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Time, Space and Capital

Åke E. Andersson and David Emanuel Andersson

In this challenging book, the authors demonstrate that economists tend to misunderstand capital. Frank Knight was an exception, as he argued that because all resources are more or less durable and have uncertain future uses they can consequently be classed as capital. Thus, capital rather than labor is the real source of creativity, innovation, and accumulation. But capital is also a phenomenon in time and in space. Offering a new and path-breaking theory, they show how durable capital with large spatial domains — infrastructural capital such as institutions, public knowledge, and networks — can help explain the long-term development of cities and nations.
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Chapter 6: Durability, duration of production, growth and location

Åke E. Andersson and David Emanuel Andersson

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In this chapter we claim that all goods are durable and in this respect they are all capital goods by definition. Our claim builds on Frank Knight’s analysis: any durable good is capital and must thus have a future return that is intrinsically uncertain. It is this uncertain return that is the subject matter of entrepreneurial judgment, as Knight also explained. But it is not only goods that are capital. Labor is also capital, which is why it makes more sense to speak of human capital. And this, too, reflects uncertain future returns, in this case of investments in education. Even land is capital, since inaccessible land without network links to the rest of the world yields no return: it lacks capital value. The durability of capital and the rate of depreciation are key attributes of capital. Deterministic models show that if households and firms were to optimize these attributes, then the equilibrium growth rate would equal the real interest rate in a multi-good economy. We also show that a good’s durability determines the number of firms and thus the potential market form, in the case that production, transport and transaction costs jointly determine equilibrium. The greater the durability of a good is, the smaller its trading cost will be, other things being equal. Trade will keep expanding until there are no price differences between different locations for the limiting case of extremely durable goods. For goods with extreme durability and low transportation and transaction costs, the law of one market price will thus prevail.

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