Chapter 8—Production: Entrepreneurship and
Change (Continued)
Previous
Section * Next
Section
Table
of Contents
Chapter
8—Production: Entrepreneurship and Change
(continued)
4.
Capital Accumulation and the Length of the Structure of Production
We have been demonstrating that investment lengthens the structure of
production. Now we may consider some criticisms of this approach.
Böhm-Bawerk is the great founder of production-structure
analysis, but unfortunately he left room for misinterpretation by
identifying capital accumulation with adopting “more
roundabout” methods of production. Thus, consider
his famous example of the Crusoe who must first construct (and
then maintain) a net if he wishes to catch more than the number of fish
he can catch without any capital. Böhm-Bawerk stated:
“The roundabout ways of capital are fruitful but long; they
procure us more or better consumption goods, but only at a later period
of time.”
Calling these methods
“roundabout” is definitely paradoxical; for do we
not know that men strive always to achieve their ends in the most
direct and shortest manner possible? As Mises demonstrates,
rather than speak of the higher productivity of roundabout
methods of production, “it is more appropriate to speak of
the higher physical productivity of production processes
requiring more time” (longer processes).
Now let us suppose that we are confronted with an array of possible
production processes, based on their physical productivities.
We may also rank the processes in accordance with their length,
i.e., in terms of the waiting time between the input of the resources
and the yielding of the final product. The longer the waiting period
between first input and final output, the greater the disutility, ceteris
paribus, since more time must elapse before the satisfaction
is attained.
The first processes to be used will be those most productive (in value
and physically) and the shortest. No one has
maintained that all long processes are more
productive than all short processes.
The point is, however,
that all short and ultraproductive processes will
be the first ones to be invested in and established. Given any present
structure of production, a new investment will not be in a shorter
process because the shorter, more productive process would have been
chosen first.
As we have seen, there is only one way by which man can rise from the
ultraprimitive level: through investment in capital. But this cannot be
accomplished through short processes, since the short processes for
producing the most valuable goods will be the ones first adopted. Any
increase in capital goods can serve only to lengthen the structure,
i.e., to enable the adoption of longer and longer productive processes.
Men will invest in longer processes more productive than the ones
previously adopted. They will be more productive in two ways: (1) by
producing more of a previously produced good,
and/or (2) by producing a new good that could not have been produced at
all by the shorter processes. Within this framework these longer
processes are the most direct that must be used to
attain the goal—not more roundabout. Thus, if Crusoe can
catch 10 fish per day directly without capital and can catch 100 fish
per day with a net, building a net should not be considered as a
“more roundabout method of catching fish,” but as
the “most direct method for catching 100 fish a
day.” Furthermore, no amount of labor and land without
capital could enable a man to produce an automobile; for this a certain
amount of capital is required. The production of the requisite amount
of capital is the shortest and most direct method of obtaining
an automobile.
Any new investment will therefore be in a longer and more productive
method of production. Yet, if there were no time preference, the most
productive methods would be invested in first,
regardless of time, and an increase in capital would not cause more
productive methods to be used. The existence of time
preference acts as a brake on the use of the more productive
but longer processes. Any state of equilibrium will be based on the
time-preference, or pure interest, rate, and this rate will determine
the amount of savings and capital invested. It determines capital by
imposing a limit on the length of the production processes and
therefore on the maximum amount produced. A lowering of time
preference, therefore, and a consequent lowering of the pure rate of
interest signify that people are now more willing to wait for any given
amount of future output, i.e., to invest more proportionately and in
longer processes than heretofore. A rise in time preference and in the
pure interest rate means that people are less willing to wait and will
spend proportionately more on consumers’ goods and less on
the longer production processes, so that investments in the longest
processes will have to be abandoned.
