Hayek In The Pure Theory Of Capital

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Robert Vienneau
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This is more of my commonplace book, based on reading some of Hayek's The Pure Theory of Capital. Hayek rejects Böhm Bawerk's average period of production, a single number summarizing the capital intensity of a structure of production. He still strives to say that more capital-intensive techniques are longer in some non-aggregate sense. I probably will not finish this book. To compare and contrast this book with J. R. Hicks' Value and Capital would be of interest.

Hayek correctly takes issue with the treatment of capital as a homogeneous quantity and the explanation of interest by the supply and demand of capital:

"the attempts to explain interest, by analogy with wages and rent, as the price of the services of some definitely given 'factor' of production, has nearly always led to a tendency to regard capital as a homogeneous substance the 'quantity' of which could be regarded as a 'datum', and which, once it had been properly defined, could be substituted, for purposes of economic analysis, for the fuller description of the concrete elements of which it consisted." (Hayek 1941, p. 5)

and:

"As we shall see, it is more than doubtful whether the discussion of 'capital' in terms of some single magnitude, however defined, was fortunate even for its immediate purpose, i.e. the explanation of interest. And there can be no doubt that for the understanding of the dynamic processes it was disastrous. The problems that are raised by any attempt to analyse the dynamics of production are mainly problems connected with the interrelationships between the different parts of the elaborate structure of productive equipment which man has built to serve his needs." (Hayek 1941, p. 6)

Sraffa, of course, analyzes the structure of productive equipment in a different way.

Hayek is one of the originators of the notion of intertemporal general equilibrium

"An effective discussion of the problems of capital theory must, however, move precisely in that neglected field which deals with general equilibria that are not at the same time stationary states." (Hayek 1941, p. 6)

Hayek goes on to a discussion later built on by Lachmann and paralleling Robinson. At any point, the complex of capital equipment is unsuitable, inherited from the past in which the present was not completely foreseen. In equilibrium, the plans of all agents are adjusted. Equilibrium is not a state that an economy can get into in historical time. Nevertheless, equilibrium analysis has a logical use in a preliminary analysis. Hayek does not want to consider a temporary partial equilibrium, instead of a general intertemporal equilibrium. Furthermore, Hayek puts money aside, including the lending and borrowing of money in most of this preliminary study.

Hayek distinguishes between permanent and non-permanent resources and between producible and non-producible resources.

"The term capital itself, in so far as it is required to describe a particular part of the productive resources, will accordingly be used here to designate the aggregate of those non-permanent resources which can be used only in this indirect manner to contribute to the permanent maintenance of the income at a particular leve1." (Hayek 1941, p. 54, italics in original)

Both producible and non-producible resources can be capital. The latter include something like oil, which can be exhausted by drilling.

In his non-homogeneous concept to capital, Hayek still thinks a connection exists between capital-intensity and time:

"There are two main ways in which the productivity of investment shows itself ... the investment of any group of services of the permanent resources can be combined into one single 'process' of production in two ways. In the one case it is the duration of the actual process of production where the time factor enters, and in the other case is the durability of the product (or of the non-permanent resources used in production)." (Hayek 1941, Ch. 6, p. 65, italics in original)

Hayek was an early adopter of the distinction and terminology of point input, flow input, point output, and flow output:

"it is useful to construct ideal limiting cases which show their peculiarities in the purest form. The first case is best represented if we conceive of a continuous application of input through a period of time, leading to an output all of which matures at a moment of time at the end of the period. This has been described as the 'continuous input – point output' case. The second case is ideally represented if we imagine durable good which is produced at a moment of time and then rendes services continuously over a period of time. This case has correspondingly been described as the 'point input – continuous output' case." (Hayek 1941, p. 66-67, italics in original)

Hayek distinguishes the investment period from the length of the process and the period of production:

"The fundamental fact with which we are concerned is the change in the periods for which particular units of input are invested, that is, the interval between the application of a unit of input and the maturing of the quantity of output due to that input. This interval of time we shall describe as the investment period of that unit of input.” (Hayek 1941, p. 69, italics in original)

Hayek recognizes that an investment period requires a high degree of abstraction to identify and may not always exist.

Hayek is considering the choice of technique, in which many techniques are known for producing a given final output:

"The considerations advanced above - and it is important to remember this throughout the discussion - have nothing to do with technological progress in this sense. On the contrary, they refer to changes under conditions where knowledge is stationary. All that is assumed is that at any moment there are known possible ways of using the available resources which would yield a greater return than those actually adopted, but would not yield this return until a later date, and for this reason are not actually used.

