Works

Apart from his great work on capital theory and his Habilitation book mentioned above, Bohm-Bawerk wrote three other important pieces: first and foremost his 1896 evaluation of Karl Marx’s Capital after the posthumous appearance of volumes II and III of that great work; then, not long before he died, his incisive critique of Schumpeter’s “dynamic theory of capital” and, third, a policy-oriented newspaper article on the balance of pay­ments in which, in a very clear manner, he laid down the (full employment) theory of foreign trade: that capital exports and imports drove the balance of trade rather than the other way round (1914).

In the first volume on the theory of interest (1885) Bohm-Bawerk surveys and criticizes the whole history of theories which tries to explain the positive rate of interest. In the second volume (1889), the Positive Theory, he gives his own explanation. We best under­stand his theory as a general equilibrium theory of the stationary state - and it was of course that theory which then in his Theory of Economic Development (1912) Schumpeter tried to replace. Bohm-Bawerk writes (1889):

As a rule goods available now have a higher subjective value than future goods of the same kind and quantity. And, since the result of subjective valuations determines the objective exchange value, present goods, as a rule, have a higher exchange value and price than future goods of the same kind and quantity.

This kind of reasoning was new at the time and was an extension of Carl Menger’s subjective value theory to an inter-temporal calculus.

Bohm-Bawerk gives three causes for this lower valuation of future goods. The first is the potential or real discrepancy between the inter-temporal structure of wants to be satisfied by material goods and the inter-temporal structure of the availability of those goods. Thus, there is a desire to shift goods through time.

The second cause is impatience of individuals, basically what then later has been termed “time preference” by Irving Fisher.

The third cause is what Bohm-Bawerk called the “incremental productivity of greater roundaboutness of production”. This general law implies that earlier availability of inputs allows a greater roundaboutness of production and thus a greater labour pro­ductivity in the provision of consumption goods for a given future point in time. As this third cause is expressed in comparative or quantitative terms of “more roundaboutness” Bohm-Bawerk had to offer a measure for the degree of roundaboutness of production. This was what later would be called the average period of production or, for short, the period of production. It can be understood as the average time distance between the labour inputs and the consumption good output produced by these labour inputs. Bohm-Bawerk essentially argues in terms of a vertically fully integrated virtual factory which only buys labour inputs and only sells final consumption goods. All intermediate goods, including machinery, buildings, and so on are made and used internally by the virtual factory itself. Production starts with unassisted labour.

Owing to these three causes, the real rate of interest is positive in a stationary general equilibrium.

Many economists then were impressed by Bohm-Bawerk’s achievements, but at the same time were critical of the details. Of the great economists of the time, nobody accepted Bohm-Bawerk’s theory fully. Neither Wicksell, nor Irving Fisher, nor John Bates Clark, nor Gustav Cassel, nor even Carl Menger - Bohm-Bawerk’s teacher - accepted the concept of the average period of production as a good measure for the roundaboutness of production and the corresponding capital requirements of the economy.

Later, the Austrians, in particular Hayek and Mises, used Bohm-Bawerkian concepts to develop their severe criticism of an easy money policy. According to them, such a policy would first lead to overinvestment and then later on to a slump owing to the excess capacities thereby generated. To show this they built on Bohm-Bawerk’s temporal capital theory. Eucken further developed the Bohm-Bawerk theory by generalizing the input flows which were allowed in the model. Throughout the first half of the twentieth century many economists commented on Bohm-Bawerk’s theory.

After the introduction of the Solow model, and thus after the beginning of neoclassical growth theory in 1956, Bohm-Bawerk’s temporal capital theory basically was discarded. Whereas the idea of the roundaboutness of production continued to be used as a faςon de parler (manner of speech) the analytical tool of the average period of production was replaced by the Solow macroeconomic production function. The severe criticism of the Solow approach by the Cambridge School (Sraffa, Joan Robinson, Kaldor, Pasinetti, Garegnani, Harcourt, Schefold and others) did not lead them back to Bohm-Bawerk, but rather to David Ricardo and Karl Marx. In his Capital and Time. A Neo-Austrian Approach (1973) John Hicks came back to Bohm-Bawerk. He argued that a tempo­ral theory of capital was more suitable for a dynamic analysis than was the Solowian production function approach. Already in his much earlier “classic” Value and Capital (1939) he gave reasons why a period of production might better be defined in terms of present values of labour inputs rather than in terms of raw physical quantities, as Bohm-Bawerk had defined it. However, in both books Hicks considered the period of production to be a useless concept for an economy with fixed capital such as buildings or machinery.

What do we make of the three causes for a lower valuation of future goods today? In analysing Bohm-Bawerk’s reasoning we can admire his sharp intellect, yet we may feel sorry for him that he did not know the mathematical-axiomatic method which has allowed modern theory substantially greater clarity in the concepts used to do economic theory.

The first Bohm-Bawerkian cause, the incongruence of the inter-temporal structure of wants with the inter-temporal structure of the availability of goods, is not generally valid. Storage costs are a problem, notwithstanding the availability of money as a store of value. Money as “inside money”, for example, in the form of bank deposits for con­stant purchasing power, presupposes the existence of a sufficient number of borrowers who provide collateral which is real capital like buildings, equipment and inventories. All of these forms of real capital imply storage costs or costs in the form of wear and tear. Outside money, like gold, is not able, without substantial effort involving again inside money, to guarantee constant purchasing power. Moreover, today, with the high life expectancy of people, the desire to hold wealth for consumption purposes in old age may be larger than the availability of real capital even at a real rate of interest of zero.

The second cause, time preference, is valid, but may be quantitatively constrained. No doubt, other things being equal, a greater degree of time preference implies a higher real rate of interest. However, this does not necessarily mean that with the empirically observed time preference the real rate of interest is positive.

The third cause, greater productivity of greater roundaboutness of production, is not valid beyond any limits. This is basically admitted by Bohm-Bawerk in the first part of his “Exkurs I”. Exkurs I, as the other “Exkurses”, was written in answer to criti­cisms raised against his theory by several authors including Irving Fisher, Bortkiewicz, Gustav Cassel, Taussig and others. But Bohm-Bawerk maintains that in the real world of his time the potential for exploiting incremental productivity of greater roundaboutness had not yet been fully used. He continues in this “Exkurs I” to give quite a bit of evidence as to why he concludes that this is so. Given the substantial changes in technology and wealth which have occurred in a century after Bohm-Bawerk finished his work, we can no longer be sure whether there are still unexploited opportunities for a higher produc­tivity of greater roundaboutness.