The Review of Austrian Economics, 17:1, 67–85, 2004.
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Uncertainty in the Austrian Theory of Capital
STEFAN W. SCHMITZ email@example.com
Austrian Academy of Sciences, Research Unit for Institutional Change and European Integration—ICE,
Prinz Eugen-Strasse 8-12, A-1040 Wien, Austria
Abstract. This paper is based on the traditional Austrian Theory of Capital which deals with expected values of
future returns of investments over various periods of time. The longer the time period that elapses between the
beginning of a production process and its end, the higher the (expected) productivity must be due to positive time
preferences of individuals. This paper focuses on the uncertainty of future returns and on uncertainty preferences,
instead. Based on the Hayekian idea of the dispersion of knowledge in society, it will be shown that there is a
systematic relationship between the structure of capital and uncertainty. This result will be derived for a production
process characterized by complete vertical integration and one which is not completely vertically integrated. The
distinction between these two settings is crucial, if one accepts the distinction between an individual and a social
period of production and the planning horizon which are introduced in this paper.
KeyWords: capital theory, uncertainty, period of production, capital structure, productivity
JEL classiﬁcation: B13, D21, D24.
Problems of capital and ﬁnance are reduced to trivial questions of market allocations by
the speciﬁc set-up of microeconomic theory. As inputs are transformed into output instan-
taneously, the proceeds of the output can be used to pay for the inputs necessary.
relevant constraint the ﬁrm face is that the optimal output must be feasible—it must be
within the bounds of the production possibility set. This constraint is fully deﬁned by tech-
nology. Standard microeconomic theory, therefore, focuses on marginal productivity and
the marginal rate of technical substitution, but neglects the ﬁnancial aspects of production,
such as funding initial set-up costs, ﬁxed and working capital, and investments to expand
the production possibility set. The concepts of time and uncertainty (modeled in terms of
additive subjective probability, i.e. as risk) receive some attention in models of complete
markets and/or sequential trade.
However, their structure implies that capital and ﬁnance do
not receive sufﬁcient attention in standard micro-economics. Therefore, the income-effect
is not included in the Slutsky-equation of the ﬁrm. The stability- and uniqueness-conditions
of the general equilibrium are all based on the characteristics of the demand functions.
Austrian Capital Theory (ACT) has focused on the concept of time as early as 1871,
when Menger’s Principles were ﬁrst published. In the ﬁrst section I will outline the basic
concepts of ACT. Distinctions between the individual and the social period of production,
as well as the planning horizon will be made. In the second section the prominent role
of uncertainty in Austrian Economics will be emphasized. Both dimensions of time and
uncertainty featured equally prominently in Menger’s Principles. The role of uncertainty