Friedrich August von Hayek, Capital Consumption and Adjustment (1939)

Hayek’s book review assesses Solomon Fabricant’s Capital Consumption and Adjustment (1938), a study within the National Bureau of Economic Research’s investigation of national income and capital formation. Its central judgment distinguishes conceptual adequacy from empirical achievement: Fabricant has not satisfactorily resolved the economic meaning of capital consumption, but his investigation supplies valuable evidence in a difficult and neglected field. The review moves from the study’s scope and definitions through a theoretical objection to an appreciation of its statistical detail and methods.

Hayek introduces Fabricant’s subject by locating it within the measurement of capital formation:

The subject of the book might be described as the negative aspect of capital formation in the gross sense of the term.

The question is how to account for capital used up or diminished, rather than simply for additions to capital. Fabricant distinguishes capital consumption—the current value of durable goods used up in production—from capital adjustment, which encompasses valuation changes associated with prices, discount rates, extraordinary obsolescence, and catastrophic destruction. Hayek explains that this distinction corresponds to the business-accounting separation between income-account and capital-account changes. Establishing these categories matters because the treatment of capital losses affects the interpretation of national income and capital formation.

The review’s principal reservation concerns the passage from accounting conventions to economic concepts. Fabricant recognizes the limitations of ordinary accounting measures and reconsiders them from a broader economic perspective. Nevertheless, Hayek judges the result an uncertain compromise: the investigation remains too dependent on the accounting standpoint it seeks to transcend.

What is mainly missing is a systematic examination of the theoretical issues involved.

This criticism is more fundamental than a dispute over particular estimates. Hayek questions whether the categories being measured have received an adequate theoretical justification. He also objects to Fabricant’s acceptance of Pigou’s treatment of the problem, referring to criticisms he has developed elsewhere. The review does not reproduce those arguments, so its theoretical position remains a stated reservation rather than a demonstrated alternative. Its core conceptual move is to separate the availability of accounting figures from the economic validity of the aggregates constructed from them.

Hayek then qualifies his criticism by recognizing the practical cost of demanding complete conceptual resolution before proceeding with measurement:

But perhaps we ought to be grateful that the author has refused to be held up by the conceptual difficulties.

Both defining satisfactory concepts and translating them into concrete statistical terms present formidable obstacles. Waiting for their resolution could have substantially delayed the investigation’s results. Hayek therefore allows that uncertain aggregate meanings need not invalidate the underlying evidence. His praise rests especially on the instructive detail that remains useful even where the interpretation of totals is doubtful.

That detail includes business accounts, depreciation and depletion charges, maintenance and repairs, and provisions for accident and loss. The statistical coverage extends beyond industry to agriculture and consumers’ and government capital. As an illustration, Hayek singles out a table distributing the value of business capital-goods output in 1929 by expected useful life. Although partly dependent on estimates, it provides unusually comprehensive evidence about the quantitative importance of goods with different durabilities. This example gives substance to his favorable assessment: Fabricant’s work makes previously poorly documented features of capital available for economic inquiry.

The review closes by endorsing the study’s statistical technique, presentation, and documentation. Sources and methods are fully described, with separate appendices where necessary; the compressed exposition conceals an exceptional amount of research labour. Hayek’s final praise for pioneering work does not withdraw his conceptual objection. Instead, the review establishes a qualified standard of evaluation: empirical investigation can make a substantial contribution before its theoretical foundations are settled, provided its results are not mistaken for a definitive solution to the problem of defining and measuring capital consumption.