Wednesday, March 27, 2013

Hayek, too, abandoned the lengthening of the structure of production as a meaningful concept

I must admit I have not yet tackled the Pure Theory of Capital. So I was surprised to see that Hayek had followed my lead 70 years before me, and dropped the idea of an average period of production from his capital theory:

"By Pure Theory of Capital, however, Hayek has jettisoned the average period entirely, denying both the validity of such a construction and its usefulness." -- Goodspeed, Rethinking the Keynesian Revolution, p. 122


  1. He abandoned the average period of production, not the lengthening.

    Hayek took the view that the average period of production was meaningless. But, that each period, whatever it may be, would be lengthened if possible by a reduction in the interest rate. He took the normal length (for a process and for a given interest rate) of each production process to be endogenous. But, he took the difference to between lengths over time to be a product of monetary policy.

    That doesn't mean Hayek (or Mises) disagrees with you. As far as I remember, in "Prices and Production" the cycle can be triggered by an increase in capital intensity without needing an increase in roundaboutness.

    1. "He abandoned the average period of production, not the lengthening."

      I don't think that is right. In PTOC, he noted that it is often ambiguous as to which production processes are longer and which shorter. How, then, could we say when a production process has "lengthened"? If we could say so unambiguously, couldn't we average all those lengthenings and get a new average?

    2. I think Current may be referring to the differences between measuring the length in time and measuring the length by stages, where you can have a production process with more stages, even if it takes less time to complete than one with less stages.

    3. Time is what matters, not stages, because interest I'd related to time. I think even in the early days most expositions concentrated on time. The big problem with an average period of production is that technology is constantly changing. so, for a given financing cost/interest rate, the preferred process and the associated production time is constantly changing.

  2. "In PTOC, he noted that it is often ambiguous as to which production processes are longer and which shorter"
    Does he mean there is ambiguity re a comparison between two different kinds of production structures or re the comparison between one production structure at time t and the same one (with something added) at t+1?

    If the former, then that doesn't exclude us being able to say that any given production process was lengthened without that meaning that we can rank all the different production processes on the same scale / using the same metric (whatever the term is) and hence obtaining an average.

    (the comparison between one and the same production process at different times may involve comparing pretty commensurable entities whereas a comparison between two different types of production process may involve more or less incommensurable entities)

    I don't know nothing about this topic though, so I may be aksing a dumb question.

  3. This issue is like the old debate about whether various things cause demand or supply schedules to shift, or whether they cause movement along supply/demand schedules.

    We can have changing roundaboutness without having a defined average period of production. Suppose that the technology that a business has available to it changes between year 1 and year 2. With the technology available in year 1 there will be a range of lenths of production processes that can be used, and a range of financing costs associated with them. The same is true of year 2, though the lengths themselves may be different. Now, changes in financing cost between the two years will still cause changes in roundaboutness. But, it will be invalid to compare through time because technology has changed. The financing cost still influences which production process is used at any one time though. So, "roundaboutness" doesn't go away, it just changes. As I understand it this was what Hayek was aiming for in his later books like PToC.

    Of course there are problems with this viewpoint.



"If your approach to mathematics is mechanical not mystical, you're not going to go anywhere." -- Nassim Nicholas Taleb