4. Period of Production, Waiting Time and Period of Provision
If one were to measure the length of the period of production spent in the fabrication of
the various goods available now, one would have to trace back their history to the point
at which the first expenditure of original factors of production took place. One would
would have to establish when natural resources and labor were first employed for processes
which, besides contributing to the production of other goods, also contributed ultimately
to the production of the good in question.
The solution of this problem would require the solubility of the problem of physical
imputation.
It would be necessary to establish in quantitative terms to what extent tools, raw materials
and Labor, which directly or indirectly were used in the production of the good concerned
contributed to the result.
One would have to go back in these inquiries to the very origins of capital accumulation
by saving on the part of people who previously lived from hand to mouth.
It is not only practical difficulties which prevent such historical studies.
The very insolubility of the problem of physical imputation stops us at the first step of such
ventures.
Neither acting man himself nor economic theory needs a measurement of the time expended in
the past for the production of goods available today.
They would have no use for such data even if they knew them.
Acting man is faced with the problem of how to take best advantage of the available supply
of Goods.
He makes his choices in employing each part of this supply in such a way as to satisfy
the most urgent of the not yet satisfied wants.
For the achievement of this task he must know the length of the waiting time which separates
him from the attainment of the various goals among which he has to choose.
As has been pointed out and must be emphasized again, there is no need for him to look backward
to the History of the Various Capital Goods Available.
Acting Man Counts Waiting Time and the Period of Production Always from Today On.
In the same way in which there is no need to know whether more or less labor and material
factors of production have been expended in the production of the products available now,
There is no need to know whether their production has absorbed more or less time.
Things are valued exclusively from the point of view of the services they can render for
the satisfaction of future wants.
The actual sacrifices made and the time absorbed in their production are beside the point.
These things belong to the dead past.
It is necessary to realize that all economic categories are related to human action and
have nothing at all to do directly with the physical properties of things.
Economics is not about goods and services.
It is about human choice and action.
The praxeological concept of time is not the concept of physics or biology.
It refers to the sooner or the later as operative in the actor's judgments of value.
The distinction between capital goods and consumers' goods is not a rigid distinction
based on the physical and physiological properties of the goods concerned.
It depends on the position of the actors and the choices they have to make.
The same goods can be looked upon as capital goods and as consumers' goods.
A supply of goods ready for immediate enjoyment is capital goods from the point of view of
a man who looks upon it as a means for his own sustenance and that of hired workers during
a waiting time.
An increase in the quantity of capital goods available is a necessary condition for the
adoption of processes in which the period of production, and therefore waiting time,
are longer.
If one wants to attain ends which are temporally farther away, one must resort to a longer
period of production, because it is impossible to attain the end sought in a shorter period
of production.
If one wants to resort to methods of production with which the quantity of output is higher
per unit of input expended, one must lengthen the period of production.
For the processes with which output is smaller per unit of input have been chosen only on
account of the shorter period of production they require, but, on the other hand, not
every employment chosen for the utilization of capital goods accumulated by means of additional
saving requires a process of production in which the period of production from today
on to the maturing of the product is longer than with all processes already adopted previously.
It may be that people, having satisfied their more urgent needs, now want goods which can
be produced within a comparatively short period.
The reason why these goods have not been produced previously was not that the period of production
If one chooses to assert that every increase in the supply of capital goods available results
in a lengthening of the period of production and of waiting time, one reasons in the following
Way. If A are the goods already previously produced, and B the goods produced in the
new processes started with the aid of the increase in capital goods, it is obvious that
people had to wait longer for A and B than they had to wait for A alone. In order to
produce A and B, it was not only necessary to acquire the capital goods required for
The Treatment of the Capital Problem customary with those economists who are opposed to the
The so-called Austrian view assumes that the technique employed in production is unalterably determined by the given state of technological knowledge.
The Austrian economists, on the other hand, show that it is the supply of capital goods available at each moment
that determines which of the many known technological methods of production will be employed.
The correctness of the Austrian point of view can easily be demonstrated by a scrutiny of
the problem of scarcity of capital.
Let us look at the condition of a country suffering from scarcity of capital.
Take for instance the state of affairs in Romania about 1860.
What was lacking was certainly not technological knowledge.
There was no secrecy concerning the technological methods practiced by the advanced nations
of the West.
They were described in innumerable books and taught at many schools.
The elite of Romanian youth had received full information about them at the technological
universities of Austria, Switzerland and France.
Hundreds of foreign experts were ready to apply their knowledge and skill in Romania.
What was wanting was the capital goods needed for a transformation of the backward Romanian
apparatus of production, transportation and communication according to Western patterns.
