Ludwig Lachmann: Review of B. S. Keirstead’s Capital, Interest and Profits (1960)

Ludwig Lachmann’s journal book review assesses Keirstead’s attempt to establish a more realistic theory of capital, investment, and profits. It follows the book’s movement from theoretical argument—concentrated in its first six chapters—to the historical and explanatory discussions of its remaining five. Lachmann welcomes the dissatisfaction with established theories but argues that Keirstead’s proposed alternative misconceives capital’s role in economic progress. The review’s central contention is that capital must be understood through the specificity of its constituent resources and their complementary relationships, rather than as a stock of tools considered apart from the wider productive structure.

Keirstead rejects marginal-productivity and time-preference theories, while also criticizing Keynesian liquidity preference, entrepreneurial expectations, and the multiplier. Lachmann grants that these criticisms contain substantial truth and that greater realism is needed. His disagreement concerns what such realism requires. Against marginal-productivity theories, Keirstead emphasizes indivisibility, whose force depends on the units chosen, rather than confronting the more fundamental difficulty:

The reader notes with surprise that in criticising marginal productivity theories of capital the author spurns the strongest argument against them, viz. the heterogeneity of capital and the consequent fact that in a world of change we cannot speak of a quantity of capital or a production function.

This objection establishes the review’s conceptual direction. Capital goods cannot simply be aggregated into a quantity without losing the differences that matter to their economic uses. Keirstead’s identification of capital with tools compounds the problem: it excludes land, dwellings, durable consumer goods, inventories, and much working capital. For Lachmann, this is not merely an incomplete classification. It removes resources whose relationships to tools are essential to explaining production and progress.

Each capital good is specific in that it can only be put to a limited number of uses. Each productive operation requires a number of such capital goods which have to be used together, i. e. in the form of a capital combination. Specificity of resources and complementarity of combinations are thus the essential characteristics of a capital-using society.

The capital combination, rather than the isolated tool, becomes the appropriate unit of analysis. Goods acquire productive significance through their joint employment, and new investment must be understood in relation to existing resources. Lachmann consequently measures Keirstead’s treatment of entrepreneurship against its ability to explain changes in these combinations. Although the book acknowledges uncertainty, failed plans, and capital gains and losses, these phenomena have little operative role in its theoretical scheme. Emphasizing profit expectations does not explain how entrepreneurs form new projects in response to earlier outcomes.

But we learn nothing about the way in which success and failure of past plans, and profits realized on existing capital, affect investment projects.

The missing connection between retrospective appraisal and forward-looking judgment is central to Lachmann’s criticism. A realistic account must show how experience alters plans and how existing capital is reorganized. Keirstead’s framework leaves out take-over bids, the dissolution or reshuffling of capital combinations, and the new investment opportunities arising from such changes. Old and new goods appear alongside one another without sufficient attention to their complementary links. The issue is therefore not simply whether uncertainty is mentioned, but whether its consequences enter the explanation of investment.

Lachmann extends this criticism to profits and financial markets. Keirstead treats the rate of return on stock as the outcome of bargaining among shareholders, entrepreneurs, and trade unions. Lachmann instead emphasizes the shareholder’s yield, which depends on the price paid for shares. The Stock Exchange is accordingly integral to the problem, yet receives only limited treatment. This omission is particularly striking because Keirstead’s account of the firm’s access to successive sources of finance presupposes a reasonably smoothly functioning capital market.

But share prices reflect the values of the underlying capital combinations. Without a clear notion of the latter there can be no theory of the former.

The financial objection thus returns to the review’s governing concept. A theory of share prices requires an account of the productive arrangements being valued. Bargaining over returns cannot substitute for explaining how those arrangements generate value or how changes in their composition affect it.

The final part challenges Keirstead’s historical distinction between conventional societies and progressive societies launched into capital use by a shock. Lachmann questions both the rigidity of this division and the suggestion that progress, once initiated, necessarily continues. More fundamentally, he argues that progress begins with the careful management and effective use of existing resources. New tools must fit into the inherited capital structure; their significance lies in making better use of what is already available.

Keirstead’s observation that maritime societies have often progressed more readily than land-locked ones supplies Lachmann’s closing illustration. The ocean is an existing resource whose possibilities as a trade route and inexpensive means of transport become effective through complementary ships. This example condenses the review’s broader argument: economic progress is not explained by tool-making alone, but by discovering and developing productive relationships among resources. The review’s relevance lies in this demanding conception of realism—one that connects heterogeneous capital, entrepreneurial revision, market valuation, and historical development through changing capital combinations.