Heterodox
A mistaken theory claims prices convey information about relative scarcities. Friedrich Hayek uses an example of tin. According to this theory, a higher wage incentivizes investments in less labor-intensive techniques and to shifting production towards less labor-intensive commodities. Likewise, a lower interest rate incentivizes investments toward more capital-intensive techniques and to shifting production towards more capital-intensive commodities. A number of attempts have been made to elaborate this theory and to formalize this vision: One can measure capital-intensity by aggregating the prices of capital goods used, per person-year of labor employed, in producing a commodity. Around switch points, a lower interest rate is associated with the adoption of a more capital-intensive
Topics:
Robert Vienneau considers the following as important: Austrian School Of Economics
This could be interesting, too:
Robert Vienneau writes Ludwig Von Mises Being Wrong On Economic Calculation
Robert Vienneau writes Von Mises Wrong On Economic Calculation (Update)
Robert Vienneau writes Von Mises Wrong On Economic Calculation
Robert Vienneau writes Hayek In The Pure Theory Of Capital
A mistaken theory claims prices convey information about relative scarcities. Friedrich Hayek uses an example of tin. According to this theory, a higher wage incentivizes investments in less labor-intensive techniques and to shifting production towards less labor-intensive commodities. Likewise, a lower interest rate incentivizes investments toward more capital-intensive techniques and to shifting production towards more capital-intensive commodities.
A number of attempts have been made to elaborate this theory and to formalize this vision:
- One can measure capital-intensity by aggregating the prices of capital goods used, per person-year of labor employed, in producing a commodity. Around switch points, a lower interest rate is associated with the adoption of a more capital-intensive technique. This approach can be seen in the mainstream economist Edwin Burmeister's work with David Champerowne's chain-index measure of capital.
- One can measure capital-intensity by the period of production, which is a weighted sum of the prices of dated unproduced inputs (labor and land). The weights, in Eugen Böhm-Bawerk's approach are based on a simple interest model. A lower interest-rate is associated with an increase in the period of production.
- Capital goods include machines that operate with constant efficiency over their physical life. Lower interest rates are associated with the adoption of techniques with longer-lived machines. Ian Steedman's corn-tractor model provides a framework to investigate this approach.
- Capital goods include machines that operate with variable efficiency over their physical life. Lower interest rates are associated with the lengthening of the economic life of machines.
- One can measure the period of production by a financial approach, as in the work of Nicolás Cachanosky and Peter Lewin. Their Duration is a rediscovery of J. R. Hicks' average period of production.
The lack of foundation of these approaches can be seen by the existence of numeric counter-examples. These counter-examples are set in a framework in which market prices are attracted by prices of production.
Examples of negative real Wicksell effects show, as acknowledged by Burmeister, that the first approach is, at best, an arbitrary special case. The existence of price Wicksell effects invalidates the second approach. Steedman shows that the third approach is, again, an arbitrary special case. Numeric examples from Bertram Schefold and others show the fourth approach relies on another special case. I have demonstrated that the issues with the fourth approach are independent of the issues with the first approach.
Saverio Fratini has shown that the fifth approach is compatible with reswitching. A more roundabout technique of production, by the measure of Duration, can result in less net output per worker. This result seems contrary to what those formalizing measures of capital-intensity intend.
One could respond to above with mysticism, maintaining the doctrines of Austrian capital theory, while refusing to state anything clearly. As I understand it, this is the approach of Jésus Huerta de Soto and others.