Average Period Of Production Research Articles

A FINANCIAL ANALYSIS OF RESWITCHING

The classical Austrian Business Cycle Theory (ABCT) is based on an inverse relationship between the so-called Average Period of Production (APP) or ‘roundaboutness’ and the interest rate. According to Böhm-Bawerk (1884 [1891]), the APP is the weighted average time that a unit of labor is locked up in the production process1; moreover, there is a positive relationship between savings (the ‘subsistence fund’) and the APP: the higher the latter the higher the former, which implies an inverse relationship between interest rates and the APP. Thus, a lower interest rate will lead to a higher APP ceteris paribus. Hayek (2008) based his Hayekian triangles on Böhm-Bawerk’s work: a lower (higher) interest rate leads to a more (less) rounda- bout structure of production, increasing (decreasing) the APP. Including Mises’s (1921) business cycle theory into the analysis, whenever the interest rate is pushed lower than its ‘natural level’, either by the central bank or the banking system, there is an unsus- tainable extension of the APP that will generate an economic boom; the crisis will irremediably follow, as the APP will pull back towards its natural level. From this brief characterization of the ABCT, it is easy to notice the key role of the inverse relationship between interest rates and roundaboutness; without it, there is no connection from changes in interest rates and roundaboutness, and the ABCT falls apart. The reswitching of techniques is precisely a counterexample to that relationship, as it claims there are situations in which lower interest rates do not lead to more roundabout productive struc- tures. The organization of this paper is as follows: the next section describes the reswitching of techniques as stated by Samuelson (1966) and the implication for the classical ABCT, based on a phys- ical measure of roundaboutness; section 3 analyzes the alternative of applying corporate finance to the ABCT following Cachanosky and Lewin (2014). Section 4 is a financial analysis of Samuelson’s example, argues why modified duration should replace Böhm- Bawerk’s APP as a measure of roundaboutness, and shows why it does not represent a paradox to the ABCT when the financial approach is used. Sections 5 and 6 address the question from two additional perspectives: a neoclassical with fully flexible prices but fixed techniques and the Austrian related dynamic efficiency.

Re-switching, the average period of production and the Austrian business-cycle theory: A comment on Fratini

In a recent contribution to this journal Saverio Fratini (Review of Austrian Economics, 2019) offers a critique of our work on Austrian Capital Theory on the grounds that our conception of capital and “roundaboutness” does not appear to provide adequate support for the Austrian business-cycle theory. In this comment we explain why we think this criticism is wrong.

Reswitching, the Average Period of Production and the Austrian Business Cycle: A Comment on Fratini

In a recent contribution to this journal Severino Fratini (2019) offers a critique of our work on Austrian Capital Theory on the grounds that our conception of capital and “roundaboutness”. In this comment we explain why we think this criticism is wrong.

A note on re-switching, the average period of production and the Austrian business-cycle theory

According to a new formulation, the average period of production is calculated by taking the shares of costs referable to each period out of the total amount of costs as weights. Once this notion had been introduced, its inverse relationship with the rate of interest prompted some scholars to believe that it could serve as a good measure of capital intensity, expecially in view of a possible resumption of the Austrian business-cycle theory. As will be shown, however, this new average period poses some problems. On the one hand, the inverse relationship mentioned above does not preclude the re-switching of production methods. On the other, if re-switching occurs, the most roundabout method may paradoxically be the one that gives the smallest net output per worker. This result can affect the revival of the Austrian business-cycle theory.

Lessons from a Review of Money, Banking, and the Business Cycle

Abstract Shawn Ritenour provides a review of my two-volume book titled Money, Banking, and the Business Cycle in the winter 2016 issue of The Quarterly Journal of Austrian Economics. This paper constitutes a response to some of the criticisms of the book in his review. In this response, I discuss topics such as the nature of profits, the sustainability of changes in time preference, the role of changes in prices versus changes in spending in the business cycle, the relationship between interest rates and the rate of profit, the nature of fraud, and the nature of value. I also discuss whether the structure of production can be measured using the average period of production. I address other issues raised by Ritenour as well. This discussion sheds light on Austrian business cycle theory and the nature of the business cycle.

Hayek's Average Period of Production: One Step Forward and a Missed Opportunity

One of Hayek’s most important contributions is his work on capital theory and business cycles as presented in Prices and Production. Hayek made significant contributions in this field. Significant contribution, however, usually are not free of issues. In this chapter, we discuss the distinctive characteristics of Hayek’s work on capital theory and how the questions his treatment raised can be answered with modern financial calculations. We also discuss Hayek’s work on capital theory after Prices and Production.

