Friedrich A. Hayek, “The Maintenance of Capital” (1939)

Hayek’s essay examines why the apparently simple idea of keeping capital “constant” becomes problematic once economic change is admitted. In static equilibrium, capital can be treated as a given stock, but in a changing economy its value, composition, and future serviceability depend on expectations about demand, technique, factor prices, and interest rates.

It is not likely that in the whole field of economics there are many more concepts which are at the same time so generally used and so little analysed as that of a “constant amount of capital.”

The opening problem is therefore methodological as much as practical. Hayek argues that the common language of capital maintenance, net saving, and net investment often assumes what it needs to prove: that there exists some independently measurable quantity of capital whose preservation can be identified apart from the anticipated income it yields.

But as soon as one tries to apply these categories to a world where things are changing, all these alluringly simple concepts become dependent in more than one way on exactly what is meant by a given stock of capital.

Hayek’s engagement with Pigou clarifies the stakes. He rejects both a purely physical conception of replacement and a simple money-value rule. What matters is not the preservation of identical goods or an unchanged aggregate valuation, but the avoidance of unintended encroachment on future income. Capital maintenance is thus a derivative accounting rule, not an independent end.

Capital accounting in this sense is simply a technical device, an abbreviated method of solving the complicated problems arising out of this task of avoiding involuntary infringements upon future income.

From this premise Hayek reinterprets depreciation, obsolescence, risk, and windfall gains. If a machine is expected to become useless before it physically wears out, its loss must be anticipated just like ordinary depreciation. If an investment is risky, extraordinary receipts in favorable cases may be required to offset losses elsewhere and cannot automatically be treated as freely consumable income. Conversely, once an unforeseen loss has occurred, the relevant question is not whether the previous capital value must be restored, but what consumption path is consistent with the best attainable future income stream.

The essay’s deeper move is to make foresight central to capital theory. Under perfect foresight, a capitalist would choose present consumption and replacement outlays by reference to the whole expected future stream of returns, not by mechanically preserving a money sum. In reality, expectations differ and are often wrong; hence there can be no fully objective, expectation-free measure of “net” saving or investment in a changing world.

The mobility of capital, the degree to which it can be maintained in a changing world, will depend on the foresight of the entrepreneurs and capitalists.

This argument also bears on trade-cycle theory and monetary policy. Hayek warns that business accounts denominated in money can make capital appear intact when real productive capacity or future income prospects have been impaired. During booms, rising asset valuations may be mistaken for income, encouraging consumption of what should have been treated as capital. The essay’s lasting significance is its insistence that capital is not a homogeneous fund but an intertemporal structure whose maintenance depends on expectations, valuation, accounting conventions, and the coordination of production with future consumption.