Chapter 1: Capitalist Production

CAPITALIST PRODUCTION

1. Factors of Production

Since nature has not provided man with all that he needs for his livelihood and to satisfy his further-reaching needs, he must constantly strive to produce consumer goods. The process of production was accurately described by Eugen von Böhm-Bawerk when he spoke of a combination of human labor and the gifts of nature. Human nature and those fruits of nature which are not so abundant that they suffice for all needs (and which are thus scarce) thereby become objects of “economizing”; that is, these factors of production will be used in such a way that the greatest possible return for some expenditure will be sought, and those expenditures will be avoided which cannot be justified in view of their expected results. In economic history, production has without a doubt grown extraordinarily, in spite of the fact that nature has provided the economy with only a limited supply of her best: her best soil, her best raw materials. Various circumstances have contributed to this increase in production. Above all, steady growth in the knowledge of the laws of nature has made it possible that new technical methods of production could always be found. Parallel to this was the progressive utilization of the advantages of combining the work of a number of people in various ways, especially in the form of division of labor, which successfully increased production by partitioning and simultaneously integrating productive operations. Finally, it is of utmost significance that man was able to draw on that element in the process of production that is identified with the term capital.

Labor and land (insofar as the best qualities are not available in superabundance) have been called the originary factors of production, and these have been contrasted with capital as a produced factor of production. However, if one accepts this formulation, one may not forget that when employing capital, one is never employing a new type of factor of production, but rather is using originary factors of production in a special way—since it can only have been produced out of originary factors of production. Whenever we speak of production capital, we must refer to the use of originary factors of production, the circumstances under which originary factors of production are used, and their effects. He who keeps this most obvious point in mind will easily avoid making many mistakes that derive from misguided speculation. We will see immediately that capital initially has nothing to do with money: “money capital” can only be an expression of relationships in a money economy.¹ Capital also cannot be something peculiar to a specific kind of social organization. Production “employs capital” or is “capitalist production” if it uses originary factors of production in a specific way, regardless of whether it is organized in a “capitalist way,” which commonly means that private ownership of capital plays a specific social role. Finally, capital can be conceived of even less as a force of production that lies outside the reality of the world of goods, as an imaginary fund of productive achievements or something similar. To go astray here is most dangerous for economic theory.

The following discussion will first explain the essence of capital-employing production starting from well-known doctrines. We will only develop these doctrines insofar as they will later serve us as the foundation for our discussion of the phenomena of a market economy. For this reason, some of what would need to be explained in presenting a complete theory of capital will be absent here and will only be discussed later, and then only as regards its particular appearance within a market economy.

2. Roundabout Production

Human labor can be employed in production such that its direct goal is the finished product. An appropriate example, repeatedly cited since the times of Wilhelm Roscher, is of a nation of fishermen who directly employ their labor for the purpose of catching fish. This labor will reach a higher degree of productivity if the fishermen are able to produce a boat and other fishing tools. In this case, labor first must be expended in order to produce these “produced factors of production,” but the reward for this expenditure will be a greater return. The essence of this process has been seen (Jevons and Böhm-Bawerk) in the combination of human labor and fruits of nature (natural resources) that are directed into a time-consuming roundabout method of production.

Here, the fishermen are faced with the task of increasing the product. Such an increase would be possible by employing more laborers: If the population increases, it can be expected that (given a sufficient amount of fish) an increase in the number of working hands will also lead to a larger harvest. However, in choosing a roundabout method of production we are concerned with another way of increasing the return while the number of laborers remains unchanged. Labor will now no longer be used directly for “momentary production” in order to achieve a finished product, but instead it will be redirected into a roundabout method of production. It will first be used to produce factors of production with whose help, and with the help of additional labor, the finished product will be attained. While this method of production will lead to an increase in returns as compared to the case of “momentary production,” a longer period of time will elapse between the initial employment of labor and the final attainment of the finished product. Not only in modern times, but since the rise of man above the most primitive civilization, almost every act of production has been performed using a roundabout method of production; hardly anything that man eats or otherwise uses could have been attained without roundabout methods of production.

The general thesis would then read: An increase in the returns of production is not only possible by increasing the factors of production, but also by lengthening the roundabout methods of production, i.e., by using the same number of factors of production in such a way that more time elapses between their initial employment in production and the attainment of the finished product. Metaphorically, this formula may be used: A sacrifice of time permits a greater output.

Regarding this thesis it should be noted that:

1. Not every lengthening of the roundabout method of production will necessarily lead to an increase in output. Rather, of all possible ways of lengthening the roundabout methods of production, an “intelligent choice” (Böhm-Bawerk) must be made in order to find those that will result in increased output.

2. Lengthening the roundabout method of production means that factors of production are not employed directly and without delay for the creation of a product, but instead that these factors of production are first rerouted for the creation of intermediary products out of which the final end product then results (usually with the help of additional factors of production). With the selection of additional roundabout methods of production, the length of time between the employment of the factors of production and the attainment of the finished product is increased. A lengthening of the roundabout method of production occurs every time the starting point for using factors of production is moved to an earlier point in time in the production process.

3. Increasing returns is to be understood as achieving a more advantageous ratio between the amount of factors of production expended and the amount of products produced. Thus, a greater amount of products will be achieved per factor of production as a result of lengthening the roundabout production method. We will only be able to measure this clearly if we begin by considering a single factor of production, for instance the expenditure of human labor of equal quality. Only then can the number of factors of production used be summed up and compared to the output. Where it is a question of using several different kinds of factors of production, we will later find a simple formula, which, in this case, will also permit the establishment of a relationship between expenditure and return.

4. Later we will have to prove that with repeated lengthening of the roundabout methods of production, the output always grows more slowly. Here this is only presented as a suggestion; we will need to prove this proposition before we draw conclusions from its application.

The law of greater productivity of roundabout methods of production can be validated without difficulty in economic reality. There can be no doubt that production constantly takes place in roundabout ways, and in always lengthened ways; for no one would have an interest in initiating time-consuming roundabout methods of production unless an increased return were the result.² From a purely economic standpoint, what one commonly calls improved production must almost always be understood as lengthening roundabout methods of production—except when it is exclusively attributable to progress of the division of labor or technological knowledge. For example, when a farmer produces grain—a production process whose length is determined by the natural ripening process of the plants—and uses chemicals as fertilizer, he thereby uses “previously done” labor to increase his harvest. He uses something in his production process which is the result of previously expended originary factors of production. Whenever a farmer uses machines in production, the roundabout method of production is lengthened in the same way because previously expended factors of production are thereby made available for current production. If an automobile is produced on a conveyor system (mass produced) rather than built in a unit-production mechanical garage, again machines will generally be used which are the product of previously expended factors of production that will only later yield a result. Why is all this done? Simply because as a result of lengthening the roundabout method of production, output increases.

