Bringing Capital Back into Macroeconomics

Conventional macroeconomics neglects severely the importance of capital. It is relegated to the theory of economic growth and there it gets treated as a homogeneous blob denoted as K for capital. In contrast, capital and entrepreneurship are fundamental to Austrian macroeconomics. In this theory, capital is conceptualized as a subjective phenomenon that gains its livelihood by the human action of the entrepreneur. His investment decision must deal with the problem of time and uncertainty when he embarks upon roundabout production. The accumulation of capital is contingent on savings and as such relates to time preference and the interest rate. By differentiating the micro- from the macro-aspect of malinvestment, capital and entrepreneurship come into play to explain the occurrence of economic downturns and persistent stagnations.