If the aid granted to the Romanians on the part of the advanced foreign nations had consisted
merely in providing them with technological knowledge, they would have had to realize
says that it would take a very long time until they caught up with the West.
The first thing for them to have done would have been to save in order to make workers
and material factors of production available for the performance of more time-consuming
processes.
Only then could they successively produce the tools required for the construction of
of those plants, which, in the further course, were to produce the equipment needed for the
construction and operation of modern plants, farms, mines, railroads, telegraph lines,
and buildings. Scores of decades would have passed until they had made up for the time
lost. There would not have been any means of accelerating this process than by restricting
in current consumption as far as physiologically possible for the intermediary period.
However, things developed in a different way.
The capitalist West lent to the backward countries the capital goods needed for an instantaneous
transformation of a great part of their methods of production.
It saved them time and made it possible for them to multiply very soon the productivity
of their Labor.
The effect for the Romanians was that they could immediately enjoy the advantages derived
from the modern technological procedures.
It was as if they had started at a much earlier date to save and to accumulate capital goods.
Shortage of capital means that one is further away from the attainment of a goal sought
than if one had started to aim at it at an earlier date.
As one neglected to do this in the past, the intermediary products are wanting, although
the nature-given factors from which they are to be produced are available.
Capital shortage is dearth of time.
It is the effect of the fact that one was late in beginning the march toward the aim
concerned.
It is impossible to describe the advantages derived from capital goods available and the
The disadvantages resulting from the paucity of capital goods without resorting to the
time element of sooner and later.
To have capital goods at one's disposal is tantamount to being nearer to a goal aimed
at.
An increment in capital goods available makes it possible to attain temporally remotor ends
without being forced to restrict consumption.
A loss in capital goods, on the other hand, makes it necessary either to abstain from
striving after certain goals which one could aim at before, or to restrict consumption.
To have capital goods means, other things being equal, a temporal gain.
As against those who lack capital goods, the capitalist, under the given state of technological
College is in a position to reach a definite goal sooner without restricting consumption
and without increasing the input of labor and nature-given material factors of production.
His head start is in time.
Arrival endowed with a smaller supply of capital goods can catch up only by restricting his
consumption.
The start which the peoples of the West have gained over the other peoples consists in
the fact that they have long since created the political and institutional conditions
required for a smooth and by and large uninterrupted progress of the process of larger scale saving,
capital accumulation and investment.
Thus, by the middle of the 19th century, they had already attained a state of well-being
which far surpass that of poorer races and nations, less successful in substituting the
ideas of acquisitive capitalism for those of predatory militarism.
Left alone and unaided by foreign capital, these backward peoples would have needed much
more time to improve their methods of production, transportation and communication.
It is impossible to understand the course of world affairs and the development of the relations
between West and East in the last centuries, if one does not comprehend the importance
of this large-scale transfer of capital.
The West has given to the East not only technological and therapeutical knowledge, but also the
capital goods needed for an immediate practical application of this knowledge.
These nations of Eastern Europe, Asia and Africa have been able, thanks to the foreign
capital imported, to reap the fruits of modern industry at an earlier date.
They were, to some extent, relieved from the necessity of restricting their consumption
in order to accumulate a sufficient stock of capital goods.
This was the true nature of the alleged exploitation of the backward nations on the part of Western
and Capitalism about which their nationalists and the Marxians lament.
It was a fecundation of the economically backward nations by the wealth of the more advanced
nations.
The benefits derived were mutual.
What impelled the capitalists of the West to embark upon foreign investment was the
demand of the consumers.
Consumers asked for goods which could not be produced at all at home, and for a cheapening
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
Catallactics but of history to deal with the consequences of the internationalization of
the capital market, its working, and its final disintegration brought about by the expropriation
policies adopted by the receiving countries.
Catallactics has only to scrutinize the effects of a richer or poorer supply of capital goods.
We compare the conditions of two isolated market systems, A and B. Both are equal in size and
population figures, the state of technological knowledge, and in natural resources.
They differ from one another only in the supply of capital goods, this supply being larger
in A than in B. This enjoins that in A many processes of production are employed with
with which the output is greater per unit of input than with those employed in B.
In B, one cannot consider the adoption of these processes on account of the comparative
scarcity of capital goods.
Their adoption would require a restriction of consumption.
In B, many manipulations are performed by manual labor, which in A are performed by
labor-saving machines.
In A, goods are produced with a longer durability. In B, one must abstain from producing them,
although the lengthening of durability is obtained by a less than a proportionate increase
in input. In A, the productivity of labor and, consequently, wage rates and the standard
of living of the wage earners are higher than in B.
of the period of provision beyond the expected duration of the actor's life.
