Capital theory is one of the fundamental pillars of the Austrian school of economics. Unlike mainstream economists, who view capital as a relatively homogeneous mass of production goods, Austrian economists have developed a much richer, more nuanced conception. This approach integrates the central role of time in the continuous improvement of the productive structure. Capital, in this perspective, represents the entire productive structure, from the original factors of production such as land to the final production of consumer goods. The intermediate stages are taken care of by entrepreneurs and capitalists who invest in productive assets to improve this structure.

Neoclassical economists, notably in the Solow-Swan model, use the notion of capital stock without dwelling on its internal composition. While this restrictive vision makes it easy to measure capital in their macroeconomic models, it neglects essential aspects. Notions linked to capital structure, i.e. the complexity of the arrangement of intermediate stages and the time required to deploy them, are underestimated or even totally absent. Capital becomes a balancing, static and homogeneous notion.

With Eugen von Böhm-Bawerk, Austrian economists developed a robust theory of capital centered on the concept of production detours. According to this approach, society operates on a global capital structure whose size and complexity are determined by the time preferences of individuals. Investment in the stages furthest removed from consumption forms what Böhm-Bawerk called the detours of production: producing capital goods first, which are then used to produce consumer goods.

A simple example illustrates this concept. You can fish with your bare hands in a river, which is direct production. Alternatively, you can first make a fishing net, which represents a production detour. This detour requires time and effort with no immediate consumption, but once the net is finished, your productivity will increase considerably. As Böhm-Bawerk wrote, man chooses detour production methods that require more time but compensate for this delay by generating more and better products.

Savings play a crucial role, as they signal that current consumption is satisfied. It tells entrepreneurs that they can invest in other stages of production without negatively impacting current consumption. Savings and their price, the interest rate, are therefore essential in steering production towards the right time frame.

Economist Mark Skousen estimates that over sixty percent of productive resources available outside the public sector are devoted to the production of capital goods. This remarkable figure means that two-thirds of scarce factors of production are not devoted directly to consumption, but to perfecting the capital structure. This structure will serve the interests of consumers by enabling the production of goods of better quality, in greater quantity and at a better price.

Capital is a complex and diverse set of production goods, each with unique characteristics and specific uses. A mineral extraction machine is not the same as a combine harvester, and a container ship is not a tractor. Yet all these goods play a part in maximizing final production. But these capital goods are not interchangeable: you can't instantly convert a mining machine into a combine harvester.

This heterogeneity has far-reaching consequences for the understanding of business cycles. Bad investments, what the Austrians call malinvestment, cannot be easily corrected. A misdirected capital structure cannot instantly be reallocated to other, more productive uses. The entrepreneur plays a central role here as an actor capable of speculating on the best way to serve the consumer, and organizing the capital structure accordingly. This theory will be crucial to understanding the Austrian theory of business cycles, since economic crises, according to the Austrians, are precisely crises in the structure of capital distorted by inappropriate monetary intervention.