The Three Dimensions of Capital and Capital Structure: A Value Dimension, a Time Dimension, and the Jevons-Cassel Composite Dimension Called “Aggregate Production Time”

One of the most distinctive features of Austrian macroeconomic theory is its use of the concept of a "structure of production." This concept was formulated to give explicit recognition to the notion that capital (and the capital structure) has two dimensions. It has a value dimension which can be expressed in monetary terms, and it has a time dimension which is an expression of the time that elapses between the application of the "original means of production" (labor and land) and the eventual emergence of the consumption goods associated with them. The development of the notion of two-dimensional capital has its roots, of course, in the writings of Jevons. It can be traced from Jevons to Cassel and Böhm-Bawerk and then to Mises, and from Mises to Hayek, Rothbard, and other contemporary Austrian theorists. This view of capital, then, is neither new nor is it strictly Austrian, yet the notion of two-dimensional capital is by no means readily accepted by capital theorists in general.

A third though not independent dimension of capital can be envisaged which represents a composite of the two dimensions described above. Again, Jevons was the first to synthesize this third dimension. He made the distinction between the "quantity of capital" and the "length of time during which it remains invested." He then devised the third dimension of capital by" ... multiplying each portion of capital invested at any moment by the length of time for which it remains invested." The compounding of interest was ignored for the sake of simplicity. The resulting composite dimension was shown to have the units of "dollar-years." (The units are Americanized here. Jevons, of course, used "pound-years.")

Cassel followed thirty years later with a similar formulation: " . . . interest is paid in proportion to the capital lent and in proportion to the duration of the loan, i.e., in proportion to the product of value and time" (emphasis added). Cassel's product and Jevons's composite dimension measure the same thing. They are indications of the extent to which capital is "tied-up" in the production process. No claim is made here that this product can be calculated directly, but if we can conceive of interest income and of the rate of interest, then we can conceive of this composite dimension of capital--the amount of "waiting" or postponement of consumption brought about by the payment of interest.

This composite dimension will be referred to as "aggregate production time" or simply as "production time." For sure, there are problems in aggregating (even conceptually) the production time associated with different pieces of capital just as there are problems with all macroeconomic aggregates. Much ambiguity will be avoided, however, by using the concept of aggregate production time rather than average production time or average period of production.

--Roger W. Garrison, Austrian Macroeconomics: A Diagrammatical Exposition, Studies in Economics 5 (Menlo Park, CA: Institute for Humane Studies, 1978), 5-6.