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NOTE 8.04. Capital Accumulation and the Length of the Structure of Production

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4. Capital Accumulation and the Length of the Structure of Production

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We have been demonstrating that investment lengthens the structure of production.

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Now we may consider some criticisms of this approach.

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Boehm-Bawerk is the great founder of production structure analysis,

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but unfortunately he left room for misinterpretation by identifying capital accumulation

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with Adopting More Roundabout Methods of Production Thus consider his famous example of the Crusoe who must first construct and then maintain a net if he wishes to catch more than the number of fish he can catch without any capital Boehm-Bawerk stated the roundabout ways of capital are fruitful but long they procure us more or better consumption goods but only at a later

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period of time.

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Calling these methods roundabout is definitely paradoxical, for do we not know that men always

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strive to achieve their ends in the most direct and shortest manner possible?

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As Mises demonstrates, rather than speak of the higher productivity of roundabout methods

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of production, it is more appropriate to speak of the higher physical productivity of production

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Production Processes Requiring More Time, Longer Processes

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Now let us suppose that we are confronted with an array of possible production processes

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based on their physical productivities.

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We may also rank the processes in accordance with their length, that is, in terms of the

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waiting time between the input of the resources and the yielding of the final product.

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The longer the waiting period between first input and final output, the greater the disutility,

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setterus paribus, since more time must elapse before the satisfaction is attained.

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The first processes to be used will be those most productive in value and physically, and

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the shortest.

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No one has maintained that all long processes are more productive than all short processes.

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Similarly, there are numerous long processes which are not productive at all, or which

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are less productive than shorter processes.

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These longer processes will obviously not be chosen at all.

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And some, while all new investment will be in longer processes, it certainly does not

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follow that all longer processes are more productive and therefore worthy of investment.

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The point is, however, that all short and ultra-productive processes will be the first

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ones to be invested in and established.

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In any present structure of production, a new investment will not be in a shorter process,

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because the shorter, more productive process would have been chosen first.

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As we have seen, there is only one way by which man can rise from the ultra-primitive

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level, through investment in capital.

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But this cannot be accomplished through short processes, since the short processes for producing

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Man will invest in longer processes more productive than the ones previously adopted.

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They will be more productive in two ways.

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1. By producing more of a previously produced good, and or 2. By producing a new good that could not have been produced at all by the shorter processes.

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Within this framework, these longer processes are the most direct that must be used to attain the goal, not more roundabout.

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Thus, if Crusoe can catch ten fish per day directly without capital, and can catch one

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hundred fish per day with a net, building a net should not be considered as a more roundabout

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method of catching fish, but as the most direct method for catching one hundred fish a day.

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Furthermore, no amount of labor and land without capital could enable a man to produce an

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in Automobile, for this a certain amount of capital is required.

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The production of the requisite amount of capital is the shortest and most direct method

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of obtaining an automobile.

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Any new investment will therefore be in a longer and more productive method of production.

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Yet if there were no time preference, the most productive methods would be invested

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in first, regardless of time, and an increase in capital would not cause more productive

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methods to be used.

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The existence of time preference acts as a break on the use of the more productive but

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longer processes.

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Any state of equilibrium will be based on the time preference or pure interest rate,

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And this rate will determine the amount of savings and capital invested.

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It determines capital by imposing a limit on the length of the production processes,

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and therefore on the maximum amount produced.

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A lowering of time preference, therefore, and a consequent lowering of the pure rate

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of interest, signify that people are now more willing to wait for any given amount of future

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The Theory of Money and Credit

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that as Mises lucidly put it,

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originary, pure interest is not a price determined

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on the market by the interplay of the demand for

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and the supply of capital or capital goods.

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Its height does not depend on the extent

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of this demand and supply.

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It is rather the rate of originary interest

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that determines both the demand for

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and the Supply of Capital and Capital Goods.

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It determines how much of the available supply of goods is to be devoted to consumption in

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the immediate future, and how much to provision for remoter periods of the future.

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One qualification to the law that increased investment lengthens production processes

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appears when investment turns to a type of good which is less useful than the goods previously

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acquired, yet which has a shorter process of production than some of the others.

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Here the investment in this process was checked not by the length of the process,

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but by its inferior value productivity. Yet even here the structure of production was lengthened

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Since people have to wait longer for the new and the old goods than they previously did

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for the old good, new capital investment always lengthens the overall structure of production.

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What of the case where a technological invention permits a more productive process with a lesser

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amount of capital investment?

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Is this not a case in which increased investment shortens the production structure?

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Up to this point we have been assuming technological knowledge as given, yet it is not given in

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the dynamic world.

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Technological advance is one of the most dramatic features of the world of change.

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What then of these capital saving inventions?

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One interesting example was cited by Horace White in a criticism of Boehm-Bawerk.

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Oil was produced first by ships hunting in the Arctic for whales, the whale oil being

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processed from the whales, etc., an obviously lengthy production process.

