2000)
2000 Kluwer Academic Publishers
Capital as Embodied Knowledge: Some Implications
for the Theory of Economic Growth
HOWARD BAETJER, JR., HBaetjer@Towson.edu
Department of Economics, Towson University, 7800 York Road, Towson, Maryland 21252
Abstract. Capital goods are embodied knowledge of howto produce. Therefore, capital development is a learning
process, through which knowledge gets embodied in new capital goods. Because the necessary knowledge is
dispersed among many people who must interact to communicate their particular, often tacit knowledge, capital
development is a social process. Because this interaction takes time and continually changes the capital structure,
capital development is an on-going process. Capital development is a social learning process. Neither traditional
nor “new” growth theory illuminates how the capital structure evolves. Traditional growth theory, by modeling
capital as single variable in the production function, ignores the heterogeneity of capital goods and their varied
structural relationshipsof complementarity, substitutability, feedback, and feed-forward. Newgrowththeory, while
accounting for technological change, still treats capital as aggregableand thusimplicitly homogeneous.That capital
development is a learning process suggests that growth rates can increase. What prevents exponential growth is
neither diminishing returns nor upper bounds to human capital, as growth models assume. It is the constant
challenge of maintaining capital complementarities in a world of incomplete and rapidly changing knowledge.
JEL classiﬁcation: O40 and O30.
The purpose of this paper is to understand better the nature of economic development, by
studying the nature of capital and what that means for the process of capital development.
Throughout the paper, by capital is meant capital goods—in Bohm Bawerk’s words, “the
produced means of production”—as opposed to ﬁnancial or human capital.
The paper is in three sections. The ﬁrst investigates the idea that capital is essentially
knowledge, and what that implies for the process of new capital development. The next
section examines and ﬁnds lacking the treatment of capital and capital development in
traditional and “new” growth theory. A concluding section considers what the nature of the
capital development process implies about the determinants of economic growth rates, in
particular tendencies toward very rapid growth, and factors that check those tendencies.
Capital Goods as Knowledge; Capital Development as Learning
The research programme of which this article is part is motivated by the same question that
motivated Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations
(1976): how do we account for human beings’ economic advancement? How is it that our
race of talking primates has been able to advance from barbarism to abundance, at least in