Wednesday, January 20, 2010

Of Capital Flows

Is capital intensity properly measured as a stock or flow? Prof Frank H Knight (1885-1972) argued that “the quantities of economics are properly rates…” (1921/2002, p. 59). Knight's supposition underlies the derivatives concept to this day:
Utility, and any product yielding utility, must be thought of as a time-rate or intensity, not a thing. Even the notion of rate is unfortunate, as it suggests a quantity spread over a period of time. The dimensional relation is the inverse of this. The economic magnitude is inherently a process, something going on, not something existing. An analogy such as that of hydraulics is misleading in that water exists whether it flows or not, and its rate of flow is a quantity divided by a time interval. The correct analogy for economics is current electricity, or better still, light, which cannot be thought of as existing without flowing. A quantity of light is inherently a two-dimensional concept, an intensity multiplied by time, such as a candle-power-hour. The economic reality is of the same sort, a process going on in time. We cannot think of an instantaneous economic experience, still less plan for one. (Knight, 1967, pp. 126-127)

Knight, F H (1967), The Economic Organization (with an article) Notes on Cost and Utility, New York: Augustus M Kelley Publishers.

Knight, F H (1921/2002), Risk, Uncertainty and Profit, Washington, DC: BeardBooks.

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