And it can be seen clearly that the essence of this process of changing production does not lie in the use of more or different factors of production. It is true that other factors of production are used in the sense that the results of previous labor—fertilizer, machines, etc.—are something different from those factors of production which were used alone at an earlier time. However, one should not limit oneself to a purely technological viewpoint. These new factors of production, too, are achievements of labor and natural gifts which have been used previously. If one thinks of these factors of production as the result of using originary factors of production, then the essence of this process lies in the fact that these originary factors of production were used at an earlier point in time. No one should confuse the use of machinery in production with an increased use of originary factors of production in the course of a roundabout method of production that is unchanged with respect to time.

Some choose to identify the “produced factors of production,” which appear in the roundabout method of production, with the term capital. The formula of the greater productivity of roundabout methods of production, then, is simply expressed as follows: Employing capital (formerly expended originary factors of production) increases the output of production. We do not wish to run the risk of placing our explanations on unsteady ground by prematurely introducing the ambiguous and disputed concept of capital. For this reason we will avoid using this term. The essence of every process of production that uses capital can come into existence only because something had been produced with originary factors of production earlier which can now be used for further production. We will now occupy ourselves with the question of the possibility of an earlier use of factors of production in order to later attain a finished product. Thereby, it will be to our advantage to ignore everything that may be connected with any preconceived concept of capital. We will seek a definition of the concept of capital only after we have clarified the function of capital in roundabout methods of production.

3. The Length of Roundabout Production

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides laborers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. The population would in any case have an interest in stretching the roundabout method of production as long as possible, as every “cleverly chosen” lengthening of the roundabout method of production results in increased output. The extent to which the roundabout method of production can be lengthened is restricted, however, by the limited nature of the subsistence fund. The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be.

It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices. If a shorter roundabout method of production were begun with a subsistence fund that suffices for one year, then the output would be smaller than it could have been. However, if the roundabout method of production is too long, then it could not be completed without interruption. Let the possibilities that would arise be mentioned here. If a roundabout method of production of about two years’ length is attempted, and if after one year the population realizes that half-finished products are being produced with which a greater output could be attained in an additional year, but there would be nothing left to live off of during this second year, then the roundabout method of production would have to be discontinued. The population would have to attempt to live “from hand to mouth” and get along with whatever could be produced daily in “momentary production.”³ Naturally, it will be less than it would have been if the roundabout method of the production in relation to the nature-given wealth of the land is too large; it will not even be possible to support the population, and some of them will starve. However, stopping a too lengthy roundabout process of production altogether is not the only possibility available here. If the population realizes in time that the subsistence fund is running out, then—ignoring here the possibility of shortening the rations in which the subsistence fund is used up—it can also attempt to shorten the once-begun roundabout production in order to attain an earlier return. This return, however, will be smaller than that attainable with unhindered continuation of the roundabout method of production. But it will still be greater than that which can be attained through momentary production. This shortening of the roundabout method of production can be imagined such that part, perhaps about half, of the already begun production is continued, while the other part of production is stopped. The continued production is finished more quickly by means of an increased use of originary factors of production, in particular, of labor. We will have more to say about this process of shortening roundabout production later. Here we have only given a very general outline. It is clear that we still must answer the question of how a shortening of the roundabout method of production is technically possible, and hence whether and how it can happen that a roundabout method of production that is already in progress can be shortened.⁴

We must keep in mind that the size of the subsistence fund which supports the population for the duration of the roundabout method of production determines the length of the roundabout method of production. The problem of the roundabout method of production arises apparently from the fact that continuous support of the population is necessary, while the expenditure of originary factors of production, insofar as it occurs in time-consuming roundabout methods of production, will only later provide a return in the form of means of subsistence.

Now it will be necessary to change our example somewhat and to conjure up a picture that more clearly reflects the situation of a real economy. We will keep the above in mind in order to have the problem of the length of roundabout methods of production permanently at our fingertips. If we wish to present the just mentioned feature of production graphically, we will represent the length of time for which production expenditure is successively fed into the roundabout production as a straight line. Production will be started at a point in time. After the completion of a time t (perhaps one year,⁵ as in the previously mentioned example), production is finished. All originary factors of production have been expended during this time for products emerging out of a single roundabout production process. With these products, the economy has achieved a new subsistence fund which, after completion of time t and upon repeating the same roundabout method of production, will have been produced anew. It is not necessarily the case that after time t the acquired subsistence fund will suffice again for the same amount of time, i.e., that it is at least as large as was the initial fund. Yet, this will be explained later in connection with a discussion of the relationship between expenditures (costs) and revenue. Here we must pass by this question.

In the reality of modern production, the situation as compared to this simple case is different in many respects. But it will not be difficult to expand the just developed simple model by incorporating several further assumptions so that it takes on a form in which the appearance of today’s production becomes completely clarified in its essence.

Now it was a very unrealistic assumption in our outline when we assumed that the entire production of a country would be started anew at one point in time and production would be carried out from beginning to end by making use of a given subsistence fund. In fact, we always see several production processes occurring simultaneously and in such a way that the individual production processes are finished at different times. We now would like to incorporate this fact of “synchronizing production” (John Bates Clark) into our model in a starkly stylized way. Hence, production does not occur in a single process, but rather it will be divided into several—as we here would still like to assume, equal—parts, such that within the time frame t (for example, one year) six independent production processes will be completed. Each production process—as we will again assume to simplify matters—produces the same kind of product in roundabout methods of production of equal lengths, and every production process will be repeated at its finish. We will represent this case as follows.

We are interested here in the role of the subsistence fund. It is immediately clear that at the completion of every production process, a subsistence fund of the size of one-sixth of that subsistence fund will be available which in the first case of a single uninterrupted production process was considered necessary. During the entire time t, the subsistence fund available to the population will be of the same size as in the first case. The reason, however, that at the completion of one of the six production processes the subsistence fund must not be at hand in its entire size is that in addition to the final subsistence fund, there exist five as yet incomplete subsistence funds at various stages of maturity. In carrying out production in a single process, we saw at the beginning a subsistence fund of a certain size which during the duration of the roundabout method of production successively declined until in the end it was completely exhausted. Simultaneously, a new subsistence fund grew. In the present case being analyzed, however, the subsistence fund available at the end of production has only one-sixth of the former’s size. But this is compensated for by the fact that an unfinished equal-sized subsistence fund already exists at such a stage of maturity that it can replace the present funds as soon as this is exhausted.

Before we analyze even more realistic situations, we would like to point out something whose importance for roundabout methods of production we will only later understand. Here the formulation will appear as self-evident.