One qualification to the law that increased investment
lengthens production processes appears when investment turns
to a type of good which is less useful than the goods previously
acquired, yet which has a shorter process of production than some of
the others. Here the investment in this process was checked, not by the
length of the process, but by its inferior (value) productivity. Yet
even here the structure of production was lengthened, since people have
to wait longer for the new and the old goods than
they previously did for the old good. New capital investment
always lengthens the overall structure of production.
What of the case where a technological invention permits a more
productive process with a lesser amount of capital investment?
Is this not a case in which increased investment shortens
the production structure? Up to this point we have been assuming
technological knowledge as given. Yet it is not given in the
dynamic world. Technological advance is one of the most
dramatic features of the world of change. What then of these
“capital-saving” inventions? One
interesting example was cited by Horace White in a criticism of
Böhm-Bawerk.
Oil was produced first by
ships hunting in the Arctic for whales, the whale oil being processed
from the whales, etc., an obviously lengthy production process. Later
an invention permitted people to bore for oil in the ground, thereby
immeasurably shortening the production period.
Aside from the fact that, empirically, most inventions do not shorten
physical production processes, we must reply that the limits at any
time on investment and productivity are a scarcity of saved
capital, not the state of technological
knowledge. In other words, there is always an unused shelf of
technological projects available and idle. This is demonstrable by the
fact that a new invention is not immediately and instantaneously
adopted by all firms in the society. Therefore, any further investment
will lengthen production processes, many of them more productive
because of superior technique. A new invention does not
automatically impel itself into production, but first joins
the unused array. Further, in order for the new invention to be used, more
capital must be invested. The ships for whaling have already been
built; the oil wells and machinery, etc., must be created anew.
Even the newly invented method will yield a greater product only
through further investment in longer processes. In other words, the
only way to obtain more oil now is to invest more capital in more
machinery and lengthier production periods in the oil-drilling
business. As Böhm-Bawerk pointed out, White’s
criticism would apply only if the invention were progressively
capital-saving, so that the product would always increase with
the shortening of the process. But in that case, boring for oil with
one’s bare hands, unaided by capital, would have to be more
productive than drilling for oil with machinery.
Böhm-Bawerk drew the analogy of an agricultural invention
applied to two grades of land, one grade previously yielding a marginal
product of 100 bushels of wheat, the lower grade yielding 80
bushels. Now suppose use of the invention raises the marginal
product of the lower-grade land to 110 bushels. Does this mean that the
poorer land now yields more than the fertile land
and that the effect of agricultural inventions is to make poorer lands
more productive than fertile ones? Yet this is precisely analogous to
White’s position, which maintains that inventions may cause
shorter production processes to be more productive! As
Böhm-Bawerk pointed out, it is obvious that the source of the
error is this: inventions increase the physical productivity of both
grades of land. The better land becomes still
better. Similarly, perhaps it is true that an invention will
cause a shorter process to be more productive now than a longer process
was previously. But this does not mean that it is superior to all
longer processes; longer processes using the invention will still be
more productive than the shorter ones. (Boring for oil with
machinery is more productive than boring for oil without machinery.)
Technological inventions have received a far more important place than
they deserve in economic theory. It has often been assumed that
production is limited by the “state of the
arts”—by technological knowledge—and
therefore that any improvement in technology will immediately show
itself in production. Technology does, of course, set a limit
on production; no production process could be used at all without the
technological knowledge of how to put it into operation. But while
knowledge is a limit, capital is a narrower limit.
It is logically obvious that while capital cannot engage in
production beyond the limits of existing available knowledge, knowledge
can and does exist without the capital necessary to put it to use.
Technology and its improvement, therefore, play no direct
role in the investment and production process; technology,
while important, must always work through an
investment of capital. As was stated above, even the most dramatic
capital-saving invention, such as oil-drilling, can be put to use only
by saving and investing capital.
The relative unimportance of technology in production as
compared to the supply of saved capital becomes evident, as
Mises points out, simply by looking at the
“backward” or
“underdeveloped” countries.