Among the wide range of possible methods of production known at any one time there will be some which will yield their product after shorter periods of time and some which will not yield it until after longer periods. From among each group of methods involving the same 'amount of waiting' - if we may make provisional use of this vague term - the one that will be chosen will be the one which yields the greatest return from a given investment of factors. But so long as there is any limitation on the 'amount of waiting' for which people are prepared, processes that take more time will evidently not be adopted unless they yield a greater return than those that take less time. (Hayek 1941, p. 72-73)

Hayek uses 'process' synomously with what I usually call a technique. Hayek thinks longer processes, in some sense, support a greater division of labor and often the use of resources that were not used before. Perhaps the consumer good is different but satisfies the same needs.

Here Hayek is once again rejecting an average period of production:

"Before we can pass on to this problem it is necessary to return for a moment to the, difficulty of talking about changes in the length of the process of production. It will probably be fairly obvious by now that as the complete processes of production with which we have to deal become increasingly complex it becomes more and more difficult, and may in some cases be impossible, to say in any general way which of several, alternative processes under consideration is as a whole the shortest or the longest. The total length of time which elapses between the very beginning of the process and the completion of the product may be shorter in one process than in another, and yet by far the greater part of the input used may be applied very early in the first process and very late in the second process. Which of these two processes is to be regarded as the longer? It is impossible to answer this question at the present stage, and there is in fact no general answer to it. It is only mentioned at this point in order to warn the reader against any attempt to provide himself with an answer by introducing some concept of an 'average period' of production. Such a concept, as we shall see, is not only unnecessary but is also highly misleading." (Hayek 1941, p. 76)

The above does not get at reswitching, I do not think. He wants a process in which resources are applied at the start and the end, in contrast to when they are used mostly in the middle.

Somewhere around here, Hayek defines stages of production, much like in his triangles.

I think the following gets at the possibility of reswitching:

"... when we compare two different investment structures, it will not always be possible even to say, on purely technical grounds, which of them involves the greater amount of waiting. At one set of relative values for the different kinds of input and at one rate of interest, the one structure, and at a different set of values or a different rate of interest, the other structure will represent the greater amount of waiting, or will be 'longer' in the sense in which this term has commonly been used." (Hayek 1941, Ch. 11, p. 144)

There is also something suggestive of capital-reversing in Chapter XXI.

"We shall not follow up this point in detail. For the method adopted to give a general picture of the considerations involved is really not adequate for an exhaustive analysis. The reason for this is, of course, as in all other cases where productivity or demand curves for individual factors are regarded as given, that these curves cannot be regarded as simultaneously and independently valid. But to take account of the complicated relations of technological (and psychological) complementarity which are involved, requires another technique which has been evolved quite recently in closely related fields, and which will also have to be used in a more exhaustive investigation of our problems. Here all that we shall mention is that if we were to start from a complete statement of the substitution relationships between all the different resources concerned, all kinds of peculiarities and apparent anomalies in the behaviour of individual factors would appear to be quite consistent with the general tendencies which can be deduced from the cruder type of analysis. It is, for instance, quite possible that while a fall in the rate of interest will create a tendency for the services of most of the permanent factors to be invested for longer periods and for their prices to rise, in the case of some individual factor the effect may well be that it will be invested for shorter periods, or that its price will be lowered, or both." (Hayek 1941, Ch. 21, p. 191-192)

The earliest description of something like reswitching is due to Irving Fisher.

Hayek and other Austrian-school economists are, of course, wrong. In what sense, whether assessed by value measures or physical properties, do more well-chosen, roundabout techniques raise net output? Samuelson (1966) noted that reswitching is not consistent with "the simple tale told by Jevons, Bohm-Bawerk, Wicksell, and other neoclassical writers". Fratini (2019a, 2019b) shows that the adoption of techniques with an increased average period of production, as assessed by financial measures, is compatible with decreased net output per worker. Steedman (2020), in considering techniques associated with the operation of different types of machines, demonstrates that more durable machines can also yield less net output per worker. I know that the economic life of machines do not support Hayek's idea.

Technical Terms: Continuous (flow) input or point input, continuous (flow) output or point output, Intertemporal general equilibrium, Investment period, Period of production, Permanent and non-permanent resources, Producible and non-prodicable resources, Stages of production, Structure of production