The six-fold partitioned process of production, in which one part is, so to speak, integrated with another, can of course only be carried out over time if after completion of each of these parts the acquired subsistence fund is in fact used again to take up new production, that is in “support” of this production.⁶ Since here we are considering the process of production which involves roundabout methods of production without regard to a specific socioeconomic system, we must state this proposition in this form and only note that the way in which a subsistence fund is used further in production takes on very different appearances, depending on the socioeconomic order. If such production is carried out under the rule of an economic dictator in a centrally directed economy, he will assign this acquired subsistence fund to the residents of the country, but he will also see to it that they continue to work. If, on the other hand, in a market economy based on division of labor, production is directed by a plurality of independent entrepreneurs who acquire factors of production in exchange for their products, then production will only be continued if the attained consumption goods in turn serve to “purchase” factors of production. Regardless of the kind of socioeconomic order, if the once acquired subsistence fund is exhausted, the continued production would experience a disruption: It would show that after exhausting the subsistence fund, a further supply of means of sustenance is not available. Let this self-evident proposition be stated in a brief formula. Production can only be maintained if each attained subsistence fund is used to support another roundabout method of production. It is not, then, the fact that a subsistence fund exists which makes the continuation of production possible, but the way in which this subsistence fund is used: It must not be used in a “purely consumptive” way, but rather in the sense of “reproductive consumption,” in the sense of consumption which simultaneously assures further production.

With this—later we will have to come back to it in a very different connection—we have pointed out two notions for characterizing the function of the subsistence fund in the framework of roundabout production processes. There must first be products which are appropriate for physically supporting the population, and second, these consumption goods must be used in such a way that, simultaneous to their expenditure, a later attainment of a new return of consumption goods is assured.

And now we can turn to further expanding our explanatory model. Only a few short comments need be mentioned because they do not significantly alter anything mentioned thus far. Essentially, nothing is changed in our explanation if we drop the assumption that each of the various integrated production processes results in the same consumption goods. In our graph (page 10), we can imagine a multitude of roundabout methods of production being placed at the points of the six integrated roundabout methods of production, with each producing a different product. Also, we can easily assume that the length of the roundabout method of production in the various production processes will be different too. After further extending a roundabout method of production in some production processes this may indeed be the case, depending on the extent of productivity. More will be said on this later. Nothing about the relationship between subsistence funds and roundabout methods of production changes if it is only assured that on the one hand, the subsistence fund which makes the roundabout method of production possible is continually maintained at a sufficient size and in an appropriate composition, and, on the other hand, that the roundabout methods of production are extended as far as the size of the subsistence fund permits. Finally, we will be able to include in our explanation the fact that production is so frequently partitioned in practice that in most production processes, products are completed in very brief periods of time; for many products, daily. Longer intervals between the production of any two contributions to the subsistence fund will occur primarily wherever production is tied to the rhythm of the seasons or where demand varies seasonally.

Let us once more return to a consideration of a simple model. Let us assume that, with an overall length of the roundabout method of production of one year, an equal part of the product is finished every week. The result would be that the subsistence fund available for the continuation of production is reduced to the size of the demands of one week. In addition to the subsistence fund, we always find unfinished products in the various stages of maturity. The supply of unfinished products is built up in such a way that in each following week a subsistence fund large enough for one week’s needs will be finished. Each time, the finished available subsistence fund of the economy is reduced to a minimum. Yet, it is clear even in this case that the continuation of production is only possible if this subsistence fund is again used so that the various integrated production processes can be carried on continuously. The more elaborate the temporal partitioning of production into a number of synchronized production processes, the smaller the finished available subsistence funds will be. The always available subsistence fund will be reduced in importance even more as compared to the overall supply of goods in various stages of maturity. But note that nothing changes regarding the function of the subsistence fund. Maintaining roundabout production requires that a fund of consumer goods is regularly produced which is used to further support this production.

But now yet another decisive step must be taken. We have so far assumed that roundabout methods of production are always carried out in such a way that originary factors of production are employed and that labor is successively expended until the product is finished, at which time the same process begins anew, this is by no means unrealistic in the sense that such production would not be possible. But such production would be highly inefficient. To employ machines in a production process which ultimately would lead to the production of a consumer good, for example, one would have to start with the production of iron immediately. Only once the next roundabout method of production is at the same stage the iron production would have to begin anew. It is thus a great advantage to the integration (synchronization) of production processes that the production of raw materials used in these various production processes can proceed continuously. The individual roundabout method of production thus encompasses different firms, so to speak, which continuously make contributions to each of the roundabout production processes.

Now we have to take account of the fact that to a greater or lesser extent almost every firm uses produced factors of production which make contributions to a large number of production processes. Originally the individual roundabout method of production had been conceived of in such a way that originary factors of production were employed. With the expenditure of additional originary factors, the resulting “intermediate product” was transformed into the finished product; thus, the various intermediate products were only produced for the purpose of a single act of production. Now the situation has changed insofar as from now on “durable factors of production” will be produced. This kind of produced factor of production has been a much more frequent subject of treatments of the problems of production than the subsistence fund of which we have spoken so far. However, we will soon see that both must be considered simultaneously for an understanding of the phenomenon of roundabout production, and, in both cases, we are ultimately faced with one and the same problem.

4. Relatively Durable Factors of Production

The essence of the roundabout method of production can be seen clearly. Imagine that human labor employs raw materials which, with further labor and perhaps the help of other natural resources, in time turn into finished consumer goods. Once the finished product is attained, no other result of the expenditures of factors of production significant for further production remains. Throughout the various stages of the developing product, the maturing material changes into the finished consumer good and thus the process of production is completed.

This viewpoint is incomplete insofar as it ignores that, as a rule, production generates means that remain available for further production. Even in the most primitive production processes, tools are used which are relatively durable compared with the individual process of creating a finished product. In modern production, the use of such factors of production generally described as “machines” is of the greatest importance. It is necessary to emphasize again that the essence of roundabout production does not depend on the use of “produced factors of production” of this kind. Every production process which progresses past the stage of “hand to mouth” and takes on a “sacrifice of time,” of “waiting” from the initial employment of originary factors of production until the product is attained, must, due to the fact that production serves the purpose of supplying human wants and can only be justified insofar as it serves this purpose, depend on the condition that it is integrated into a framework of continuously supplying people. Such a production process might be technically “correct” or even the best, but it will be economically inefficient or impossible if it is not structured in such a way that it adjusts to the scarcity of the various existing and maturing means of subsistence. If originary factors of production are used today that only later provide a return of consumer goods, and if nothing is available before the completion of these consumer goods for the necessary provisions, then the introduction of this production process must prove erroneous. In the process of employing originary factors of production in order to later achieve a finished product, the production of durable factors of production is only one special case. Here, too, nothing essentially happens other than that the originary factors of production available today are used for the purpose of attaining a future return. The peculiarity is only that in producing “machines,” a relatively large number of originary factors of production are expended (“invested”), while the later incorporation of relatively few additional factors of production in addition to the achievements of the machines, can continuously yield a relatively large return over a longer period of time. And the greater the investment of originary factors of production in such durable factors of production, the more the relationship between the still-necessary expenditures and the revenue changes. If, however, the generally recognized advantage of this way of structuring the roundabout method of production is that a very significant increase in returns can be achieved relative to the expenditures of originary factors of production, then it is clear that nothing else is at hand here than the choice of particularly lengthy roundabout methods of production.⁷

We now must ask which general considerations are important for the integration of such production processes into the framework of a “correctly” structured production system. When we pointed out that, in general, a relatively large extension in the roundabout method of production is present here, it is clear that here, too, as for the previously mentioned structure of roundabout methods of production, the limitations of the subsistence fund available between the first expenditure of factors of production and the attainment of a finished product must be a decisive constraint for the length of the roundabout methods of production.

