Lesson 3 of 7
And what it does not
The word does more work in this literature than any other, and is read as something its authors did not say. Its content, and the reading refused.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- In this literature liquidation means the winding up of a commitment that is no longer worth completing, so that whatever survives it can be used for something else.
- Rothbard's own description has two outcomes: some investments are abandoned altogether and others are shifted to other uses, with the governing principle being efficient use of the stock that exists.
- It is not a claim that assets should be destroyed, that unemployment is desirable, or that a contraction should be made worse. This course refuses that reading and says so plainly.
No word in this tradition is misread more often. It is worth setting out what the authors use it to mean before anything is built on it.
Three outcomes for one asset when a process is abandoned
Most value retained
- Redeployed · moved to another use at some cost, common for non-specific goods5050%
- Repriced and continued · the project is finished by a new owner at a lower basis3030%
- Abandoned · the commitment is written off and the asset scrapped or left2020%
Least
Total100
The technical content
A process was started that is no longer worth finishing at current prices. The question is what to do with what exists: the part-built plant, the machines bought for it, the contracts signed around it.
Rothbard describes the adjustment as consisting in rapid liquidation of the wasteful investments, and immediately gives two outcomes: some will be abandoned altogether, others will be shifted to other uses. The principle he states is to make the most efficient use of the existing stock of capital rather than to mourn past errors.
That is the whole of it. A decision about the best remaining use of things that already exist.
What decides which outcome
Specificity, which the structure course covered. A non-specific asset goes to somebody else and keeps most of its value. A purpose-built asset with no second buyer near its cost is the one that gets abandoned.
The people involved are a separate question. Labour is the most redeployable factor there is in principle and the slowest in practice, because moving between industries takes time, place and skill. Hayek's own account is explicit that released factors find new employment only as the shorter processes approach completion, which is why the gap exists at all.
The reading this course refuses
Three claims that get attached to the word and are not in the texts cited here.
That destroying capacity is beneficial. Nothing in the account says an asset should be scrapped that somebody would pay to use. The argument is about which use is best, not about reducing the stock.
That unemployment is desirable. The theory treats unemployment as the cost the gap imposes, not as a good. Hayek's description of the crisis is of workers becoming temporarily unemployable because the complementary capital is not there, which is a diagnosis, not a recommendation.
That the contraction should be deepened. Members of this tradition disagree sharply about whether a monetary contraction following a crisis does any good at all. That disagreement is the next two lessons, and treating one side of it as the tradition's settled position misrepresents it.
Check yourself
What does liquidation mean in this literature?
- Selling assets to repay depositors
- Winding up a commitment no longer worth completing, so whatever survives can be put to its best remaining use
- Reducing the money supply
Show the answer
Answer: B.
Rothbard gives two outcomes explicitly, abandonment and shifting to other uses, and states the governing principle as efficient use of the existing stock.What decides whether an asset is redeployed or abandoned?
- The owner's preference
- Its specificity: whether there is another use, and another buyer, near its cost
- The length of the contraction
Show the answer
Answer: B.
Non-specific goods keep most of their value by moving. Purpose-built assets with no second buyer are the ones that get written off.Which reading does this course refuse?
- That specific capital falls in price
- That destroying capacity is beneficial, that unemployment is desirable, or that a contraction should be deepened
- That the boom is where the error happened
Show the answer
Answer: B.
None of the three is in the texts cited, and members of this tradition disagree openly about the third, which is the subject of the next two lessons.Sources
- Rothbard, America's Great Depression, 1963, part one, chapter 1, section on the explanation of boom and depression, for the adjustment consisting in rapid liquidation, for the two outcomes of abandonment and shifting to other uses, and for the principle of making the most efficient use of the existing stock of capital.
- Hayek, Prices and Production, first published 1931, second revised edition 1935, lecture III, section 8, for released factors finding new employment only as the shorter processes approach completion, and for workers becoming temporarily unemployable where the complementary capital is absent.
- Lachmann, Capital and Its Structure, 1956, chapter 1, for second-best uses having to be discovered rather than looked up.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The three assets in the example are invented and describe no company. The ordering in the figure is illustrative and the values carry no measurement.
- Some writers in and around this tradition have used the word to defend positions this lesson says are not in the texts cited. Reporting that the readings exist is not endorsing them, and this academy takes no position on what should be done in a contraction.