The judgments of value which determine the choice between satisfaction in nearer and
in remoter periods of the future are expressive of present valuation and not of future valuation.
They weigh the significance attached today to satisfaction in the nearer future against
the significance attached today to satisfaction in the remoter future.
The uneasiness which acting man wants to remove as far as possible is always present uneasiness.
That is, uneasiness felt in the very moment of action and it always refers to future conditions.
The actor is discontented today with the expected state of affairs in various periods of the
of the Future, and tries to alter it through purposive conduct.
If action is primarily directed toward the improvement of other people's conditions,
and is therefore commonly called altruistic, the uneasiness the actor wants to remove is
his own present dissatisfaction with the expected state of other people's affairs in various
periods of the future.
When taking care of other people, he aims at alleviating his own dissatisfaction.
It is therefore not surprising that acting man often is intent upon prolonging the period
of provision beyond the expected duration of his own life.
Some Applications of the Time Preference Theory
Every part of economics is open to intentional misrepresentation and misinterpretation on
the part of people eager to excuse or to justify fallacious doctrines underlying their party
programs.
To prevent such misuse as far as possible, it seems expedient to add some explanatory
remarks to the exposition of the time preference theory.
There are schools of thought which flatly deny that men differ with regard to innate
characteristics inherited from their ancestors.
In the opinion of these authors, the only difference between the white men of Western
civilization and Eskimos is that the latter are in arrears in their progress toward modern
industrial civilization.
This merely temporal difference of a few thousand years is insignificant when compared with
the many hundreds of thousands of years which were absorbed by man's evolution from the
simian state of his ape-like forebears to the conditions of present-day homo sapiens.
It does not support the assumption that racial differences prevail between the various specimens
of mankind.
Praxeology and economics are foreign to the issues raised by this controversy, but they
They must take precautionary measures, lest they become implicated by partisan spirit
in this clash of antagonistic ideas.
If those fanatically rejecting the teachings of modern genetics were not entirely ignorant
of economics, they would certainly try to turn the time preference theory to their advantage.
They would refer to the circumstance that the superiority of the Western nations consists
was merely in their having started earlier in endeavors to save and to accumulate capital
goods.
They would explain this temporal difference by accidental factors, the better opportunity
offered by environment.
Against such possible misinterpretations, one must emphasize the fact that the temporal
head start gained by the Western nations was conditioned by ideological factors which cannot
be reduced simply to the operation of environment.
What is called human civilization has up to now been a progress from cooperation by virtue
of hegemonic bonds to cooperation by virtue of contractual bonds.
But while many races and peoples were arrested at an early stage of this movement, others
kept on advancing.
The eminence of the Western nations consisted in the fact that they succeeded better in
checking the spirit of predatory militarism than the rest of mankind, and that they thus
brought forth the social institutions required for saving and investment on a broader scale.
Even Marx did not contest the fact that private initiative and private ownership of the means
of production were indispensable stages in the progress from primitive man's penury
to the more satisfactory conditions of 19th century Western Europe and North America.
What the East Indies, China, Japan and the Mohammedan countries lacked were institutions
of safeguarding the individual's rights.
The arbitrary administration of pashas, kadis, rajas, mandarins and daimeos was not conducive
to large-scale accumulation of capital.
The legal guarantees effectively protecting the individual against expropriation and confiscation
were the foundations upon which the unprecedented economic progress of the West came into flower.
These laws were not an outgrowth of chance, historical accidents and geographical environment.
They were the product of reason.
We do not know what course the history of Asia and Africa would have taken if these
peoples had been left alone.
What happened was that some of these peoples were subject to European rule, and others,
China and Japan were forced by the display of naval power to open their frontiers.
The achievements of Western industrialism came to them from abroad.
They were ready to take advantage of the foreign capital lent to them and invested in their
territories, but they were rather slow in the reception of the ideologies from which
modern industrialism had sprung.
Where assimilation to western ways of life is superficial.
We are in the midst of a revolutionary process, which will very soon do away with all varieties
of colonialism.
This revolution is not limited to those countries which were subject to the rule of the British,
the French and the Dutch.
Even nations which, without any infringement of their political sovereignty, had profited
from Foreign Capital are intent upon throwing off what they call the yoke of foreign capitalists.
They are expropriating the foreigners by various devices, discriminatory taxation, repudiation
of debts, undisguised confiscation, foreign exchange restrictions.
We are on the eve of the complete disintegration of the international capital market.
The economic consequences of this event are obvious.
Its political repercussions are unpredictable.
In order to appreciate the political consequences of the disintegration of the international
capital market, it is necessary to remember what effects were brought about by the internationalization
of the capital market.