The production of a greater amount of durable factors of production requires a relatively large subsistence fund. It is only possible if a previously created (or continuously maturing) subsistence fund can support the population during the investment period. However, once the investment has been made, only a relatively brief period of production is necessary for the purpose of completing the now possible production processes. The once-made investment represents the economy’s wealth and implies the possibility of attaining a large return with relatively few additional factors of production. Hence, this investment in durable factors of production appears as an independent factor of production. It is a means of increasing production which exists independent of the originary factors of production. A new, independent, third production factor is now created. Its creation was dependent on the fact that a subsistence fund had been available previously which permitted the acquisition of this factor of production. Once this is available, however, it will be available as a lasting aid.

Here it is now necessary to point out that all forms of investment in produced factors of production that can be termed durable can only be considered relatively durable. They certainly outlast the individual production process, and further investment will lead to an even larger output. However, every such investment will be used up sometime.⁸ Its new creation will only then be possible if a new subsistence fund is available that is sufficient for the length of time needed to carry out the reinvestment. If we perhaps imagine—once again ignoring the synchronization of production—that all production in an economy is structured such that a large subsistence fund initially has made a significant investment in machines (“durable” investments) possible, then the possession of these produced factors of production has continuously permitted an ample provision for the population, and that finally this entire investment is completely worn out and becomes useless. Furthermore, maintaining previous ample provisions for the population is only possible if, in the meantime, a sufficient “renewal fund” has been accumulated; that is, a subsistence fund that provides for the population during the reconstruction of the investment (and during the period of the production of the first products). If this renewal fund is lacking, only a transition to momentary production with its extremely narrow provisions is possible. If the subsistence fund is too small, a transition to methods of production which require smaller amounts of durable factors of production—to a shortening of the roundabout methods of production—is required, which will also bring a lower return.

This rigid model should only illustrate the role of the renewal fund. Maintaining a continuous attainment of consumer goods within the framework of a production system that produces durable factors of production in roundabout production methods will only be possible if a corresponding part of the product continuously takes over the function of the renewal fund. And with the help of this continuously provided renewal fund, the reacquisition of all of those produced factors of production must be made possible which are needed to replace the used up investments. We shall present a highly stylized example.

In an economy, several factories each produce a specific number of rations of subsistence means (in the broadest sense of the word) every week. For continuous production, the factories require the employment of labor and raw materials which at first are taken directly from nature and are then transformed in other factories. We will assume here that in all of these factories, in those which produce finished consumer goods as well as in those which produce raw materials, there are significant investments of (relatively) durable factors of production. Thus, in addition to a process of current production of means of subsistence, a current production of existing investments in the factories is necessary. We also assume that this takes place in factories which once again employ significant amounts of investment in (the form of) produced factors of production.

The question we ask ourselves is this: How must the regularly reproduced subsistence fund (a specific number of rations of means of subsistence every week) be used so that production can be maintained without interruption? The subsistence fund can only serve to provide for human wants, yet while the subsistence fund is being used up, continuation of production must be made possible in the form of the above-mentioned “reproductive” consumption. It is clear that we must distinguish between different ways in which the subsistence fund is used:

1. The subsistence fund must support everyone who is involved in producing the finished product.

2. The subsistence fund must support everyone who is involved in producing raw materials for the production of means of subsistence.

3. The subsistence fund must support everyone who is involved in the production of machines (relatively durable factors of production); that is, of those machines used directly in the production of consumer goods as well as of those which are used in the production processes that precede the production of consumer goods.

4. Finally, the subsistence fund must also support everyone who is involved in producing the raw materials used in the machine industry.

Thus, the production of consumer goods must also “support” (alimentieren) the creation of durable factors of production and the appropriation of raw materials, i.e., it must supply these production processes, which themselves produce nothing that can be directly considered consumer goods, with those consumer goods necessary for the subsistence of those employed in these production processes. Naturally, the form which this support assumes depends on the organization of the economic system. In the case that is relevant to us—a market economy based on division of labor—this process will be in the form of exchanges, such that the owner of a firm producing finished consumer goods first pays from the returns of his production everyone who provides him with originary factors of production for further production, then everyone who supplies him with raw materials, and lastly, everyone who renews his stock of machines. The manufacturer of machines in turn will be able to “work” with the fund he receives from the sale of his produced factors of production. With this fund he in turn pays those who make originary factors of production available to him, those who sell him raw materials, and those who deliver replacements for used up machines. In precisely the same way, the producers of raw materials will support their production with that fund of consumption goods which they have attained through the sale of their products. That would be the simplest model. All of these exchange acts can also go through the hands of middlemen. In particular, it will often be possible to smooth over discontinuities by employing middlemen. Thus, perhaps an entrepreneur whose machinery is not yet in need of replacement,⁹ but who already continually sets aside a part of his products in order to later be able to “support” the reproduction of his equipment with this renewal fund, will not have to keep this subsistence fund in natura. He can turn it over to someone who will only later return this subsistence fund; and from this point on—since, of course, it is not necessary that the same pieces be returned—this subsistence fund can temporarily (probably in the course of a further exchange) be employed for the purpose of supporting another production process from whose product the timely return to those who originally set aside this subsistence fund in the form of a renewal fund should then be possible. One can also imagine that a subsistence fund is turned over by the consumer goods industry to the preceding production stages of raw materials production for whose output the consumer goods industry only has a demand at a later date. After completion of these preceding production stages, the consumer goods industry will receive the now necessary finished raw materials (or in another case, machines) in place of the renewal fund. Nothing much will change if this process in a monetary economy is finally hidden behind a “veil of money”; if the entrepreneur who builds up a renewal fund does not know that the money he receives in return for his products and deposits in his bank “represents” a subsistence fund; if he who borrows money from the bank is not aware that in so doing he draws from a renewal fund of means of subsistence provided elsewhere in the economy, and that if he pays back the money, he will in turn provide a renewal fund or some products produced with its assistance. Here, however, we will first be concerned with clearly presenting those processes which occur in the realm of real goods.

One must keep in mind that the entire investment of an economy in durable factors of production can only become reproduced with the assistance of a renewal fund, which originated in the consumer goods industry, just as the current continuation of the individual production processes from the attainment of raw materials up to the finishing of consumer goods is only possible if the subsistence fund needed for the duration of this process is available. If this last mentioned process corresponds to the example of a production process treated by us earlier, in which a raw material develops into a finished product without producing durable factors of production and a subsistence fund supports this process, then parallel to this process we now see another one in which the reproduction of once-produced equipment takes place and which also must be supported by returns from a subsistence fund. To schematically present the relationships, let the previously discussed model be further elaborated as a numerical example.

