Hayek's got my back on this one

'Hayek openly concedes it is impossible to characterize different investment processes as "longer" or "shorter," and thus as more or less capital-intensive, in any unambiguous way, except, perhaps, in the ex post tautological sense of being adopted at a lower interest rate. But it is nonetheless the case that a lower rate of interest means investment projects that would not otherwise be undertaken, either because the volume of their expected output functions was too small, or else the volume of the relevant input functions too large, will now be feasible. The rate of interest, then, determines "only to what point on the schedule investment will be carried," that is, it determines the last investment project that becomes economically viable.' -- Rethinking the Keynesian Revolution, Goodspeed, pp. 134-135

As I understand the above, it agrees with what I wrote here. Hayek had abandoned a "lengthening structure of production" as an important component of his cycle theory 70+ years before I did.


  1. mmmh, but does 'there is no unambiguous way to characterize different investment processes as "longer" or "shorter," and thus as more or less capital-intensive' mean that it is also nonsensical or just fruitless to do so? I mean, does Hayek's admitting that there is no unambiguous way to do so also mean that he thinks the very concepts of 'longer' and 'shorter' production structures should be discarded?

    the mere fact that there is irreducible ambiguity when it comes to concepts and their application does of course not mean that those concepts therefore should be discarded.

    are e.g. 'longer' and 'shorter' production structure not a convenient shorthand for expressing *something* that is important somehow even though when these terms ultimately break down under technical analysis/torture?

    it just seems that in (non-mathematical) economics there are so many expressions that we use and that are handy but that, upon deep analysis, are deeply problematic and impossible to give a clear meaning.

    - Well, Narrator, why don't you give some examples of such terms?

    Ach, yes, that would be good but not sure I can do that, at least not right now. It's a bit of a vague intuition that I have (and the belief that in the past couple of years I *have* stumbled upon those kinds of concepts but didnt sort of have the framework to see or categorize them as similar to one another in that respect and so I never really explicitly thought about them with regard to that aspect, and so never really created memories of them that come to mind now that I *am* thinking about this aspect explicitly) but that, for whatever that is worth, I do feel strongly about.

    - okay, Narrator, whatever, you gonna pass me that joint now?

  2. okay, this is not the best example but I think that it is *an* example of what I mean:

    "prices reflect or communicate or convey or transmit information."

    then when one just factually describes how the price mechanism works, what happens from one moment to the next, which actors make decisions, based on what, and how this influences the decisions of other acts, it more or less becomes impossible to give any unambiguous meaning to the idea of prices communicating (or conveying etc) information. But it's probably still a concept that is meaningful to us, that helps us to understannd and/or to express something that is important. it's just that when we try to actually describe just what it is that is important *and* that gets expressed via those words, we run into walls, dead-ends and off cliffs every way we try.

  3. Can you explain why we need to get rid of the concept of lengthening?

    Clearly it is possible to characterize different investment projects as "longer" or "shorter" since different processes take different amounts of time. Building a house may take 6 months or 12 months depending on the process used for example, even if it's the same house. The picture is vaguer if there are factor markets interposing at each stage.

    See my comment here too: http://gene-callahan.blogspot.ie/2013/03/hayek-too-abandoned-lengthening-of.html

    "Roundaboutness", "lengthening" and "Capital Intensity" are not that troublesome, especially as relative concepts which is what they need to be here. The "Average Period of Production" certainly is though.

  4. 'Can you explain why we need to get rid of the concept of lengthening?'

    I did not say we ne to "get rid of it" -- my claim (and the 1941 Hayek's) is that it does not help us explain business cycles.

    'Clearly it is possible to characterize different investment projects as "longer" or "shorter" since different processes take different amounts of time.'

    Well, no, you've missed Hayek's point here. Process A make take 12 months, but with few inputs invested in months 1-11 and then quite a few in month 12. Process B make take six months, with almost all of the inputs invested in the first month. Which is a "lengthier" production process?

    As Hayek (and Mises!) recognized, we just don't need this concept.

    1. I see what you mean, clearly I'm wrong. I'm going to go away and think about this some more.

    2. Current, you win the second "someone who actually re-thought a view based on an Internet discussion" award of the year!

      (I may sound sarcastic here, and I am, but the sarcasm is directed at most Internet discussions, not at you, Current. It is just so rare to see someone do this that I want to make a big deal out of it each time it happens.)

  5. I agree that because of the kind of complexities noted by Hayek in PToC (and highlighted in the Cambridge Capital discussions) that the length of the structure of production can not be measured.

    When the originary rate of interest falls then the new processes adopted will just be those those that produce the consumer goods with the highest present value given the new discount rate on future goods and these will not necessary be longer processes.

    However in an ABCT type scenario (like in your previous post) where an increase in the money supply leads to a lowering of nominal interest rates then the yield on capital goods that last a long time will go up in the short-term. For example: In equilibrium where interest rates are 10% a machine that lasts 10 years will have a present value to reflect this and the value of the flow of goods it produces. If interest rates fall to 5% but the price of the good it produces stays the same then its present value will increase as (net of interest payments) it will now have a greater return than before. People will buy money to borrow it and manufacturers will increase its production. Eventually when interest rates and prices adjust to the new money these new investments will turn out to be unprofitable.

    So while I agree that "lenghtening" is not a meaningful concept for discussing what happens when the interest rates falls as a result of a change in time preference I still think we can use a similar concept to show how an artificial lowering of the interest rate can cause "longer" processes to expand - where length refers to the amount of interest payments embedded in the price. And how these processes will be mal-investments not just over-investments.

  6. Some may find this article on reswitching helpful.

    1. I applaud the author on this point: "In conclusion, the possibility of technique reswitching underscores the great danger of basing economic propositions on purely physical facts, rather than subjective value judgments."

      He should follow up with an article noting how Sraffa formulated the "own-rate" problem by focusing on physical facts, but Keynes and Hayek solved it by switching to the investor's point of view.