Thursday, June 20, 2019

There Is No Perfectly Rigorous Way to Define the Length of a Production Process in Purely Physical Terms; This Fact Is at the Heart of the 3 Capital Controversies (Böhm-Bawerk v. Clark, Hayek v. Knight, and the Cambridges)

The Austrian economists emphasize that production takes time, and, other things constant, the longer the (linear) supply chain, the more “time” it takes. Thus, modern production is much more “roundabout” (Böhm-Bawerk’s term) than older, more rudimentary production processes. Rather than picking the fruit in our backyard and eating it, most of us today get our fruit from farms using complex picking, sorting, and packing machinery and specialists to process carefully engineered fruit products. Consider the amount of “time” (for example, in people-hours) involved in setting up and assembling all the pieces of this complex production process from scratch—from before the manufacture of the machines and so on—to appreciate what is meant by production methods that are “roundabout.” Doing things in a more complicated, specialized way is more difficult—loosely speaking, it takes more “time” because it is more roundabout, more indirect—it involves the construction of more intermediate products (or services) before moving to the next step in the process.

The scare quotes for “time” in the previous paragraph are used because, even for simple linear processes, there is no perfectly rigorous way to define the length of a production process in purely physical terms. This essential fact is at the heart of the three capital controversies that have occurred over the last one hundred years: the first in the late nineteenth and early twentieth century involving Böhm-Bawerk and his critics (notably J. B. Clark), the second in the 1930s and 1940s involving Hayek and his critics (notably Frank Knight), and the last from the 1970s onward, lingering until today, known as the Cambridge-Cambridge debate, involving, respectively, protagonists from Cambridge, England, and Cambridge, Massachusetts. ACT [Austrian Capital Theory] was explicit in the first two controversies and implicit in the third. All concerned the essential nature of production in a capital-using economy. Böhm-Bawerk was tackled because of his use of a simplifying, inconsistent theoretical construct: the “average period of production.” It can be easily shown that any attempt to calculate such a magnitude is fraught with insurmountable difficulties except in the simplest of cases—and even there, the calculation is impossible if we consider, as we should, the interest rate implicit in the formula to be compound interest. Böhm-Bawerk’s lengthy, intuitive discussion of the nature of capitalist production as an increasing reliance on produced means of production in specialized production processes became associated with this rather specific and limited formula. Though actually a small part of his work as a whole and arguably an aberration in his breadth of vision, it became the focus for the prolonged and energetic debate in capital theory.

--Peter Lewin and Howard Baetjer Jr., “The Capital-Using Economy,” in The Oxford Handbook of Austrian Economics, ed. Peter J. Boettke and Christopher J. Coyne (New York: Oxford University Press, 2015), 146.


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