Let us assume that out of the return of consumer goods production of 50,000 rations per week, 10,000 are given to laborers employed in the production of consumer goods, an equally large number is given to the suppliers of raw materials, and 30,000 rations form the renewal fund. This renewal fund will be passed on to those production processes which produce the machines employed in the production of consumer goods. Here, it serves in turn the same purpose that the total product serves in the framework of the production of consumer goods: A part (for example, 10,000 rations) will be handed over to the employed laborers, the suppliers of raw materials will receive another part (10,000 rations), and still another part (10,000 rations) will serve in turn as the renewal fund for the reproduction of the equipment used up in this production process. That part of the return from the production of means of subsistence, however, which goes to the producers of raw materials (10,000 rations each, from both the production of consumer goods and the stages of production preceding it), must be handed over again to the just characterized usages. One part (5,000 rations) will be turned over to the employed laborers, while another part (perhaps a greater part, maybe 10,000 rations) is passed on to those who provided the originary factor of production of land, and a last part (5,000 rations) will again have to serve as a renewal fund for the presently employed durable factors of production. For simplicity’s sake, we will finally assume here that the renewal of investment in firms producing raw materials as well as in those producing durable factors of production employs originary factors of production exclusively. When we review this process as a whole, we notice that the entire subsistence fund, which is the result of consumer goods production, is assigned to originary factors of production, either directly or indirectly via other production processes. In fact, it will invariably be assigned to factors of production which contribute to the further production of consumer goods, either directly in the production of consumer goods or else in production processes which supply either raw materials or durable factors of production (machines) employed in this production process.¹⁰ Beyond this, however, another thing must be remembered.

The expenditure of an originary factor of production within the framework of roundabout methods of production must—if production is to be maintained at an unchanged pace—be reproducible after some time at the same place within the structure of production. And to make this possible, the appropriate ration of the means of subsistence must be available at the correct time to enable the employment of this originary factor of production in a roundabout method of production. Just as the employment of an originary factor of production in roundabout methods of production today is only possible if a ration of a means of subsistence is available to this factor, so will the employment of this factor at the same place in the system of production processes only be possible if today’s expenditure of this factor of production for use at a later time has secured the necessary ration of subsistence means. The length of time that passes before the employment of an originary factor of production at the same place within the continuous flow of production again becomes necessary might well vary. In the case of those originary factors of production (laborers) directly employed in the production of consumer goods, a return will soon be the result; under certain circumstances it will occur so quickly that with respect to such factors one cannot even speak of an earlier employment in the production process.¹¹ For those originary factors that aid in the production of raw materials for the production of consumer goods, one must wait a longer time between their originary employment and the completion of the consumer good. However, all of those originary factors of production employed for the creation of durable factors of production—either directly or indirectly through the expenditure of labor for the production of raw materials needed here—must wait an especially long time until, through the use of these factors of production, consumer goods are created from which a renewal fund can be derived making the reproduction of the previously invested expenditures for the purpose of maintaining the “durable” equipment possible. Regardless of how long this productive contribution is tied up in the roundabout process of production, for every originary factor of production expended, an economic replacement in the form of a finished product must be produced sooner or later. This replacement factor, in order to maintain production, must in turn serve to support an originary factor of production employed at the same place and which, then, again must wait until a new consumer good is produced. It is clear that for this renewed employment of an originary factor of production in the production process, a ration of the subsistence fund must be available in time. Later we will have to handle the question of the quantitative relationship between the factors of production and the product in an expanded framework. Only then will we have to treat the question of a surplus beyond expenditures. Here the problem is different. If a roundabout method of production is to be maintained, then this is only possible such that the same quantities of originary factors of production are always employed and invariably at the same stage of the time-consuming production process. And since in a roundabout process of production a period of time always passes between the original employment of an originary factor of production and the achievement of an output (for it is only possible to employ factors of production prior to achieving a return if at that point in time a subsistence fund is available), then in order to maintain production, part of its return must be made available for the repetition of the roundabout method of production. Synchronizing production will generally make it possible for an originary factor of production to be reemployed at the same place in a regularly progressing process of production. But one must not take it for granted that this factor of production indeed finds the necessary ration of the available means of subsistence.

Here it was our task to demonstrate that the direction of production towards a timely provision of means of subsistence for each required employment of originary production factors is the precondition for uninterrupted production.

It should be noted that the employment of an originary factor of production in a roundabout method of production always coincides with the expenditure of a ration of subsistence means. It is unimportant whether one says, “We will today expend a certain amount of labor whose return will only be achieved in one year,” or “We will today invest a certain number of rations of the subsistence fund which will permit the employment of these laborers.” Both are expressions of one and the same process. We can speak of an employment of originary factors of production that occurs prior to the achievement of a product as well as of an investment of rations of means of subsistence, even in the simplest case of a continuous process of production carried out from beginning to end without any durable equipment. We can apply this formula to the case in which on-going production employs large investments of durable factors as well as to the process of producing machines and other durable factors of production. The laborer in the iron ore mine must receive his support as continuously as the laborer in the food industry, the laborer in the machine factory just as the laborer in the weaving industry. All of these expenditures of laborers are expenditures in the roundabout method of production. They would not be possible if a fund of the means of subsistence had not previously been accumulated and is made available for the support of the laborers. Continuous production would not be possible if each time that labor had to be expended at a certain point, a new supply of means of subsistence were not indeed available. It is also clear that only the manifold synchronization of production makes continuous work at all stages of production possible, and that the support of individual labor contributions in the roundabout method of production is only possible insofar as returns of previous production processes are available. Only in the last act of the production of consumer goods, where no significant time elapses between the expenditure of labor and the achievement of the finished product, can an originary factor of production be employed without there previously having been a subsistence fund available for its support.

Wherever originary factors of production serve the purpose of renewing the investment of (relatively) durable factors of production, a renewal fund must be accumulated. We emphasized that such a renewal fund can only be provided by the consumer-goods industry. Wherever a renewal of investments in preceding production stages is necessary, moreover, this renewal is only possible in such a way that the subsistence fund handed over from the consumer goods industry must provide the consumer goods necessary for accomplishing this renewal. A consumer-goods industry equipped with durable factors of production can continue to work for awhile, even if no renewal takes place, if during economic fluctuations the splitting off of a renewal fund out of returns is not possible. Production will then only come to a standstill if the equipment is completely consumed. The production of factors of production is, however, entirely dependent on being supported by a renewal fund provided through the consumer goods industry. It will come to a standstill once no renewal fund is accumulated in production. The renewal fund made available by the consumer goods industry is the economic successor of the expenditures in the production of durable factors of production. The renewed availability of this fund is the precondition for the production of factors of production being able to work towards the renewal of durable investments in the consumer goods industry.

