Capital Goods Can Only Be Used If Corresponding Quantities of Consumer Goods Are Fed into the Production Process to Sustain the Laborers Who Work with These Capital Goods

Strigl builds his theory of the macroeconomy on an original account of the part played by different forms of capital. In particular, he stresses the fundamental role that consumer goods, or means of subsistence, play in connection with the fact that production takes time. When consumer goods are used to sustain laborers engaged in time-consuming roundabout production processes, they are used as “free capital.” Since without sustenance for laborers no such roundabout production processes can be started at all, consumer-goods-used-as-capital are the most fundamental or “originary form” of capital.

This fundamental insight, that productively-used consumer goods are originary capital, had already been expressed in Jevons's wage-fund theory of capital, and it is still common stock in Austrian economics. However, no one has surpassed Strigl in systematically analyzing the implications thereof, and in integrating these findings into a theory of the macroeconomy. His legacy to present day capital theorists rests to a great extent mainly on this contribution.

One important implication of this insight is that it is unwarranted to conceive of capital from a purely technological point of view. Machines, buildings, etc.—that is, those capital goods most readily identified with the notion of capital—are themselves products of previous production processes which, ultimately, make use of labor, land, and “productively-used” consumer goods. Moreover, capital goods can only be used if corresponding quantities of consumer goods are fed into the production process to sustain the laborers who work with these capital goods. Using capital goods in production processes and supporting these processes with consumer goods are nothing but two aspects of “one and the same process.”  In short, the quantities and qualities of capital goods in use at any time depend ultimately on what people choose to do with the consumer goods they control. A man can choose to use all his consumer goods in “pure consumption” or to use a part of them (his “savings”) in “productive consumption”; that is, he can use this part to sustain himself or others while being engaged in a productive venture. Depending on such choices, consumer goods become either pure consumer goods or originary capital. Hence, whether one and the same physical object is capital depends ultimately on the choices of the market participants; capital formation has a subjective basis.

—Jörg Guido Hülsmann, introduction to Capital and Production, by Richard von Strigl (Auburn, AL: Ludwig von Mises Institute, 2000), xvii-xix.

Roundabout Methods of Production Need Three Forms of Capital: Free Capital (the Subsistence Fund), Intermediate Products, and Fixed Capital

Production employing capital means production using roundabout methods. . . . We will now distinguish between three forms of capital:

1. Free capital: This is the subsistence fund (supply of consumer goods) which is made available for the support of roundabout methods of production;
2. Intermediate products: These are raw materials in the various stages of processing prior to the finishing of the consumer good (raw materials take on the shape of "maturing" consumer goods in the course of processing);
3. Fixed (stable) capital: ("relatively durable factors of production": machines, etc.); These are produced factors of production that can be used for a number of individual production processes.

Intermediate products and fixed capital are goods which are characteristic of roundabout methods of production. We will label them with the term "capital goods." In contrast, consumer goods as such are never capital; they only assume the function of capital if they are used in the specific way we previously described with the term "reproductive consumption," i.e., if they serve to support roundabout methods of production. Intermediate products and free capital serve to support the individual production processes and can thus be labeled "liquid" capital in contrast to "fixed" capital. Yet, one must pay attention to the fact that liquid capital is also employed in the process of producing fixed capital.

--Richard von Strigl, Capital and Production, trans. Margaret Rudelich Hoppe and Hans-Hermann Hoppe, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2000), 26-27.

Roundabout Production

Human labor can be employed in production such that its direct goal is the finished product. An appropriate example, repeatedly cited since the times of Wilhelm Roscher, is of a nation of fishermen who directly employ their labor for the purpose of catching fish. This labor will reach a higher degree of productivity if the fishermen are able to produce a boat and other fishing tools. In this case, labor first must be expended in order to produce these "produced factors of production," but the reward for this expenditure will be a greater return. The essence of this process has been seen (Jevons and Böhm-Bawerk) in the combination of human labor and fruits of nature (natural resources) that are directed into a time-consuming roundabout method of production.

The general thesis would then read: An increase in the returns of production is not only possible by increasing the factors of production, but also by lengthening the roundabout methods of production, i.e., by using the same number of factors of production in such a way that more time elapses between their initial employment in production and the attainment of the finished product.

--Richard von Strigl, Capital and Production, trans. Margaret Rudelich Hoppe and Hans-Hermann Hoppe, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2000), 2-3.