What is lacking in these
countries is not knowledge of Western technological methods
(“know-how”); that is learned easily enough. The
service of imparting knowledge, in person or in book form, can be paid
for readily. What is lacking is the supply of saved capital
needed to put the advanced methods into effect. The African peasant
will gain little from looking at pictures of American tractors; what he
lacks is the saved capital needed to purchase them. That is the
important limit on his investment and on his production.
A businessman’s new investment in a longer and more
physically productive process will therefore be made from a
sheaf of processes previously known but unusable because of the
time-preference limitation. A lowering of time preferences and
of the pure interest rate will signify an expansion of saved capital at
the disposal of investors and therefore an expansion of the longer
processes, the time limitation on investment having been
weakened.
Some critics charge that not all net investment goes to
lengthening the structure—that new investments might
duplicate pre-existing processes. This criticism misfires,
however, because our theory does not assume that net saving must be
invested in an actually longer process in some specific line of
production. A longer production structure can just as well be achieved
by a shift from consumption to investment that will lengthen the aggregate
production structure by greater investment in already existing
longer processes, accompanied by less investment in existing shorter
processes. Thus, in the case of Crusoe mentioned above, suppose that
Crusoe now invests in a second net, which will
permit him to catch a total of 150 fish a day. The structure of
production is now lengthened even though the second net may be no more
productive than the first. For the total period of production, from the
time he must build and rebuild his total capital until his
product arrives, is now considerably longer. He must now cut
down again on present consumption (including leisure) and work
on his second net.
5.
The Adoption of a New Technique
At any given time, then, there will be a shelf of available and more
productive techniques that remain unused by many firms continuing with
older methods. What determines the extent to which these firms
adopt new and more productive techniques?
The reason that firms do not scrap their old methods
immediately and begin afresh is that they and their ancestors
have invested in a certain structure of capital goods. As
times and tastes, resources, and techniques change, much of this
capital investment becomes an ex post
entrepreneurial error. If, in other words, investors had been
able to foresee the changed pattern of values and methods, they would
have invested in a far different manner. Now, however, the
investment has been made, and the resulting capital structure
is a given residue from the past that supplies the resources they have
to work with. Since costs in the present are only
present and future opportunities forgone, and bygones are bygones,
existing equipment must be used in the most profitable way. Thus, there
undoubtedly would have been far less investment in railroads in late
nineteenth-century America if investors had foreseen the rise
of truck and plane competition.
Now that the existing
railroad equipment remains, however, decisions concerning how
much of it is to be used must be based on current and expected future
costs, not on past expenses or losses.
An old machine will be scrapped for a new and better
substitute if the superiority of the new machine or method is
great enough to compensate for the additional expenditure necessary to
purchase the machine. The same applies to the shifting of a plant from
an old location to a superior new location (superior because of greater
access to factors or consumers). At any rate, the adoption of new
techniques or locations is limited by the usefulness of the already
given (and specific) capital-goods structure. This means that
those processes and methods will be adopted at any time which will best
satisfy the desires of the consumers. The fact that investment in a new
technique or location is unprofitable means that the use of
capital in the new process at the cost of scrapping the old equipment
is a waste from the point of view of satisfying consumer wants. How
fast equipment or location is scrapped as obsolescent, then,
is not decided arbitrarily by businessmen; it is determined by the
values and desires of consumers, who decide on the price and
profitability of the various goods and on the values of the
necessary nonspecific factors used to produce these goods.
As is often true, critics of the free market have attacked it from two
contradictory points of view: one, that it unduly slows down the rate
of technological improvement from what it could and should be; and,
two, that it unduly accelerates the rate of technological improvement,
thereby unsettling the peaceful course of society. We have seen that a
free market will, as far as the knowledge and foresight of
entrepreneurs permit, produce so that factors are best allocated to
satisfy the wishes of consumers. Improvement in productivity
through new techniques and locations will be balanced against the
opportunity costs forgone in value product from using the
existing old plant.
