3. The Period of Production. Capital-Goods and ‘Rent-Goods’

The main significance of Böhm-Bawerk’s theory lies, however, in my opinion, in the masterly way in which the role of capital in production is discussed there. In the last analysis this role consists, as has already been said, simply and solely in making possible the introduction of a longer period of time between the beginning and the conclusion of the process of production of the commodity concerned and consequently the adoption of a more productive round-about method of production than would be possible if production were less strong in capital or totally devoid of capital. Consequently, free capital, by its very nature, consists of a sum of means of subsistence, i.e. consumption goods which are advanced to the workers and the owners of the forces of nature by the capitalists during production; that is to say, they are exchanged for labour and services of the land. This sum, however, need not, at any rate at the beginning of production, be kept available; it need only become realizable successively. On an average, however, it is consumed some time before the completion of the work (about half-way through the production). If now at any point of time we take, so to speak, a cross-section of the production, this labour which has been done in advance, and these stored-up services of the land, appear in the form of raw materials, tools, half-finished products, and so on, which represent fixed capital. They are an indication of the length of the period of production. In proportion as these and, consequently, the invested capital, are greater, the proportion of workers occupied in the final stage of production decreases. This smaller number, however, produces a larger quantity of finished goods than the larger number at work during a shorter period of production, and still more than the whole number of workers occupied in production for present use which is carried on without capital. The greater the amount of capital that can be used in the production, that is to say, the lengthier the average period of production that can be applied, the greater will be the annual production of finished consumption goods, provided the same number of workers and the same area of the country are involved.

This is not to say, of course, that all technical advances must necessarily lead to the lengthening of the production processes which were usual before. But in so far as they do not lead to this lengthening, they do not make necessary an increase in the existing capital (or only temporarily). Capital can even be freed in this process. They simply operate, therefore, as if human labour or Nature under otherwise unchanged circumstances had become more productive.

In most cases, however, technical advances will necessitate all kinds of preparatory work; they will lead, that is to say, to new round-about methods of production and so make necessary the formation of new capital. There can be no doubt that in our time an incomparably greater accumulation of capital has taken place than at any time in the past.¹

Since, therefore, the relatively definite and very simple concept of the lengthening of the process of production replaces the older, vague, and multiform idea of productivity of capital, the theory of capital-interest can be treated in as exact a fashion as the theory of ground-rent before. As I shall try to show later, both of these together constitute the elements which we shall need if we are to lay down the real factors which determine exchange value.

It is assumed in this case that within every single branch of business, the productivity of labour, for instance, the annual production of one worker, is, under otherwise constant circumstances, a function of the length of the production process—a function which increases with the length of this period but more slowly, so that the scale of the surplus returns becomes a decreasing one—an effect which entirely agrees with experience. Even if we assume that the length of the period of production and the productivity of production are continuously variable magnitudes, we shall still be in the sphere of reality. Sometimes, of course, there are inventions, due to which the method of production usual before is transformed so thoroughly that the length of the process as well as its productiveness becomes quite different. In most cases, however, production changes only gradually. The technical possibility of all kinds of ‘improvements’ is very often already present, but the economic possibility is still lacking: the new ‘labour-saving’ machines or processes were invented long ago, but their application is not yet profitable. It is only when an increase in wages or a decrease of capital-interest has taken place, or because of other reasons, that this application becomes just profitable enough to be adopted—a proof of the fact that in similar cases it is only a question of relatively small changes.¹

Certain difficulties stand in the way of this interpretation, however. Some of these Böhm-Bawerk has removed, but not, in my opinion, all. The first is the division of labour which has the effect that, in reality, the whole process of production of any one commodity will practically never be completed by one and the same firm. This difficulty is, however, not one of principle. So long as it is only a question of average capital-interest, wages, etc., we can think of all these partial businesses, in so far as they contribute to the production of the same final product, as being united in one single business. But if we pursue this thought, it soon becomes clear that very often several different businesses meet in one and the same business, either retrospectively or in a future view, or, which is the same, one single business branches out into several. For instance, one and the same factory delivers machines which later will serve for the production of goods of various kinds. It will be difficult or even impossible always to determine exactly how much work, and especially how much labour done in advance, this or that machine has really cost. The average quantity of labour and period of production within each group can be found approximately only if the goods are here divided into larger groups.

Another difficulty is caused by the existence of durable (productive) goods. If these, like tools or machines, only last a few years, it will still be of some help to us that the work necessary to produce the machine is distributed to the goods produced by its aid. In this case the average life of the machine can be regarded as an indication of the average length of the period of production or as part of this. This expedient breaks down, however, when it is a question of production goods which last 50, 100 or more years. Böhm-Bawerk disregards this difficulty. He remarks¹: ‘A fraction of a working-day already expended hundreds of years ago, on account of its smallness, is in most cases of no importance.’ But if with him we reckon amongst capital productive buildings, factories, store-houses, railways, etc., which are often very old, then, according to the above conception—after deduction of maintenance and running costs—the interest paid for the use of these capital-goods must necessarily be regarded as remuneration for a part of the work which has gone into their construction in these far-off times. Obviously, however, the original cost of construction no longer has any influence on the present-day level of rent of these buildings or on the freight charges of the railways in question; and if similar work is to be carried out to-day, its prospective returns in some distant future will have just as little significance for its present capital-value or profitableness²—as, by the way, Böhm-Bawerk himself explicitly emphasizes. In my opinion, however, it is precisely because of this that goods of greater durability (such as streets, railways, buildings, etc.) cannot be regarded or treated as capital in the narrower sense, but, once they are there, must be placed, economically speaking, in the same category as landed property itself. In other words, if, in accordance with Böhm-Bawerk’s precedent which we ourselves shall later follow, all existing capitals are united in one sum, in order to use this sum as an element in the theoretical determination of the level of interest and of wages, it would be misleading to think of the capital value of all railways, buildings, etc., as being included in this sum. This value is rather, like the capital value of landed property itself, to be thought of as a secondary phenomenon which has no influence on the determination of the above-named magnitudes. The net interest of durable goods, however, is determined, like ground-rent, simply by the value of their useful services (after the cost of repairs has been deducted).

If, however, we disregard the difficulties which we mentioned first, and if in the meantime we suppose that the services of the land and the use of the other rent-goods are free—the influence of these factors will be considered later—then Böhm-Bawerk in Volume III, Chapter V, of his book has taught us that with the help of the concept of the length of the production period a very simple relationship between the present position of wages and of capital-interest can be laid down, if the number of the available workers within an economy and the amount of the capital are known. Böhm-Bawerk avoids the use of mathematical symbols here and tries to make the matter clear by presenting it in tabular form. But in doing this he is obliged to assume that the magnitudes in question vary discontinuously. Since, however, the assumption of magnitudes which vary continuously in fact corresponds more nearly to reality as well as being simpler in theory, I for my part prefer to take this assumption as fundamental, and shall present the theory in a corresponding mathematical guise. About Böhm-Bawerk’s method of treating these questions, I shall say a few words later.