We have demonstrated that for each employment of originary factors of production in the production of durable factors it is necessary in order to maintain production that there be an economic successor in the form of a regenerated subsistence fund, available whenever the time of renewal has come. Only under this condition is a renewed employment of this factor possible. Thus, each expenditure in the process of the creation of factors of production has become fully integrated into our treatment of roundabout methods of production: With every employment of originary factors of production, a subsistence fund must also be present at each stage of the roundabout structure of production. Of course, the situation here is significantly more complicated than in the first model we used, which explained the role of the subsistence fund within the roundabout method of production. The question arises: through what reactions will the economy find its direction in light of this complex structure of the roundabout method of production? Until now it has been our task to explain the way in which production processes must be structured so that a continuous return from production can be expected. We will later expand on this lesson concerning factors of production.

5. Forms of Capital

In analyzing roundabout methods of production, we restricted ourselves to considering relationships in the world of goods. The problem was formulated as such: what is the prerequisite for production’s taking advantage of the increased returns associated with choosing roundabout methods of production? We found that the existence of a subsistence fund was this prerequisite. While analyzing roundabout methods of production, we found further that there existed various specific provisions of goods whose production, on the one hand, was the result of choosing roundabout methods of production and whose expenditure, on the other hand, was necessary for the continuation of the roundabout process of production, and which had to be continuously reproduced in order to maintain it. We now wish to consider in summary all of those complexes of goods which we have encountered during our observations. In so doing, we decide to describe them as various forms of capital. But it should once again be pointed out emphatically that we have not the slightest reason here to abandon the greatest possible awareness of the real factors of production. Production employing capital means production using roundabout methods. We are exclusively dealing with occurrences in this realm. Specific features of a monetary economy or features of the socio-economic order are irrelevant here; neither should we assign any role to unrealistic features of an abstract world.

We will now distinguish between three forms of capital:

1. Free capital: This is the subsistence fund (supply of consumer goods) which is made available for the support of roundabout methods of production;

2. Intermediate products: These are raw materials in the various stages of processing prior to the finishing of the consumer good (raw materials take on the shape of “maturing” consumer goods in the course of processing);

3. Fixed (stable) capital: (“relatively durable factors of production”: machines, etc.); These are produced factors of production that can be used for a number of individual production processes.

Intermediate products and fixed capital are goods which are characteristic of roundabout methods of production. We will label them with the term “capital goods.” In contrast, consumer goods as such are never capital; they only assume the function of capital if they are used in the specific way we previously described with the term “reproductive consumption,” i.e., if they serve to support roundabout methods of production. Intermediate products and free capital serve to support the individual production processes and can thus be labeled “liquid” capital in contrast to “fixed” capital. Yet, one must pay attention to the fact that liquid capital is also employed in the process of producing fixed capital.

The production process at work in roundabout methods of production is determined by the employment of these three forms of capital. The fact that originary factors of production can initially be used in the production of intermediate products which mature only in the course of time into finished products, is made possible by a supply of free capital. A special form of roundabout method of production is present if in addition—and this again is only possible under the condition of a supply of free capital—originary factors of production are employed in the production of fixed capital, which later in turn produces the finished product by incorporating intermediate products and additional originary factors of production. However, because the production of a capital good is only possible with the help of a subsistence fund which supports a process that has not yet produced any consumer goods, every capital good must have been preceded by free capital. The capital good is produced as a result of the expenditure of free capital.

Thus, new capital can be formed exclusively by free capital. New capital can only come into existence because finished consumer goods are “saved” and employed so that they permit the choice of a roundabout method of production.¹² This not only applies to the case of building up new capital, intended to increase the economy’s supply of capital; it also applies to the renewal of all capital that has been invested in the economy. Every roundabout process of production begins with the investment of free capital, and every further step in the production process implies a new expenditure of free capital. The period of time this free capital is tied up will vary in length, and the form of the capital goods that result from the tying up of free capital will vary too, depending on whether durable capital goods are produced or the investment leads to intermediate products. In both cases, however, the tying up of capital is only temporary, and the once saved and then invested free capital will later be set “free” again in the form of consumer goods. If production is to be maintained, this freed capital must in turn be incorporated into the roundabout method of production. It must “support” the employment of originary factors of production in a time-consuming roundabout method of production. If this does not happen, production must be discontinued during the next production period.¹³ If the roundabout production process is to be repeated, then the once-saved free capital must continue to function as capital after it is freed from its temporary binding in an intermediate product or in a fixed capital investment. In this regard, G. Akerman coined the particularly appropriate phrase “maintained savings”: In order to maintain the continuous provisions generated through time-consuming production processes, it does not suffice that one once saved. It is equally critical that the free capital invested in production—regardless of whether it has been transformed into an intermediate product or into fixed capital investments—is reinvested after its release.

Each time free capital is tied up, a more or less extensive restriction in the possible employments for this capital is implied. Free capital can be assigned to every possible use in roundabout methods of production. However, if free capital is used, for example, to produce iron (“invested” in this capital good), then the range for its further use is reduced. It is still possible that this iron may develop from an intermediate product into a finished consumer good (for example, an automobile¹⁴), or to use it for the production of a machine—fixed capital. The machine can sometimes have a very wide range of uses (a simple lathe and even the most simple tools are examples here), but it can also be designed for very specific uses (a complex textile machine), and otherwise be practically useless. Thus, in the course of production, free capital assumes a more or less “specific”¹⁵ form, so that only a narrow range of uses remains open.

The process of transforming free capital into capital goods which frequently have a highly specific nature and which always have a more restricted range of uses than free capital is of the greatest importance whenever there is a question of reemploying tied up capital in different production processes. This is important for two reasons: First, the transfer of capital from one production process into another can be problematic whenever an error in the direction of production has led to producing too much of one kind of a consumer good and too little of another, such that production does not reflect demand. Second, it can become a problem that free capital has been invested in too lengthy of roundabout methods of production, such that the result is a production structure for which, along with too many capital goods, there is too little free capital. In both cases, the fact that capital goods that have assumed a specific form are not employed and other goods are required in their place—in the second case, consumer goods instead of capital goods or, in the first, different capital goods rather than the actually available ones—will lead to difficulties because the specific quality of the capital goods makes a reallocation difficult.

The notion of the liquidity of capital investments as a problem of capital formation arises from the fact that free capital invested in capital goods cannot perform the same function as free capital. The length of time free capital is tied up will be the shortest for free capital used to employ originary factors of production in the production of consumer goods. It will be longer when free capital supports originary factors in the production of raw materials. It will be longest when free capital is used to direct originary factors of production into the production of durable capital goods. If an excessive investment of capital has taken place, then investments in the economy certainly exist which might later permit the production of means of subsistence, but the thing lacking right now is free capital which permits the continuation of production. This situation can be described most precisely with the formula that every capital good, and in particular every durable capital good, requires a corresponding amount of free capital in the form of a complementary good if it is to aid in supporting the economy.¹⁶ If capital investment does not find the necessary complements of free capital, then a “disproportionality” in the structure of proportions exists: Free capital is “misdirected” in that it has been invested to too great an extent in equipment without enough free capital having been made available to make the completion of production possible.