And ability in
entrepreneurial foresight will be assured as much as possible by the
market’s process of “selection” in
“rewarding” good forecasters and
“penalizing” poor ones proportionately.
A.THE ENTREPRENEUR AND INNOVATION
Under the stimulus of the late Professor Schumpeter, it has been
thought that the essence of entrepreneurship is innovation
—the disturbance of peaceful, unchanging business routine by
bold innovators who institute new methods and develop new products.
There is, of course, no denying the importance of the discovery and
institution of more productive methods of obtaining a product
or of the development of valuable new products. Analytically, however,
there is danger of overrating the importance of this process.
For innovation is only one of the activities performed by the
entrepreneur. As we have seen above, most entrepreneurs are not
innovators, but are in the process of investing capital within
a large framework of available technological opportunities.
Supply of product is limited by supply of capital goods rather
than by available technological know-how.
Entrepreneurial activities are derived from the presence of uncertainty.
The entrepreneur is an adjuster of the discrepancies of the market
toward greater satisfaction of the desires of the consumers.
When he innovates he is also an adjuster, since he
is adjusting the discrepancies of the market as they present
themselves in the potential of a new method or product. In
other words, if the ruling rate of (natural) interest return is 5
percent, and a business man estimates that he could earn 10 percent by
instituting a new process or product, then he has, as in other cases,
discovered a discrepancy in the market and sets about
correcting it. By launching and producing more of the new process, he
is pursuing the entrepreneurial function of adjustment to
consumer desires, i.e., what he estimates consumer desires
will be. If he succeeds in his estimate and reaps a profit,
then he and others will continue in this line of activity until the
income discrepancy is eliminated and there is no
“pure” profit or loss in this area.
6.
The Beneficiaries of Saving-Investment
We have seen that an increase in saving and investment causes an
increase in the real incomes of owners of labor and land factors. The
latter is reflected in increases in the capital value of ground lands.
The benefits to land factors, however, accrue only to particular lands.
Other lands may lose in value, although there is an aggregate gain.
This is so because usually lands are relatively specific factors. For
the nonspecific factor par excellence, namely,
labor, there is, on the contrary, a very general rise in real
wages. These laborers are “external
beneficiaries” of increased investment, i.e., they
are beneficiaries of the actions of others without paying for these
benefits. What benefits do the investors themselves acquire?
In the long run, they are not great. In fact, their rate of interest
return is reduced. This is not a loss, however, since it is the outcome
of their changed time preferences. Their real
interest return may well be increased, in fact, since the fall in the
interest rate may be offset by the rise in the purchasing power of the
monetary unit in an expanding economy.
The main benefits gained by the investors, therefore, are
short-run entrepreneurial profits. These are earned by
investors who see a profit to be gained by investing in a certain area.
After a while, the profits tend to disappear as more investors enter
this field, although changing data are always presenting new profit
opportunities to enterprising investors. But the short-run
benefits earned by the workers and landowners are more
certain. The entrepreneur-capitalists take the risks of speculating on
the uncertain market; their investment may result in profits,
in breaking even with no profits at all, or in suffering
outright losses. No one can guarantee profits to them.Aggregate new
investment will result in aggregate net profits, to be sure,
but no one can predict with certainty in what areas the profits will
appear. On the other hand, the workers and landowners in the fields of
new investment gain immediately, as new investment
bids up wages and rents in the longer processes. They gain even if the
investment turns out to have been uneconomic and unprofitable. For in
that case, the error in satisfying consumers is borne by the heavy
losses of the capitalist-entrepreneurs. In the meanwhile, the workers
and landowners have reaped a gain. This is hardly a clear gain,
however, since consumers have, as a whole, suffered in real income
through entrepreneurial error in producing the wrong kind of goods. Yet
it is obvious that the brunt of the loss from making the error is
suffered by the entrepreneurs.
7.