Under the conditions of the later 19th century, it did not matter whether or not a nation
Man was prepared and equipped with the required capital in order to utilize adequately the
natural resources of its territory.
There was practically free access for everybody to every area's natural wealth.
In searching for the most advantageous opportunities for investment, capitalists and promoters
were not stopped by national borderlines.
As far as investment for the best possible utilization of the known natural resources
was concerned, the greater part of the earth's surface could be considered as integrated
into a uniform, world-embracing market system.
It is true that this result was attained in some areas, like the British and the Dutch
East Indies and Malaya, only by colonial regimes, and that autochthonous governments
The independence of these territories would probably not have created the institutional setting indispensable for the importation of capital.
But Eastern and Southern Europe and the Western Hemisphere had of their own accord joined the community of the international capital market.
The Marxians were intent upon indicting foreign loans and investments for the lust for war, conquest and colonial expansion.
In fact, the internationalization of the capital market, together with free trade and the freedom
of migration, was instrumental in removing the economic incentives to war and conquest.
It no longer mattered for a man where the political boundaries of his country were drawn.
The entrepreneur and the investor were not checked by them.
Precisely those nations which, in the age preceding the First World War, were paramount
in Foreign Lending and Investment were committed to the ideas of peace-loving, decadent liberalism.
Of the foremost aggressor nations, Russia, Italy and Japan were not capital exporters.
They themselves needed foreign capital for the development of their own natural resources.
Germany's imperialistic adventures were not supported by its big business and finance.
The disappearance of the international capital market alters conditions entirely.
It abolishes the freedom of access to natural resources.
If one of the socialist governments of the economically backward nations lacks the capital
needed for the utilization of its natural resources, there will be no means to remedy
this situation.
If this system had been adopted a hundred years ago, it would have been impossible to
to exploit the oil fields of Mexico, Venezuela and Iran, to establish the rubber plantations
in Malaya, or to develop the banana production of Central America. It is illusory to assume
that the advanced nations will acquiesce in such a state of affairs. They will resort
to the only method which gives them access to badly needed raw materials. They will resort
to Conquest. War is the alternative to freedom of foreign investment as realized by the international
capital market. The inflow of foreign capital did not harm the receiving nations. It was
European capital that accelerated considerably the marvelous economic evolution of the United
States and the British dominions. Thanks to foreign capital, the countries of Latin America
America and Asia are today equipped with facilities for production and transportation which they
would have had to forego for a very long time if they had not received this aid.
Real wage rates and farm yields are higher today in those areas than they would have
been in the absence of foreign capital.
The mere fact that almost all nations are vehemently asking today for American credits
explodes the fables of the Marxians and the Nationalists.
However, the mere lust for imported capital goods does not resuscitate the international
capital market.
Investment and lending abroad are only possible if the receiving nations are unconditionally
and sincerely committed to the principle of private property, and do not plan to expropriate
the foreign capitalists at a later date.
It was such expropriations that destroyed the international capital market.
Intergovernmental loans are no substitute for the functioning of an international capital
market.
If they are granted on business terms, they presuppose no less than private loans the
full acknowledgement of property rights.
If they are granted, as is usually the case, as virtual subsidies without any regard for
For payment of principle and interest, they impose restrictions upon the debtor nation's sovereignty.
In fact, such loans are, for the most part, the price paid for military assistance in coming wars.
Such military considerations already played an important role in the years in which the European powers prepared the great wars of our age.
The outstanding example was provided by the huge sums which the French capitalists, pressed
hard by the government of the Third Republic, lent to Imperial Russia.
The Tsars used the capital borrowed for armaments, not for an improvement of the Russian apparatus
of production.
They did not invest it.
They consumed a great part of it.
5.
The Convertibility of Capital Goods
Capital goods are intermediary steps on the way toward a definite goal.
If in the course of the period of production the goal is changed, it is not always possible
to use the intermediary products already available for the pursuit of the new goal.
Some of the capital goods become absolutely useless, and all expenditure made in their
and their production appears now as waste. Other capital goods can be utilized for the new project, but only after having been subjected to a process of adjustment.
It would have been possible to spare the costs required by this alteration if one had, from the start, aimed at the new goal.
A third group of capital goods can be employed for the new process without any alteration,
but if it had been known at the time they were produced that they would be used in the
new way, it would have been possible to manufacture at smaller cost other goods which could render
the same service.
Finally, there are also capital goods which can be employed for the new project just as
well as for the original one.
It would hardly be necessary to mention these obvious facts if it were not essential to
refute popular misconceptions.
There is no such thing as an abstract or ideal capital that exists apart from concrete capital
goods.
