Eugen's Big Mistaken, Adventure
Ever since my parents named me after Eugen Böhm-Bawerk, I have had a soft spot in my heart for the man. But that does not prevent me from realizing that his postulating time as a factor of production, so that land and labor have higher yields the longer they are invested, was a terrible derailment of capital theory. In fact, Böhm-Bawerk got this exactly backwards: it is not that investing for a longer period of time creates higher returns, it is that one will only invest in a longer production process when it has greater yields than a shorter one.
If the error had disappeared with Böhm-Bawerk, it would not be worth noting. But it has continued to plague capital theory since, and created confusions for many subsequent capital theorists. Fortunately, Böhm-Bawerk's greatest student was able to escape the mare's nest Eugen had created:
"The length of time expended in the past for the production of capital goods available today does not count at all. These capital goods are valued only with regard t o their usefulness for future want-satisfaction. The 'average period of production' is an empty concept. What determines action is the fact that in choosing among various ways which can remove future uneasiness the length of the waiting time in each case is a necessary element.
"It was an outcome of these two errors that Böhm-Bawerk in the elaboration of his theory did not entirely avoid the productivity approach which he himself had so brilliantly refuted in his critical history of the doctrines of capital and interest" (Human Action, p. 521-2).
More on capital to come.
If the error had disappeared with Böhm-Bawerk, it would not be worth noting. But it has continued to plague capital theory since, and created confusions for many subsequent capital theorists. Fortunately, Böhm-Bawerk's greatest student was able to escape the mare's nest Eugen had created:
"The length of time expended in the past for the production of capital goods available today does not count at all. These capital goods are valued only with regard t o their usefulness for future want-satisfaction. The 'average period of production' is an empty concept. What determines action is the fact that in choosing among various ways which can remove future uneasiness the length of the waiting time in each case is a necessary element.
"It was an outcome of these two errors that Böhm-Bawerk in the elaboration of his theory did not entirely avoid the productivity approach which he himself had so brilliantly refuted in his critical history of the doctrines of capital and interest" (Human Action, p. 521-2).
More on capital to come.
Wow, that's cool that your parents were into political economy. I don't think that mine ever cracked a book, which is kind of weird, because my father could answer (correctly) just about any question put to him, he was like an encyclopedia of the most random and little-known information, and his grasp of math was almost scary. Yet I had never seen him read a single book and there were only like 5 books in the house (all fiction).
ReplyDeleteIt's been a while since I've read anything by EBB, and I do remember that I disagreed with his use of time in capital theory at the time, but I was still happy to see that he was looking at the time aspect even if it was wrong. I wouldn't at all be surprised if Mises's thoughts on time were highly influenced by EBB, but that it was his own sense that there was something wrong with EBB's theory that prompted his own focus on it.
"Wow, that's cool that your parents were into political economy."
DeleteNah, I'm just joshin y'all.
Ah man, I thought that might have been the case, but you didn't give any indication.
DeleteWho were you named after? (I was named after my mother's father)
After my father.
DeleteBTW, capital theory and monetary theory have been and are still my greatest areas of interest in economics, so I look forward to your future posts on the subject.
ReplyDeleteWear a condom when you read Gene talking about Bohm-Bawerk, Joe.
ReplyDeleteI am missing something here. Is Joe going to want to have sex with me after reading these posts? With prostitutes?
DeleteMaybe he's just concerned that I'll make a mess.
Delete