The Progressing Economy and the Pure Rate of Interest
It is clear that a feature of the progressing economy must necessarily
be a fall in the pure rate of interest. We have seen that in order for
more capital to be invested, there must be a fall in the pure rate of
interest, reflecting general declines in time preferences. If the pure
rate remains the same, this is an indication that there will be no new
investment or disinvestment, that time preferences are generally
stable, and that the economy is stationary. A
fall in the pure rate of interest is a corollary of a drop in time
preferences and a rise in gross investment. A rise in the pure rate of
interest is a corollary of a rise in time preferences and net
disinvestment. Hence, for the economy to keep advancing, time
preferences and the pure rate of interest must continue to fall. If the
pure rate of interest remains the same, capital will only just be
maintained at its same real level.
Since praxeology never establishes quantitative laws, there is no way
by which we can determine any sort of quantitative
relation between changes in the pure rate of interest and the
amount that capital will change. All we can assert is the
qualitative relation.
It should be noticed what we are not saying. We are
not asserting that the pure rate of
interest is determined by the quantity or value of capital
goods available. We are not concluding, therefore, that an increase in
the quantity or value of capital goods lowers the pure rate of interest
because interest is the “price of capital” (or for
any other reason). On the contrary, we are asserting precisely
the reverse: namely, that a lower pure rate of
interest increases the quantity and value of capital goods
available. The causative principle is just the other
way round from what is commonly believed. The pure rate of interest,
then, can change at any time and is determined by time preferences. If
it is lowered, the stock of invested capital will increase; if it is
raised, the stock of invested capital will fall.
That a change in the pure rate of interest has an inverse
effect on the stock of capital is discovered by deduction from
accepted axioms and not inferred from uncertain and complex
empirical data.
The law is not deduced,
for example, by observing that the market rate
of interest in backward nations is higher than in advanced nations. It
is clear that this phenomenon is at least partly due to the higher
entrepreneurial risk component in the backward countries and is not necessarily
caused by differences in the pure rate of
interest.
8.
The Entrepreneurial Component in the Market Interest Rate
In the ERE, as we have seen, the interest rate throughout the economy
will be uniform. In the real world there is an additional entrepreneurial
(or “risk”) component,
which adds to the interest rate in particularly
risky ventures, and in accordance with the degree of risk. (Since
“risk” has an actuarially
“certain” connotation, we may better call
it “degree of uncertainty.”) Thus, suppose that the
basic social time-preference rate, or pure rate
of interest, in the economy is 5 percent. Capitalists will buy 100
ounces of future goods to sell less remotely future goods one year
later at 105 ounces. Thus, a 5-percent return is a
“pure” return, i.e., it is the return assuming that
the 105 ounces will definitely be
accruing. The pure rate, in other words, abstracts from any
entrepreneurial uncertainty. It gauges the premium of present
over future goods on the assumption that the future goods are
known as certain to be forthcoming.
In the real world, of course, nothing is absolutely certain, and
therefore the pure rate of interest (the result of time preference) can
never appear alone. Now suppose that in one particular venture
or industry it is fairly certain that 105 ounces will be earned from
the sale of a product one year in the future. Then, with a social time
preference rate of 5 percent, the capitalist-entrepreneurs will be
willing to pay 100 ounces for factors and reap a 5-percent
return. But suppose that there is another possible venture
considered very risky by entrepreneurs. The product is
expected to sell for 105 ounces, but there are definite possibilities
that the price of the product might plummet. In that case, the
entrepreneurs will not be willing to pay 100 ounces for factors. They
would have to be compensated for the extra risks that they run; the
price of the factors might finally be 90 ounces. Thus, the riskier a
given venture appears ex ante, the higher will be
the expected interest return that capitalists will require before they
make the investment.
On the market, then, a whole structure of interest rates will be
superimposed on the pure rate, varying positively in
accordance with the expected risks of each venture. The
counterpart of this structure will be a similar variety of interest
rates on the loan market, which, as usual, is derivative from the goods
market.