If we disregard the role cash-holding plays in the composition of capital, we will deal
with this problem in one of the later sections.
We must realize that capital is always embodied in definite capital goods, and is affected
by everything that happens with regard to them.
The value of an amount of capital is a derivative of the value of the capital goods in which
it is embodied.
The money equivalent of an amount of capital is the sum of the money equivalents of the
and the aggregate of capital goods to which one refers in speaking of capital in the abstract.
There is nothing which could be called free capital.
Capital is always in the form of definite capital goods.
These capital goods are better utilizable for some purposes, less utilizable for others
and absolutely useless for still other purposes.
Every unit of capital is therefore in some way or other fixed capital, that is, dedicated
to definite processes of production.
The businessman's distinction between fixed capital and circulating capital is a difference
of degree, not of kind.
Everything that is valid with regard to fixed capital is also valid, although to a smaller
degree, with regard to circulating capital.
All capital goods have a more or less specific character. Of course, with many of them, it
is rather unlikely that a change in wants and plans will make them entirely useless.
The more a definite process of production approaches its ultimate end, the closer becomes
the tie between its intermediary products and the goal aimed at. Iron is less specific
is more specific in character than iron tubes, and iron tubes less so than iron machine parts.
The conversion of a process of production becomes, as a rule, the more difficult, the
farther it has been pursued, and the nearer it has come to its termination, the turning
out of consumers' goods.
In looking at the process of capital accumulation from its very beginnings, one can easily recognize
is that there cannot be such a thing as free capital.
There is only capital embodied in goods of a more specific character and in goods of
a less specific character.
When the wants or the opinions concerning the methods of want satisfaction change, the
value of the capital goods is altered accordingly.
Additional capital goods can come into existence only through making consumption lag behind
and Current Production.
The additional capital is already in the very moment of its coming into existence embodied
in concrete capital goods.
These goods had to be produced before they could, as an excess of production over consumption,
become capital goods.
The role which the intraposition of money plays in the sequence of these events will
be dealt with later.
Here we need only recognize that even the capitalist whose whole capital consists in
money and in claims to money does not own free capital.
His funds are tied up with money.
They are affected by changes in money's purchasing power, and as far as they are invested in
claims to definite sums of money, also by changes in the debtor's solvency.
It is expedient to substitute the notion of the convertibility of capital goods for the
misleading distinction between fixed and free or circulating capital.
The convertibility of capital goods is the opportunity offered to adjust their utilization
to a change in the data of production.
Convertibility is graduated.
It is never perfect, that is, present with regard to all possible changes in the data.
In the case of absolutely specific factors, it is entirely absent.
As the conversion of capital goods from the employment originally planned to other employments
becomes necessary through the emergence of unforeseen changes in the data, it is impossible
to speak of convertibility in general without reference to changes in the data which have
already occurred or are expected.
A radical change in the data could make capital goods previously considered to be easily convertible,
either not convertible at all, or convertible only with difficulty.
It is obvious that in practice the problem of convertibility plays a greater role with
With goods, the serviceability of which consists in rendering a series of services over a period
of time, than with capital goods, the serviceability of which is exhausted by rendering only one
service in the process of production.
The unused capacity of plants and transportation facilities, and the scrapping of equipment
which, according to the plans underlying its production, was designed for longer use, are
are more momentous than the throwing away of fabrics and clothing out of fashion and
of physically perishable goods.
The problem of convertibility is peculiarly a problem of capital and capital goods only
in so far as capital accounting makes it especially visible with regard to capital goods.
Essentially, it is a phenomenon present also in the case of consumers' goods, which an
Capitalists and Entrepreneurs in their capacity as owners of capital are never perfectly free.
They are never on the eve of the first decision and action which will bind them.
They are always already engaged in some way or other.
Their funds are not outside the social process of production, but invested in definite lines.
If they own cash, this is, according to the state of the market, either a sound or an
unsound investment.
But it is always an investment.
They have either let slip the right moment for the purchase of concrete factors of production
Capitalists and entrepreneurs, in expending money for the purchase of concrete factors
of production, value the goods exclusively from the point of view of the anticipated
Future State of the Market. They pay prices adjusted to future conditions, as they themselves
appraise them today. Errors committed in the past in the production of capital goods available
today do not burden the buyer. Their incidence falls entirely on the seller. In this sense,
the entrepreneur who proceeds to buy against money capital goods for future production
crosses out the past.
His entrepreneurial ventures are not affected by changes which in the past occurred in the
valuation and the prices of the factors of production he acquires.
In this sense alone, one may say that the owner of ready cash owns liquid funds and
is free.