Keynes argued that by stimulating spending on outputs, consumption, goods and services, one could increase productive investment to meet that spending, thus adding to the capital stock and increasing employment. Hayek, on the other hand furiously accused Keynes of insufficient attention to the nature of capital in production. For Hayek, capital investment does not simply add to production in a general way, but rather is embodied in concrete capital items. Rather than being an amorphous stock of generalized production power, it is an intricate structure of specific interrelated complementary components. Stimulating spending and investment, then, amounts to stimulating specific sections and components of this intricate structure. Before heading out to Austrian School of Economics, here is another important difference between the two that is cardinal, and had more do with monetary system. Keynes viewed the macro system as vulnerable to periodic declines in demand, and regarded micro adjustments such as wage and price declines as ineffective to restore growth and prosperity. Hayek viewed the market as capable of correcting itself by taking advantages of competitions, and regarded government and Central Banks’ policies to restore growth as sources of more instability.
The best known Austrian capital theorist was Eugen von Böhm-Bawerk, though his teacher Carl Menger is the one who got the ball rolling, providing the central idea that Böhm-Bawerk elaborated. For the Austrians, the general belief lay in the fact that production takes time, and more roundabout the process, the more delay production needs to anticipate. Modern economies comprise complex, specialized processes in which the many steps necessary to produce any product are connected in a sequentially specific network – some things have to be done before others. There is a time structure to the capital structure. This intricate time structure is partially organized, partially spontaneous (organic). Every production process is the result of some multiperiod plan. Entrepreneurs envision the possibility of providing (new, improved, cheaper) products to consumers whose expenditure on them will be more than sufficient to cover the cost of producing them. In pursuit of this vision the entrepreneur plans to assemble the necessary capital items in a synergistic combination. These capital combinations are structurally composed modules that are the ingredients of the industry-wide or economy-wide capital structure. The latter is the result then of the dynamic interaction of multiple entrepreneurial plans in the marketplace; it is what constitutes the market process. Some plans will prove more successful than others, some will have to be modified to some degree, some will fail. What emerges is a structure that is not planned by anyone in its totality but is the result of many individual actions in the pursuit of profit. It is an unplanned structure that has a logic, a coherence, to it. It was not designed, and could not have been designed, by any human mind or committee of minds. Thinking that it is possible to design such a structure or even to micromanage it with macroeconomic policy is a fatal conceit. The division of labor reflected by the capital structure is based on a division of knowledge. Within and across firms specialized tasks are accomplished by those who know best how to accomplish them. Such localized, often unconscious, knowledge could not be communicated to or collected by centralized decision-makers. The market process is responsible not only for discovering who should do what and how, but also how to organize it so that those best able to make decisions are motivated to do so. In other words, incentives and knowledge considerations tend to get balanced spontaneously in a way that could not be planned on a grand scale. The boundaries of firms expand and contract, and new forms of organization evolve. This too is part of the capital structure broadly understood.
Hayek emphasizes that,
the static proposition that an increase in the quantity of capital will bring about a fall in its marginal productivity . . . when taken over into economic dynamics and applied to the quantity of capital goods, may become quite definitely erroneous.
Hayek stresses chains of investments and how earlier investments in the chains can increase the return to the later, complementary investments. However, Hayek is primarily concerned with applying those insights to business cycle phenomena. Also, Hayek never took the additional step that endogenous growth theory has in highlighting the effects of complementarities across intangible investments in the production of ideas and/or knowledge. Indeed, Hayek explicitly excludes their consideration:
It should be quite clear that the technical changes involved, when changes in the time structure of production are contemplated, are not changes due to changes in technical knowledge. . . . It excludes any changes in the technique of production which are made possible by new inventions.