In the long run,
of course, the tendency, given no changes of data, will be for people
to realize that such and such a venture is pretty consistently
yielding a higher than 5-percent return. The risk component for this
venture will then fall, other entrepreneurs will enter this
type of venture, and the interest rate will tend to fall back to 5
percent again. Thus, the varying risk structure of interest does not
invalidate the tendency toward uniformity of the interest rate. On the
contrary, any variety is something of an index of the various
“risks” of uncertainty which still remain in the
market and which would be eliminated if data were frozen and an ERE
were reached. If data did remain constant, then the
uniformity of the ERE would ensue. It is because data are
always changing and thus setting up new uncertainties in place
of the old that we do not have the uniformity of the ERE.
9.
Risk, Uncertainty, and Insurance
Entrepreneurship deals with the inevitable uncertainty of the future.
Some forms of uncertainty, however, can be converted into actuarial
risk. The distinction between “risk” and
“uncertainty” has been developed by
Professor Knight.
“Risk”
occurs when an event is a member of a class of a large number of
homogeneous events and there is fairly certain knowledge of the
frequency of occurrence of this class of events. Thus, a firm
may produce bolts and know from long experience that a certain
almost fixed proportion of these bolts will be defective, say
1 percent. It will not know whether any given bolt will be
defective, but it will know the proportion of the total number
defective. This knowledge can convert the percentage of
defects into a definite cost of the firm’s operations,
especially where enough cases occur within a
firm. In other situations, a given loss or hazard may be large and
infrequent in relation to a firm’s operations (such
as the risk of fire), but over a large number of firms it could be
considered as a “measurable” or actuarial risk. In
such situations, the firms themselves could pool their risks, or a
specialized firm, an “insurance company,” could
organize the pooling for them.
The principle of insurance is that firms or individuals are
subject to risks which, in the aggregate, form a class of
homogeneous cases. Thus, out of a class of a thousand firms,
no one firm has any idea whether it will suffer a fire next year or
not; but it is fairly well known that ten of them will. In that case,
it may be advantageous for each of the firms to “take out
insurance,” to pool their risks of loss. Each firm will pay a
certain premium, which will go into a pool to compensate those firms
which suffer the fires.
As a result of competition, the firm organizing the insurance service
will tend to obtain the usual interest income on its
investment, no more and no less.
The contrast between risk and uncertainty has been brilliantly analyzed
by Ludwig von Mises. Mises has shown that they can be subsumed under
the more general categories of “class
probability” and “case
probability.” “Class
probability” is the only scientific use of the term
“probability,” and is the only form of probability
subject to numerical expression.
In the tangled
literature on probability, no one has defined class
probability as cogently as Ludwig von Mises:
Class
probability means: We know or assume to know, with regard to the
problem concerned, everything about the behavior of a whole class of
events or phenomena; but about the actual singular events or phenomena
we know nothing but that they are elements of this class.
Insurable risk is an example of class probability. The
businessmen knew how many bolts would be defective out of a
total number of bolts, but had no knowledge as to which particular
bolts would be defective. In life insurance the mortality tables reveal
the proportion of mortality of each age group in the
population, but they tell nothing about the particular life
expectancy of any given individual.
Insurance firms have their problems. As soon as something
specific is known about individual cases, firms break down the
cases into subaggregates in an effort to maintain homogeneity of
classes, i.e., the similarity, as far as is known, of all individual
members in the class with respect to the attribute in question. Thus,
certain subgroups within one age group may have a higher
mortality rate because of their occupation; these will be
segregated, and different premiums applied to the two cases. If there
were knowledge about differences between subgroups, and insurance firms
charged the same premium rate to all, then this would mean that the
healthy or “less risky” groups would be subsidizing
the riskier. Unless they specifically desire to grant such subsidies,
this result will never be maintained in the competitive free market. In
the free market each homogeneous group will tend to pay premium rates
in proportion to its actuarial risk, plus a sum for interest income and
for necessary costs for the insurance firms.