If one wishes to emphasize that here the free capital has been tied up, one might say that capital has been immobilized, that capital investments have become illiquid. Stated simply: The machines and raw materials are there, but there is too little of that which the people who work need for their subsistence; the workers cannot work in advance of their payment if they have nothing to live on. Free capital is normally used such that it again becomes “liquid” free capital after it has been tied up for some time. In the case of immobilization, however, capital has been excessively directed into uses from which it cannot be freed up in time, and hence cannot be freed at all. For the only way to free up capital that has once been tied up (invested) is to carry out the once-begun roundabout production until it is completed: Only when a product becomes a consumer good is the once tied up capital free again. It is clear that an excessive tying up of free capital is identical to the choice of too lengthy roundabout methods of production. For the “correct” length of the roundabout methods of production exists whenever the roundabout methods of production are extended as far as the available supply of free capital permits without there being a reduction in the supply of products.¹⁷ If the normal process of liquidating capital investments—a continuation of the planned production—cannot be carried out due to a lack of free capital, then it will be necessary to shorten the roundabout methods of production. If the population did not realize in time that too lengthy a roundabout method of production had been chosen, and if it consumed and invested¹⁸ the free capital without assuring its timely reproduction; and if half-finished products but not consumer goods were thus available to the population, then each roundabout production process would have to be discontinued and production would have to take on the form of momentary production. We have already pointed this out. In fact, it will not have to come to this for two reasons. First, the state of immobilized capital will probably be noticed before it actually arises. In such a case, production will be transformed such that part of the roundabout methods of production will be discontinued while another part will be continued with the help of an increased addition of originary factors of production which are supported by the rest of the available free capital; this is equivalent to shortening the roundabout method in such lines of production.¹⁹ Second, however, a transformation of production—again in the sense of shortening the roundabout production process—will be possible by transferring capital goods that have an unspecific nature from a longer planned roundabout method of production to a shorter one. To the extent that this is possible, capital goods which are the result of an excessive lengthening of roundabout methods of production can still be usefully employed. Sometimes, however, a loss of investments will be associated with such reallocations. This shall be discussed later in a different connection.²⁰

It was our task here to clarify the role of capital in production. We have seen that the function of capital is determined exclusively by the fact that roundabout production is only possible if a subsistence fund is available to support those who supply originary factors of production. All problems of capital can be deduced from this. In particular, capital invested in durable factors of production must never be considered as separate from the problem of roundabout processes of production. If one wished to begin with the fact that there are physical goods which aid in production and help increase it, one could never solve the task that one faces from an economic point of view. For these capital investments, too, are intimately connected with the problem of roundabout methods of production by two factors. First, even the most durable capital investment can only be considered relatively durable, and thus necessarily requires for its maintenance a steadily renewed expenditure of originary factors of production which must be invested long before they can attain a return of consumer goods. These expenditures which are only possible if, as for any roundabout method of production, free capital is available. Closely related to this is the fact that durable capital must provide a renewal fund of free capital out of its returns if it is to be maintained. And second, there is a relationship between durable capital investments and the problem of roundabout production processes because durable capital investments always require free capital as a complementary good. Clearly, the supplementation of fixed capital with free capital that remains tied up for an especially long time is necessary wherever the length of time that passes between the employment of the capital investment and the production of consumer goods is as long as will be the case for investments in the production goods industry—whereas wherever the fixed capital investment serves directly to produce consumer goods, there will be a noticeably smaller demand for free capital for a shorter binding period. In fact, under certain circumstances the importance of free capital will be reduced entirely. But even here there is a connection with a need for free capital, and indeed, an indirect demand for free capital will be particularly great because these investments can only be maintained by means of continuous renewal. Such renewal is only possible by maintaining the entire preceding production of factors of production which requires large amounts of free capital and capital that must be tied up for a long period of time.

In explaining the principles which generally guide production in roundabout methods, we have so far avoided asking how economic forces manage to adapt production to these principles. When we saw that production must adjust the length of the roundabout methods of production to the supply of free capital, we did not ask how this adjustment will take place. The general law that the choice of too short a roundabout method of production must forgo a possible increase in production and that the choice of too lengthy a roundabout method of production must lead to an immobilization of the economy’s supply of capital says nothing about how the adjustment of production to the supply of capital will occur. We will only later treat these questions within the framework of our discussion of the formation of prices in a market economy. Only then will we see that what determines all adjustments of production processes to the supply of capital is the height of the interest rate.

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¹This formula does not rule out the possibility that changes in the structure of production can be affected from the side of money. More will be said on this later.

²Cf. the discussion of the cooperation between factors of production on pp. 65ff. and 103ff.

³Even “momentary production” is a physical process which takes place in time. The roundabout method of production, however, lasts for an “economically relevant” period of time; that is, a time, as explained earlier, between the introduction of the originary factor of production and the achievement of the product that can only be bridged if a provision is possible through already finished means of subsistence.

⁴The borderline between “momentary production” that brings the continuation of roundabout methods of production to a complete halt and merely shortening the roundabout method of production will have to be drawn sharply for a purely theoretical analysis. In practice, even the former case of the use of half-finished products will be possible in some way. For us, however, the sharp theoretical differentiation is of importance. Shortening the roundabout methods of production, it will be possible to maintain shortened roundabout methods of production under certain conditions, whereas the employment of the half-finished products in the process, which we here call momentary production, must, in a yet to be described sense, be considered capital consumption.

⁵It would, however, be advantageous not to think thereby of the one-year duration of farm production. This is the case because even here the roundabout method of production can actually be longer—as a result of previously expended labor.

⁶We would like to use the previously mentioned expression “support” here as a terminus technicus. It will later be shown that a process is thereby described which in a monetary economy is labeled “financing.”

⁷The “production time,” i.e., the time needed for the processing of the individual parts of material into a finished product, will often be shorter with the increased use of durable factors of production. If one seeks a relationship to the length of the roundabout method of production here, then one can say that the length of the production process will generally be shorter, the longer the roundabout method of production is, i.e., the more durable factors of production are being used. We refer to the well-known example of Böhm-Bawerk regarding the sewing machine; in recent developments a shortening of the production time has been seen with remarkable frequency.

⁸A restriction necessary here will be treated in footnote 13.

⁹It should be phrased more precisely: for whose renewal no expenditures of labor are necessary as yet. For in general, the process of reproduction in its first stages will have to begin far ahead of the actual moment of demand.