THE AVERAGE PERIOD OF PRODUCTION: THE HISTORY AND REHABILITATION OF AN IDEA

Austrian capital theory tried to capture the intuitive and basically undeniable importance that time plays in economic life, but arguably was diverted down a blind alley with Eugen von Böhm-Bawerk’s average period of production, a purely physical measure of ‘roundaboutness’—the length of the production process. For the general case, such a measure is a chimera. But the intuition is strong, and the idea survived and reappeared at various points in the history of capital theory. Almost unknown to economists, an alternative value measure of roundaboutness has existed at least since John Hicks’s formulation of his average period (AP) in 1939, which, coincidentally, was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him “Duration” (D). Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what it was that the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle.

The Role of Capital Structure in ABCT

We argue that the application of financial analysis, especially that of duration, clarifies and supports the application of the average period of production in ABCT. We also suggest that the focus in the recent ABCT literature should be more on the average period of production (APP) and less in the stages of production as depicted in Hayek’s triangle in Garrison’s model.

A financial framework for understanding macroeconomic cycles

Purpose A comprehensive understanding business cycles needs to account not only for the allocation of resources over time but also for resource allocation across industries at any point in time. But to properly understand how these “time-distortions” take place and how the price mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production is required. The authors use insights provided by Macaulay’s duration and Hicks’s average period to show that financial duration and related concepts have a direct connection to macroeconomic stability. Design/methodology/approach This study uses a theoretical and conceptual approach. It first presents the connection between average period of production and financial duration and then compares and applies this to macroeconomic business cycle theories. Findings This study points to important implications for macroeconomic policy. It not only claims that a low interest rate contributes to the creation of asset bubbles but also shows the market mechanism through which the real sector is affected. The application of financial concepts to macroeconomic cycles shows the price mechanism through which resources are allocated across industries. Originality/value The financial approach we offer to business cycles is fairly unexplored. As such, this paper offers a novel conceptual and theoretical framework for business cycles.

Roundaboutness is Not a Mysterious Concept: A Financial Application to Capital Theory

We apply the EVA terminology to the concepts of roundaboutness and average period of production in capital theory. By doing this we show that these terms have a clear and well understood financial interpretation. A financial application to capital theory helps to clarify obscure and controversial economic terms.

The Average Period of Production: The History of an Idea

Austrian capital theory tried to capture the intuitive and basically undeniable importance that time plays in economic life, but arguably was diverted down a blind alley with Bohm-Bawerk’s average period of production, a purely physical measure of 'roundaboutness' -- the length of the production process. Such a measure is a chimera. But the intuition is strong and the idea survived and reappeared at various points in the history of capital theory. Almost unknown to economists an alternative value measure of roundaboutness existed at least since Hick’s formulation of his average period (AP) in 1939, which, coincidentally was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him duration (D). Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what it was that the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle.

Roundaboutness Is Not a Mysterious Concept: A Financial Application to Capital Theory

We apply the EVA terminology to the concepts of roundaboutness and average period of production in capital theory. By doing this we show that these terms have a clear and well understood financial interpretation. A financial application to capital theory helps to clarify obscure and controversial economic terms. We then extend our financial interpretation of roundaboutness and average period of production to the Austrian business cycle theory and show how this approach can be used to shed light on the subprime crisis.

On the Generalization of the Concept of Böhm-Bawerkʼs Average Period of Production to the Autoregressive Pattern of Input―Output Structure:

Abstract: Kei Shibata （1902―1986）, a creative theoretical economist, was the first Japanese economist to gain international recognition. One of his most famous works is an attempt to synthesize Walrasian/Casselian General Equilibrium Theory with Marxian Economic Theory. Most of his economic theories were first published in Keizaironso and were later included in his first book, Rironkeizaigaku （meaning theoretical economics） published in 1935 and 1936. After completing this book, Shibata turned to investigating new economic principles be-yond capitalism. Shibataʼs investigation had some byproducts. The most remarkable was an attempt to generalize Böhm-Bawerkʼs concept of the average period of production （APP）, which is defined as the length of the roundabout production process, whereby capital goods are first produced and then employed in the production of the final consumer good. This con-cept was criticized because it can only be applied in the case of a single linear stage pattern of production, but not in the case of an autoregressive pattern of input―output structure. Later studies reveal that the concept is destined to fail because as the roundabout period of produc-tion reaches an infinite value, the APP also reaches an infinite value. However, Shibata presented a mathematical way of determining the APP using an autoregressive pattern of the input―output structure. In addition, he concluded that in such cases, the APP has a finite value. His investigation is connected to the concept of the so-called capital intensity in modern economics and the organic composition of capital in Marx-ian economics. Therefore, his findings require further research. Hence, the present study aims to re-examine Shibataʼs contribution to the generalization of Böhm-Bawerkʼs theory of the APP. JEL classification numbers: B 41, B 53, D 24.

