Accounting and finance: capital and cost in economics

Early Austrians perceived building a coherent capital theory as an indispensable first step toward building solid foundations for economics as a discipline. However, the important connection between “capital” as a foundational concept and the rest of all of economics has been quite obscure to most economists, including many Austrian economists. That this should have been the case is unfortunate. In this chapter, we aim to make some progress toward rectifying it and, in doing so, point towards new paths in a contemporary research agenda on Austrian economics. We also argue that a renewed appreciation of capital theory’s importance is relevant to the connection between Austrian economics and mainstream (neoclassical) economics. Although this topic has been a central one throughout the post-1974 period of the Austrian revival, the nature of the perceived connection has varied. Starting from an examination of capital theory, we see this connection in terms of the relationship between economics and the contiguous disciplines of finance and accounting. In highlighting the roles of subjective value, time and disequilibrium, we contend that Austrian capital theory brings into sharp focus how economics, correctly understood, can be used alongside the practical disciplines of finance and accounting as a business management tool. The economic way of thinking is important for making good business decisions.