Most uncertainties are uninsurable because they are unique, single
cases, and not members of a class. They are unique cases facing each
individual or business; they may bear resemblances to other cases, but
are not homogeneous with them. Individuals or entrepreneurs know
something about the outcome of the particular case, but not
everything. As Mises defines it:
Case
probability means: We know, with regard to a particular event, some of
the factors which determine its outcome; but there are other
determining factors about which we know nothing.
Estimates
of future costs, demands, etc., on the part of entrepreneurs
are all unique cases of uncertainty, where methods of specific
understanding and individual judgment of the situation must apply,
rather than objectively measurable or insurable
“risk.”
It is not accurate to apply terms like “gambling”
or “betting” to situations either of risk or of
uncertainty. These terms have unfavorable emotional implications, and
for this reason: they refer to situations where new
risks or uncertainties are created for the
enjoyment of the uncertainties themselves. Gambling on the throw of the
dice and betting on horse races are examples of the deliberate creation
by the bettor or gambler of new uncertainties which otherwise
would not have existed.
The entrepreneur, on the
other hand, is not creating uncertainties for the fun of it. On the
contrary, he tries to reduce them as much as possible. The
uncertainties he confronts are already inherent in the market
situation, indeed in the nature of human action; someone must deal with
them, and he is the most skilled or willing candidate. In the
same way, an operator of a gambling establishment
or of a race track is not creating new risks; he is an entrepreneur
trying to judge the situation on the market, and neither a
gambler nor a bettor.
Profit and
loss are the results of entrepreneurial uncertainty.
Actuarial risk is converted into a cost of
business operation and is not responsible for profits or losses except
in so far as the actuarial estimates are erroneous.
Böhm-Bawerk, Positive
Theory of Capital, p. 82.
Mises, Human Action,
pp. 478–79.
See Hayek, Pure
Theory of Capital, pp. 60ff. Similarly, there are numerous
long processes which are not productive at all or which are less
productive than shorter processes. These longer
processes will obviously not be chosen at all. In sum, while all new
investment will be in longer processes, it certainly does not follow
that all longer processes are more productive and therefore worthy of
investment. For Böhm-Bawerk’s strictures on
this point, see Eugen von Böhm-Bawerk, Capital
and Interest, Vol. 3: Further Essays on
Capital and Interest (South Holland, Ill.: Libertarian Press,
1959), p. 2.
It should be clear that, as Mises
lucidly put it,
Originary
[pure] interest is not a price determined on the market by the
interplay of the demand for and the supply of capital or
capital goods. Its height does not depend on the extent of this demand
and supply. It is rather the rate of originary interest that determines
both the demand for and the supply of capital and capital goods. It
determines how much of the available supply of goods is to be
devoted to consumption in the immediate future and how much to
provision for remoter periods of the future. (Mises, Human
Action, pp. 523–24)
Eugen von Böhm-Bawerk,
“The Positive Theory of Capital and Its Critics, Part
III,” Quarterly Journal of Economics,
January, 1896, pp. 121–35. See also idem,
Further Essays on Capital and Interest, pp. 31ff.
Böhm-Bawerk,
“The Positive Theory of Capital and Its Critics, Part
III,” pp. 128ff.
Mises, Human Action,
pp. 492ff.
The futility of “Point
4” and “technical assistance” in
furthering production in the backward countries should be
evident from this discussion. As Böhm-Bawerk commented, in
discussing advanced techniques: “There are always thousands
of persons who know of the existence of the machines, who
would be glad to secure the advantage of their use, but who do not
dispose of the capital necessary for their purchase.”
Böhm-Bawerk, “The Positive Theory of Capital and Its
Critics, Part III,” p. 127. See also idem,
Further Essays on Capital and Interest, pp.
4–10.
