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

0:004. Capital Accumulation and the Length of the Structure of Production We have been demonstrating that investment lengthens the structure of production. Now we may consider some criticisms of this approach. Boehm-Bawerk is the great founder of production structure analysis, but unfortunately he left room for misinterpretation by identifying capital accumulation 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 period of time.

1:00Calling these methods roundabout is definitely paradoxical, for do we not know that men always strive to achieve their ends in the most direct and shortest manner possible? As Mises demonstrates, rather than speak of the higher productivity of roundabout methods of production, it is more appropriate to speak of the higher physical productivity of production Production Processes Requiring More Time, Longer Processes Now let us suppose that we are confronted with an array of possible production processes based on their physical productivities. We may also rank the processes in accordance with their length, that is, in terms of the waiting time between the input of the resources and the yielding of the final product.

1:55The longer the waiting period between first input and final output, the greater the disutility, setterus paribus, since more time must elapse before the satisfaction is attained. The first processes to be used will be those most productive in value and physically, and the shortest. No one has maintained that all long processes are more productive than all short processes. Similarly, there are numerous long processes which are not productive at all, or which are less productive than shorter processes. These longer processes will obviously not be chosen at all.

2:43And some, while all new investment will be in longer processes, it certainly does not follow that all longer processes are more productive and therefore worthy of investment. The point is, however, that all short and ultra-productive processes will be the first ones to be invested in and established. In any present structure of production, a new investment will not be in a shorter process, because the shorter, more productive process would have been chosen first. As we have seen, there is only one way by which man can rise from the ultra-primitive level, through investment in capital.

3:31But this cannot be accomplished through short processes, since the short processes for producing Man will invest in longer processes more productive than the ones previously adopted. They will be more productive in two ways. 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.

4:19Within this framework, these longer processes are the most direct that must be used to attain the goal, not more roundabout. Thus, if Crusoe can catch ten fish per day directly without capital, and can catch one hundred fish per day with a net, building a net should not be considered as a more roundabout method of catching fish, but as the most direct method for catching one hundred fish a day. Furthermore, no amount of labor and land without capital could enable a man to produce an in Automobile, for this a certain amount of capital is required.

5:06The production of the requisite amount of capital is the shortest and most direct method of obtaining an automobile. Any new investment will therefore be in a longer and more productive method of production. Yet if there were no time preference, the most productive methods would be invested in first, regardless of time, and an increase in capital would not cause more productive methods to be used. The existence of time preference acts as a break on the use of the more productive but longer processes. Any state of equilibrium will be based on the time preference or pure interest rate, And this rate will determine the amount of savings and capital invested.

5:58It determines capital by imposing a limit on the length of the production processes, and therefore on the maximum amount produced. A lowering of time preference, therefore, and a consequent lowering of the pure rate of interest, signify that people are now more willing to wait for any given amount of future The Theory of Money and Credit that as Mises lucidly put it, originary, pure interest is not a price determined on the market by the interplay of the demand for and the supply of capital or capital goods.

7:05Its height does not depend on the extent of this demand and supply. It is rather the rate of originary interest that determines both the demand for and the Supply of Capital and Capital Goods. It determines how much of the available supply of goods is to be devoted to consumption in the immediate future, and how much to provision for remoter periods of the future. One qualification to the law that increased investment lengthens production processes appears when investment turns to a type of good which is less useful than the goods previously acquired, yet which has a shorter process of production than some of the others.

7:57Here the investment in this process was checked not by the length of the process, but by its inferior value productivity. Yet even here the structure of production was lengthened Since people have to wait longer for the new and the old goods than they previously did for the old good, new capital investment always lengthens the overall structure of production. What of the case where a technological invention permits a more productive process with a lesser amount of capital investment? Is this not a case in which increased investment shortens the production structure?

8:43Up to this point we have been assuming technological knowledge as given, yet it is not given in the dynamic world. Technological advance is one of the most dramatic features of the world of change. What then of these capital saving inventions? One interesting example was cited by Horace White in a criticism of Boehm-Bawerk. Oil was produced first by ships hunting in the Arctic for whales, the whale oil being processed from the whales, etc., an obviously lengthy production process. Later, an invention permitted people to bore for oil in the ground, thereby immeasurably shortening the production period.

