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The Interest Rate and the Length of Production: An Attempt at Reformulation

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Tags Capital and Interest TheoryProduction Theory

11/17/2015Mateusz Machaj

Quarterly Journal of Austrian Economics 18, no. 3 (Fall 2015)

ABSTRACT: Austrian economists since the time of Böhm-Bawerk have argued that lowered interest rates lead, in general, to longer production processes. Recently Hülsmann (2011) and Fillieule (2007) have challenged this argument and demonstrated with mathematical precision that lowered interest rates shorten production processes. This paper argues that it may be misleading to search for a direct causal effect of interest rates on the length of production because another, related factor affects it more directly. We name this factor intertemporal labor intensity, since it has to do with the moment of hiring labor. We discuss the relationship between savings and the interest rate, and modify a textbook depiction of the structure of production by changing interest rates. After explaining the concept of intertemporal labor intensity, the paper discusses a crucial assumption of Hülsmann (2011) and Fillieule (2007) on the ratio of labor to capital.

KEYWORDS: capital theory, interest, production structure, Böhm-Bawerk
JEL CLASSIFICATION: B13, B53, D24, E43
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References

Machaj, Mateusz, "The Interest Rate and the Length of Production: An Attempt at Reformulation," Quarterly Journal of Austrian Economics 18, no. 3 (Fall 2015): 272–93.

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