As Hayek states:
It
is frequently supposed that all increases in the quantity of capital
per head . . . must mean that some commodities will now be produced by
longer processes than before. But so long as the processes used in
different industries are of different lengths, this is by no means a
necessary consequence. . . . If input is transferred from
industries using shorter processes to industries using longer
processes, there will be no change in the length of the period of
production in any industry, nor any change in the methods of production
of any particular commodity, but merely an increase in the periods for
which particular units of input are invested. The significance of these
changes in the investment periods of particular units of input will,
however, be exactly the same as it would be if they were the
consequence of a change in the length of particular processes of
production. (Hayek, Pure Theory of Capital, pp.
77–78)
Also
see Hayek, Prices and Production, p. 77, and Böhm-Bawerk,
Further Essays on Capital and Interest, pp. 57–71.
And if there
had been fewer land grants and other governmental subsidies to
railroads! Thus, see E. Renshaw, “Utility
Regulation: A Reexamination,” Journal of
Business, October, 1958, pp. 339–40.
See Mises, Human
Action:
The
fact that not every technological improvement is instantly applied in
the whole field is not more conspicuous than the fact that not
everyone throws away his old car or his old clothes as soon as
a better car is on the market or new patterns become fashionable. (p.
504)
Also
see ibid., pp. 502–10. Specifically, the
old equipment will continue in use as long as its operating costs are
lower than the total costs of installing the new equipment.
If, in addition, total costs (including replacement costs for
wear and tear on capital goods) are greater for the old equipment, then
the firm will gradually abandon old equipment as it wears out and will
invest in the new technique. For an extensive discussion, see
Hayek, Pure Theory of Capital, pp. 310–20.
“Technocrats”
condemn the market for rewarding investments according to their
(marginal) value-productivity instead of their
(marginal) physical productivity. But we
see here an excellent example of a technique more physically productive
but less value-productive, and for a very good reason: that the given
specific capital goods already produced lend an advantage to the old
technique, so that “out-of-pocket” operating costs
of the old technique are lower, until the equipment wears out, than
total costs for the new project. Consumers are benefited by continuing
the old techniques while they remain profitable, for then factors are
spared for more valuable production elsewhere.
As will be seen below, actuarial
risks can be “insured” against, but not the
entrepreneurial uncertainty of the market.
It is evident that
Mises’ strictures in Human Action, p.
530, apply to the doctrine that the quantity of capital determines the
pure rate of interest, and not to the present argument.
The loan market will diverge from
the “natural” market to the extent that conditions
for repayment of loans, etc., establish such differences. The two would
be the same if the loans were clearly recognized as entrepreneurial, so
that in cases where there was no deliberate fraud, the borrower would
not be considered criminal if he did not repay the loan. However, if,
as discussed in chapter 2 above, there are no bankruptcy laws
and defaulting borrowers are considered criminal, then
obviously the “safety” of all loans would
increase in relation to “natural” investments, and
the interest rates on loans would decline accordingly. In the free
society, however, there would be nothing to prevent borrowers and
lenders from agreeing, at the time the contract is made, that
borrowers would not be held criminally
responsible and that the loan would really be an entrepreneurial one.
Or they could make any sort of arrangement in dividing gains
or losses that they might choose.
Knight, Risk,
Uncertainty, and Profit, pp. 212–55, especially p.
233.
Mises, Human Action,
pp. 106–16, which also contains a discussion of the fallacies
of the “calculus of probability” as applied to
human action.
See Richard von
Mises, Probability, Statistics, and Truth (2nd ed.;
New York: Macmillan & Co., 1957).
Mises, Human Action,
p. 107.
Ibid., p. 110.
There is a distinction between
gambling and betting. Gambling refers to wagering on events of class
probability, such as throws of dice, where there is no knowledge of the
unique event. Betting refers to wagering on unique event about which
both parties to the bet know something—such as a horse race
or a Presidential election. In either case, however, the wagerer is
creating a new risk or uncertainty.
Previous
Section * Next
Section
Table
of Contents