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Later, an invention permitted people to bore for oil in the ground, thereby immeasurably

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shortening the production period.

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Aside from the fact that empirically most inventions do not shorten physical production processes,

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we must reply that the limits at any time on investment and productivity are a scarcity

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of saved capital, not the state of technological knowledge.

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In other words, there is always an unused shelf of technological projects available

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and idle.

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This is demonstrable by the fact that a new invention is not immediately and instantaneously

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adopted by all firms in the society.

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Therefore any further investment will lengthen production processes, many of them more productive

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because of superior technique.

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A new invention does not automatically impel itself into production, but first joins the

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unused array.

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Further, in order for the new invention to be used, more capital must be invested.

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The ships for whaling have already been built.

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The oil wells and machinery, etc. must be created anew.

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Even the newly invented method will yield a greater product only through further investment

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in longer processes.

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In other words, the only way to obtain more oil now is to invest more capital in more

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machinery and lengthier production periods in the oil drilling business.

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As Boehm-Bawerk pointed out, White's criticism would apply only if the invention were progressively

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capital saving, so that the product would always increase with the shortening of the

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Boehm-Bawerk drew the analogy of an agricultural invention applied to two grades of land, one

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grade previously yielding a marginal product of 100 bushels of wheat, the lower grade yielding

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Inventing 80 Bushels Now suppose use of the invention raises the

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marginal product of the lower grade land to 110 bushels.

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Does this mean that the poorer land now yields more than the fertile land?

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And that the effect of agricultural inventions is to make poorer lands more productive than

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fertile ones?

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Yet this is precisely analogous to White's position, which maintains that inventions

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may cause shorter production processes to be more productive.

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As Boehm-Bawerk pointed out, it is obvious that the source of the error is this.

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Inventions increase the physical productivity of both grades of land.

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The better land becomes still better.

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Similarly, perhaps it is true that an invention will cause a shorter process to be more productive now than a longer process was previously.

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But this does not mean that it is superior to all longer processes.

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Longer processes, using the invention, will still be more productive than the shorter ones.

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Boring for oil with machinery is more productive than boring for oil without machinery.

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Technological inventions have received a far more important place than they deserve in economic theory.

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It has often been assumed that production is limited by the state of the arts, by technological knowledge,

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and therefore that any improvement in technology will immediately show itself in production.

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Technology does, of course, set a limit on production.

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No production process could be used at all without the technological knowledge of how to put it into operation.

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But while knowledge is a limit, capital is a narrower limit.

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It is logically obvious that while capital cannot engage in production beyond the limits of existing available knowledge,

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knowledge can and does exist without the capital necessary to put it to use.

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Technology and its improvement, therefore, play no direct role in the investment and production process.

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Technology, while important, must always work through an investment of capital.

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As has been stated, even the most dramatic capital saving invention, such as oil drilling,

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can be put to use only by saving and investing capital.

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The relative unimportance of technology in production as compared to the supply of saved

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Advanced Methods into effect.

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The African peasant will gain little from looking at pictures of American tractors.

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What he lacks is the saved capital needed to purchase them.

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That is the important limit on his investment and on his production.

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The futility of .4 and technical assistance in furthering production in the backward countries

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should be evident from this discussion, as Boehm-Bawerk commented in discussing advanced

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techniques, there are always thousands of persons who know of the existence of the machines

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who would be glad to secure the advantage of their use, but who do not dispose of the

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capital necessary for their purchase.

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A businessman's new investment in a longer and more physically productive process will

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will therefore be made from a sheaf of processes previously known but unusable because of the

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time preference limitation.

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A lowering of time preferences and of the pure interest rate will signify an expansion

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of saved capital at the disposal of investors and therefore an expansion of the longer processes,

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the time limitation on investment having been weakened.

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Some critics charge that not all net investment goes to lengthening the structure, that new

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investments might duplicate pre-existing processes.

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This criticism misfires, however, because our theory does not assume that net saving

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must be invested in an actually longer process in some specific line of production.

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A longer production structure can just as well be achieved by a shift from consumption to

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investment that will lengthen the aggregate production structure by greater investment

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in already existing longer processes, accompanied by less investment in existing shorter processes.

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Thus, in the case of Crusoe, suppose that Crusoe now invests in a second net, which

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Which will permit him to catch a total of 150 fish a day.

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The structure of production is now lengthened, even though the second net may be no more

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productive than the first.

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For the total period of production, from the time he must build and rebuild his total capital

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until his product arrives, is now considerably longer.

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We must now cut down again on present consumption, including leisure, and work on his second

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net.

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As Hayek states, it is frequently supposed that all increases in the quantity of capital

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per head must mean that some commodities will now be produced by longer processes than before.

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But so long as the processes used in different industries are of different lengths, this

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is by no means a necessary consequence.

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If input is transferred from industries using shorter processes to industries using longer

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processes, there will be no change in the length of the period of production in any

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Processes of Production