Financial Foundations of Austrian Business Cycle Theory

Abstract In this paper, we study financial foundations of Austrian business cycle theory (ABCT). By doing this, we (1) clarify ambiguous and controversial concepts like roundaboutness and average period of production, (2) we show that the ABCT has strong financial foundations (consistent with its microeconomic foundations), and (3) we offer examples of how to use the flexibility of this approach to apply ABCT to different contexts and scenarios.

The Average Period of Production: History of an Idea

The Average Period of Production: History of an Idea

Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory

In response to the global economic crisis, some have advocated that Austrian school macroeconomics be reconsidered. This paper examines elements of Roger Garrison’s Time and Money as an exposition of Austrian Business Cycle Theory not incorporating some of the more complex elements of Hayek’s Pure Theory of Capital. This paper demonstrates an entrepreneur may simultaneously classify a capital good into several orders, as orders of goods are defined by Austrian economists. Hayekian triangles are defined. This paper demonstrates that the shape of a Hayekian triangle varies with the interest rate, even if real resources are not reallocated across stages of production. It is demonstrated, by an example, that no systematic tendency need exist for entrepreneurs to respond to lower interest rates by reallocating resources from producing low order goods to producing higher order goods, or otherwise increasing the capital-intensity of the structure of production. The rejection, as is typical of Garrison and others in the modern Austrian school of economics, of a physical measure of the average period of production and of a production function with an aggregate measure of capital as an argument is not sufficient for rigorous capital theory. Hayekian triangles are arguably not a good tool for investigating or explaining capital theory.

Some Capital-Theoretic Fallacies in Garrison's Exposition of Austrian Business Cycle Theory: A Research Note

In response to the global economic crisis, some have advocated that economists consider the economics of the Austrian school. This paper examines elements of Roger Garrison’s Time and Money as an exposition of Austrian Business Cycle Theory not incorporating some of the more complex elements of Hayek’s Pure Theory of Capital. This paper demonstrates an entrepreneur may simultaneously classify a capital good into several orders, as orders of goods are defined by Austrian economists. Hayekian triangles are defined. This paper demonstrates that the shape of a Hayekian triangle varies with the interest rate, even if real resources are not reallocated across stages of production. It is demonstrated, by means of an example, that no systematic tendency need exist for entrepreneurs to respond to lower interest rates by reallocating resources from producing low order goods to producing higher order goods, or otherwise increasing the capital-intensity of the structure of production. The rejection, as is typical of Garrison and others in the modern Austrian school of economics, of a physical measure of the average period of production and of a production function with an aggregate measure of capital as an argument is not sufficient for rigorous capital theory. Hayekian triangles are arguably not a good tool for investigating or explaining capital theory.

Hayek et Knight (1933-1936). La controverse sur le capital

Résumé Knight s’est lancé dans une violente attaque contre la théorie autrichienne du capital et dans une polémique avec Hayek. L’article montre que si l’opposition porte apparemment sur le concept de période de production et, plus précisément, sur celui de période moyenne, en réalité, des clivages plus profonds divisent les deux auteurs : celui de la pertinence de la théorie autrichienne comme théorie générale du système productif et, au-delà, celui de la capacité de l’analyse économique à expliquer la dynamique à long terme. C’est ainsi le projet hayékien lui-même qui va se trouver ébranlé par cette polémique.

Keynes on the Nature of Capital: An interpretation of The General Theory's Chapter 16

Chapter 16 of The General Theory contains an analysis designed to interpret the long-run effects of saving decisions and capital accumulation on employment and aggregate income. In a discussion aimed at providing a basis for this analysis, Keynes argued that the concept of roundaboutness−or average period of production−did not provide a general explanation of the origin of the return on capital and was not a general description of capital itself. The alternative view put forward by Keynes described capital as a set of heterogeneous commodities yielding a return according to their scarcity.

The Application of the Pure Theory of Population Change to the Theory and Capital

Bohm-Bawerk's concept of capital essentially that of a fund which supports factors of production during the period of production. — The lake and stream analogy, 647. — A better analogy is that of a population: capital, input, output, and the average period of production corresponding to population, births, deaths, and the average length of life, 650. — An analysis of pure population theory for a stationary state, 655; for a geometrically progressive state, 657. — Input as primarily the flow of services from all factors of production, 659. — Output as primarily the flow of services to consumers, 662. — An average period of production defined, which does not go back to any primary factors of production, 664. — Its length is between ten and twenty years, 665. — The existence of a period of production increases the probability of price disturbances, 666. — The concept objectively vague in a system of changing prices, but not so when considered as a subjective determinant of economic behavior, 666.