¹⁰In this example we have let the originary factors of production which land provides contribute directly and exclusively in the production of raw materials and during the last stage of renewals. It would have been more correct if we had also included such contributions, at least to a small degree (land for factories, etc.), in the other stages of production. We neglected to do this in order not to unduly complicate the presentation. It must be observed, incidentally, when considering the originary contributions of land and soil, that “payment” for such contributions out of the subsistence fund in the form of support for their owners—analogous to the support that must be given to the laborers—cannot be regarded as a necessary prerequisite for roundabout methods of production. This question will be discussed later in a different context. The specifics of the parceling out of the subsistence fund to different stages of the process of production here have been arbitrary. Obviously, the proportions will have to vary drastically depending on the degree of use of durable investments. Let it furthermore be mentioned that with the detailed employment of the return of consumer goods, no claim is being made of having presented a final solution to the problem of apportioning these returns to various production factors. For this reason, we could also ignore the question here whether profits can be made from production which surpass payments for the originary factors of production and the renewal fund.

¹¹The baker who produces a finished consumer good daily works in the last stage of a roundabout process of production. In this case, the time that passes from the employment of labor to the attainment of the finished product can for all practical purposes be ignored. (The laborer only receives his wage after the product is completed.) However, it will simplify our presentation here if we assume that in the consumer goods industry, too, support for the laborer results from previously produced consumer goods. This is by no means unrealistic. In particular (more or less) “durable” consumer goods require a longer period of production within the finishing production stage.

¹²The doctrine regarding roundabout methods of production leads to the wage-fund theory via this thesis: employing originary factors of production in a roundabout method of production is not possible without assuring the support of the same. We have seen that a wage fund must have been accumulated in advance or must have been provided for out of the returns of another production process. The following must be said here regarding a possible objection: Let us assume that the fishermen in Roscher’s example accumulate their capital by reducing their consumption and only use half a day to catch fish, while they use the rest of their working day to produce capital goods. An integration into our model is easily possible here. We distinguish between two parallel production processes: The consumer goods produced in one also serve to support the other roundabout production process. It is decisive that here, too, the possibility of roundabout methods of production is dependent on support. This applies also in the case in which a supplementation of the wage fund through a reduction in consumption occurs or, as we will later formulate, the “virulent” nature of the subsistence fund is increased by reducing the rations in which it is consumed.

¹³If we assume that all invested capital must necessarily be set free and that a repetition of each expenditure of capital is necessary, then we are thereby considering basically only one part of the process of expending capital. There are also investments in which a repetition of capital expenditure is not necessary; this is probably the case in some kinds of land and soil improvements. Here a one-time expenditure of capital can make these originary factors of production available in a better form once and for all. A particularly instructive example is the removal of a boulder obstructing the cultivation of a field. The one-time investment of capital provides a continuous increase in profits. We will not treat such cases further and will only point out here that if a market rate of interest exists, such expenditures can easily be incorporated into profit accounting based on their expected surplus return. In addition, a second case deserves attention here: that in which the initial expenditure of capital is greater than those expenditures that will later be necessary to maintain the factors. Again, certain soil improvements may be cited as an example. Obviously, the comparison here between initial capital expenditures and the size of the “maintenance contribution,” which takes the place of the renewal fund, is only possible via a calculation of interest. The characterization of forms of capital employment presented in the text probably corresponds to the more important cases. We need them in order to be able to analyze the conditions for the process of a “static” (in the sense of stationary) economy. Such an economic process must bring about the continual renewal of the same investment expenditures. To formulate the conditions for this economic process is simultaneously to formulate the prerequisites for the fact that some specific return from production can be attained over and over again; thus there are, so to speak, minimum requirements to be formulated whose fulfillment prevents an impoverishment of the economy. In this process, one-time investments which need not be renewed in full cannot be included. The static process implies that each expenditure must be repeated, and it is our task to formulate the prerequisites necessary for such repetitions. Contrary to this task, the question of nonrepeatable investments is of no significance for us.

¹⁴The durable “consumer good” should actually not even be classified as a consumer good in the strictest sense of the word. What is consumed here are the “use values” embodied in a desirable consumer good. It would be more appropriate to classify this as a durable capital good which often—but not always, as for example, a house or an automobile—makes its use values available for consumption without requiring additional factors of production. This view, though, faces the difficulty that even today one all too readily holds onto a “materialistic or objectivistic interpretation” of goods. Yet, if the durable consumer good is conceived of as a capital good, then its incorporation into the problem of renewal can be accomplished easily. “Static” maintenance of a house, for example, requires the steady splitting off of a renewal fund from returns. In the following we will no longer concern ourselves with the question of durable consumer goods. From this viewpoint, further lengthening of roundabout production methods would probably have to be assumed if better, more durable consumer goods are produced. (Böhm-Bawerk speaks in this regard of an “important parallel development of capitalist roundabout methods of production.”)

¹⁵This expression follows Wieser’s terminology as used by Hayek.

¹⁶The doctrine of complementary goods was developed by Menger. An exception to the above presented principle would only be at hand if one is concerned with capital goods which are so close to the consumable state that without a—here relevant—loss of time they can be turned into finished consumer goods. For the general considerations presented here regarding the liquidity of capital investments, these exceptions need not be of further concern.

¹⁷The choice of too-short roundabout methods of production will result in a situation in which the advantage of extending the roundabout method of production—increased returns—is not reached. This will manifest itself in excessive liquidity, i.e., in an especially abundant supply of free capital, which contrasts with lower future production returns. We will have more to say about this situation later.

¹⁸Consume and invest are identical here: insofar as free capital (a subsistence fund) serves to support factors of production at work in a roundabout method of production which does not yet generate consumable products, this free capital serves simultaneously to support those who provide the originary factors of production. Consumption would only be a separate concept from investment insofar as the means of subsistence do not support “reproductive consumption.” Yet, this has been excluded by the definition of free capital. It only includes those means of subsistence used to support originary factors of production.

¹⁹If free capital in the amount of n is available but the continuation of the entire production process requires 2n, then the continuation of half the production with the addition of free capital in the amount of n; that is, the addition of relatively more originary factors of production in the next production period, means shortening the roundabout methods of production in these lines as compared to the situation where the capital already invested here can be employed with only half of the liquid capital n; for then relatively more originary factors of production are employed in a stage of the production process closer to the finished product. (This could also be illustrated by the well-known method of calculating averages. The average length of time capital is tied up in a production would have to be contrasted with the longest period of time that passes between the expenditure of a factor of production and the repetition of the same expenditure. The first magnitude could serve as an index for the capital intensity of production, while the second would determine the length of the time period within which production expenditures must be repeated in the course of a static economy.)

²⁰There would be a third possibility of “stretching” the available subsistence fund by shortening the rations in which it is used up in supporting originary factors of production. With this the possibility of beginning a longer roundabout method of production with the available subsistence fund would emerge. We will disregard this possibility here—as previously—because we wish to treat the question of the size of the rations later when we discuss the formation of the prices of factors of production within the framework of an analysis of a market economy.