Prices and Production

This book owes its existence to an invitation by the University of London to deliver during the session 1930–31 four lectures to advanced students in economics, and in the form in which it was first published it literally reproduced these lectures. This invitation offered to me what might easily have been a unique opportunity to lay before an English audience what contribution I thought I had then to make to current discussions of theoretical economics; and it came at a time when I had arrived at a clear view of the outlines of a theory of industrial fluctuations but before I had elaborated it in full detail or even realized all the difficulties which such an elaboration presented. The exposition, moreover, was limited to what I could say in four lectures, which inevitably led to even greater oversimplification than I would probably have been guilty of in any other case. But although I am now conscious of many more defects of this exposition than I was even at the time of its first publication, I can only feel profoundly grateful to the circumstances which were such an irresistible temptation to publish these ideas at an earlier date than I should otherwise have done. From the criticisms and discussions that publication has caused I hope to have profited more for a later more complete exposition than I could possibly have done if I had simply continued to work on these problems for myself. But the time for that more exhaustive treatment of these problems has not yet come. It is perhaps the main gain which I derived from the early publication that it made it clear to me that, before I could hope to get much further with the elucidation of the main problems discussed in this book, it would be necessary considerably to elaborate the foundations on which I have tried to build. Contact with scientific circles which were less inclined than I was to take for granted the main propositions of the “Austrian” theory of capital on which I have drawn so freely in this book has shown—not that these propositions were wrong or that they were less important than I had thought for the task for which I had used them—but that they would have to be developed in far greater detail and have to be adapted much more closely to the complicated conditions of real life before they could provide a completely satisfactory instrument for the explanation of the particularly complicated phenomena to which I have applied them. This is a task which has to be undertaken before the theses expounded in the present book can be developed further with advantage.

Under these circumstances, when a new edition of this book was called for, I felt neither prepared to rewrite and enlarge it to the extent that a completely adequate treatment of the problems taken up would make necessary, nor to see it reappear in an altogether unchanged form. The compression of the original exposition has given rise to so many unnecessary misunderstandings which a somewhat fuller treatment would have prevented that certain additions seemed urgently necessary. I have accordingly chosen the middle course of inserting into the (on the whole unchanged) original text further elucidations and elaborations where they seemed most necessary. Many of these additions were already included in the German edition which appeared a few months after the first English edition. Others are taken over from a number of articles in which, in the course of the last three years, I have tried to develop or to defend the main thesis of this book. It has, however, been by no means possible to incorporate all the further elaborations attempted in these articles in the present volume, and the reader who may wish to refer to them will find them listed in the footnote below.1

By these modifications I hope to have removed at least some of the difficulties which the book seems to have presented in its original form. Others were due to the fact that the book was in some ways a continuation of an argument which I had begun in other publications that at the time of its first appearance were available only in German. In the meantime English translations have, however, been published2 and in those the reader will find explained some of the assumptions which are implicit rather than explicitly stated in the following discussion.

Some of the real difficulties which I fully realize this book must present to most readers will, however, not be removed by either of these changes because they are inherent in the mode of exposition adopted. All I can do in this respect short of replacing this book by an entirely new one is to draw the attention of the reader in advance to this particular difficulty and to explain why the mode of exposition which causes it had to be adopted. This is all the more necessary since this irremediable defect of the exposition has caused more misunderstandings than any other single problem.

The point in question is briefly this. Considerations of time made it necessary for me in these lectures to treat at one and the same time the real changes of the structure of production which accompany changes in the amount of capital and the monetary mechanism which brings this change about. This was possible only under highly simplified assumptions which made any change in the monetary demand for capital goods proportional to the change in the total demand for capital goods which it brought about. Now “demand” for capital goods, in the sense in which it can be said that demand determines their value, of course does not consist exclusively or even primarily in a demand exercised on any market, but to a perhaps even greater degree in a demand or willingness to continue to hold capital goods for a further period of time. On the relationship between this total demand and the monetary demand for capital goods which manifests itself on the markets during any period of time, no general statements can be made; nor is it particularly relevant for my problems what this quantitative relationship actually is. What was, however, of prime importance for my purpose was to emphasize that any change in the monetary demand for capital goods could not be treated as something which made itself felt only on some isolated market for new capital goods, but that it could be only understood as a change affecting the general demand for capital goods which is an essential aspect of the process of maintaining a given structure of production. The simplest assumption of this kind which I could make was to assume a fixed relationship between the monetary and the total demand for capital goods so as to make the amount of money spent on capital goods during a unit period of time equal to the value of the stock of capital goods in existence.

This assumption, which I still think is very useful for my main purpose, proved however to be somewhat misleading in two other, not unimportant, respects. In the first instance it made it impossible to treat adequately the case of durable goods. It is impossible to assume that the potential services, embodied in a durable good and waiting for the moment when they will be utilized, change hands at regular intervals of time. This meant that so far as that particular illustration of the monetary mechanism was concerned I had to leave durable goods simply out of account. I did not feel that this was too serious a defect, particularly as I was under the—I think not unjustified—impression that the role which circulating capital played was rather neglected and accordingly wanted to stress it as compared with that of fixed capital. But I realize now that I should have given proper warning of the exact reason why I introduced this assumption and what function it performed, and I am afraid that the footnote which I inserted in the first edition (page 37, note 2) at the last moment, when my attention was drawn to the difficulty which my argument might present, has served rather to confuse than to clear up the point.

The second effect of this assumption of separate “stages” of production of equal length was that it imposed upon me a somewhat one-sided treatment of the problem of the velocity of circulation of money. It implied more or less that money passed through the successive stages at a constant rate which corresponded to the rate at which the goods advanced through the process of production, and in any case excluded considerations of changes in the velocity of circulation or the cash balances held in the different stages. The impossibility of dealing expressly with changes in the velocity of circulation so long as this assumption was maintained served to strengthen the misleading impression that the phenomena I was discussing would be caused only by actual changes in the quality of money and not by every change in the money stream, which in the real world are probably caused at least as frequently, if not more frequently, by changes in the velocity of circulation than by changes in the actual quantity. It has been put to me that any treatment of monetary problems which neglected in this way the phenomenon of changes in the desire to hold money balances could not possibly say anything worthwhile. While in my opinion this is a somewhat exaggerated view, I should like to emphasize in this connection how small a section of the whole field of monetary theory is actually treated in this book. All that I claim for it is that it deals with an aspect which has been more neglected and misunderstood than perhaps any other and the insufficient understanding of which has led to particularly serious mistakes. To incorporate this argument into the body of monetary theory is a task which has yet to be undertaken and which I could not and did not try to undertake here. But I may perhaps add that so far as the general theory of money (as distinguished from the pure theory of capital) is concerned, it is the work of Professor Mises3 much more than that of Knut Wicksell which provides the framework inside which I have tried to elaborate a special point.

In addition to this acknowledgment of a great intellectual obligation I should like to repeat from the preface to the first edition not only the acknowledgment of what I owe to the great tradition in the field of the theory of capital which is connected with the names of W.S. Jevons, E. v. Böhm-Bawerk and Knut Wicksell, but also of the more specific debt to those who have helped me in the preparation of these lectures: to Mr. Albert G. Hart, now of the University of Chicago, who gave me the benefit of his advice when I was drafting the original English manuscript of these lectures and particularly to Professor Lionel Robbins, who, when the first edition was published, undertook the considerable labor of putting the manuscript into a form fit for publication and seeing it through the press, and who ever since has most generously given me his help with all my English publications, including the present second edition of this book.

F.A. v. Hayek

The London School of Economics and Political Science

August 1934