9:31Aside from the fact that empirically most inventions do not shorten physical production processes, we must reply that the limits at any time on investment and productivity are a scarcity of saved capital, not the state of technological knowledge. In other words, there is always an unused shelf of technological projects available and idle. This is demonstrable by the fact that a new invention is not immediately and instantaneously adopted by all firms in the society. Therefore any further investment will lengthen production processes, many of them more productive because of superior technique.

10:21A new invention does not automatically impel itself into production, but first joins the unused array. Further, in order for the new invention to be used, more capital must be invested. The ships for whaling have already been built. The oil wells and machinery, etc. must be created anew. Even the newly invented method will yield a greater product only through further investment in longer processes. In other words, the only way to obtain more oil now is to invest more capital in more machinery and lengthier production periods in the oil drilling business.

11:08As Boehm-Bawerk pointed out, White's criticism would apply only if the invention were progressively capital saving, so that the product would always increase with the shortening of the Boehm-Bawerk drew the analogy of an agricultural invention applied to two grades of land, one grade previously yielding a marginal product of 100 bushels of wheat, the lower grade yielding Inventing 80 Bushels Now suppose use of the invention raises the marginal product of the lower grade land to 110 bushels.

12:01Does this mean that the poorer land now yields more than the fertile land? And that the effect of agricultural inventions is to make poorer lands more productive than fertile ones? Yet this is precisely analogous to White's position, which maintains that inventions may cause shorter production processes to be more productive. As Boehm-Bawerk pointed out, it is obvious that the source of the error is this. Inventions increase the physical productivity of both grades of land. The better land becomes still better. Similarly, perhaps it is true that an invention will cause a shorter process to be more productive now than a longer process was previously.

12:53But this does not mean that it is superior to all longer processes. Longer processes, using the invention, will still be more productive than the shorter ones. Boring for oil with machinery is more productive than boring for oil without machinery. Technological inventions have received a far more important place than they deserve in economic theory. It has often been assumed that production is limited by the state of the arts, by technological knowledge, and therefore that any improvement in technology will immediately show itself in production. Technology does, of course, set a limit on production.

13:42No production process could be used at all without the technological knowledge of how to put it into operation. But while knowledge is a limit, capital is a narrower limit. It is logically obvious that while capital cannot engage in production beyond the limits of existing available knowledge, knowledge can and does exist without the capital necessary to put it to use. Technology and its improvement, therefore, play no direct role in the investment and production process. Technology, while important, must always work through an investment of capital. As has been stated, even the most dramatic capital saving invention, such as oil drilling, can be put to use only by saving and investing capital.

14:39The relative unimportance of technology in production as compared to the supply of saved

15:15Advanced Methods into effect. The African peasant will gain little from looking at pictures of American tractors. What he lacks is the saved capital needed to purchase them. That is the important limit on his investment and on his production. The futility of .4 and technical assistance in furthering production in the backward countries should be evident from this discussion, as Boehm-Bawerk commented in discussing advanced techniques, there are always thousands of persons who know of the existence of the machines who would be glad to secure the advantage of their use, but who do not dispose of the capital necessary for their purchase.

16:03A businessman's new investment in a longer and more physically productive process will will therefore be made from a sheaf of processes previously known but unusable because of the time preference limitation. A lowering of time preferences and of the pure interest rate will signify an expansion of saved capital at the disposal of investors and therefore an expansion of the longer processes, the time limitation on investment having been weakened. Some critics charge that not all net investment goes to lengthening the structure, that new investments might duplicate pre-existing processes.

16:49This criticism misfires, however, because our theory does not assume that net saving must be invested in an actually longer process in some specific line of production. A longer production structure can just as well be achieved by a shift from consumption to investment that will lengthen the aggregate production structure by greater investment in already existing longer processes, accompanied by less investment in existing shorter processes. Thus, in the case of Crusoe, suppose that Crusoe now invests in a second net, which Which will permit him to catch a total of 150 fish a day.

17:36The structure of production is now lengthened, even though the second net may be no more productive than the first. For the total period of production, from the time he must build and rebuild his total capital until his product arrives, is now considerably longer. We must now cut down again on present consumption, including leisure, and work on his second net. As Hayek states, it is frequently supposed that all increases in the quantity of capital per head must mean that some commodities will now be produced by longer processes than before. But so long as the processes used in different industries are of different lengths, this is by no means a necessary consequence.

18:31If input is transferred from industries using shorter processes to industries using longer processes, there will be no change in the length of the period of production in any

19:14Processes of Production