Lesson 2 of 7
The longer way round
Making the tool first can yield more than making the product directly. The claim is narrower than it sounds, and Bohm-Bawerk narrows it himself.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Producing indirectly, by making tools and intermediate goods first, can yield more from the same labour and materials than producing directly.
- Bohm-Bawerk's own statement includes the limit: extending a process yields more, but by less and less, so the gains are not open ended.
- Nothing here says longer is always better. The extra output has to be worth the wait, and what the wait is worth is the subject of the rest of the course.
There are two ways to get water from a stream. Carry it in your hands, starting now. Or spend a week making a bucket and carry far more per trip afterwards. The second is what Bohm-Bawerk calls the roundabout way, and his claim about it is the foundation of everything in this course.
Three methods, same labour, different waits
- Direct: no tool, output now100 units
- Make a simple tool first, then produce180 units
- Make a better tool first, then produce230 units
The claim, as he states it
In Book II, chapter II of The Positive Theory of Capital, Bohm-Bawerk describes production as the use of natural forces, and distinguishes producing consumption goods directly from producing intermediate goods first. His claim is that the indirect route has greater technical productiveness: the same labour and land, sent the long way round, come back with more.
He immediately qualifies it, and the qualification is as important as the claim. Extending the process further yields further surplus, but at a smaller ratio than the extension. The first tool changes a great deal. The tool to make a better tool changes less. He is describing diminishing returns to lengthening in the same chapter that introduces lengthening.
What the claim is not
It is not that longer is better. It is that longer can produce more physical output, which is a different statement, because the output arrives later and the waiting has to be financed and endured by somebody.
It is also not a claim about any particular industry. He is describing a general feature of production, not asserting that a five-year process beats a two-year one anywhere in particular. Whether the extra output justifies the extra wait is a question about value and about time preference, which is the second half of this course.
And it is not a claim that can be read off a company. Nothing in a filing tells you how roundabout a production process is, which is exactly where lesson three runs into trouble.
Why it is load bearing
Every later step in this track uses it. If longer methods produce more, then a fall in what waiting costs makes longer methods worth starting. If longer methods are also the ones that commit resources furthest from consumption, then anything that changes the cost of waiting changes what gets built and where.
The whole Austrian account of the cycle is that sentence with a cause attached to the change. Which is why the next lesson matters: you cannot say a structure of production lengthened without some idea of what length means.
Check yourself
What exactly does Bohm-Bawerk claim about roundabout production?
- Longer methods are always preferable
- Indirect production can yield greater technical output from the same labour and land
- Longer methods are cheaper to finance
Show the answer
Answer: B.
Book II chapter II claims greater technical productiveness for indirect methods. Whether a longer method is preferable depends on what the wait costs, which he treats separately.What limit does he put on the claim in the same chapter?
- It applies only to manufacturing
- Extending the process yields further surplus, but in a smaller ratio than the extension
- It applies only where labour is cheap
Show the answer
Answer: B.
The diminishing return to lengthening is stated alongside the claim. A course that taught only the first half would be teaching half a sentence.What does the physical ranking of methods leave out?
- The quantity of labour used
- What the output given up during the wait was worth
- Whether the output is sellable
Show the answer
Answer: B.
The comparison is of physical output. Ranking the methods in value requires knowing what present output is worth relative to later output, which is the theory of interest.Sources
- Bohm-Bawerk, The Positive Theory of Capital, 1889, English translation by Smart, Book II, chapter II, on capitalist production, on the greater technical productiveness of indirect methods, and on the surplus from further extension rising in a smaller ratio than the extension itself.
- Menger, Principles of Economics, 1871, English translation 1950, chapter I, section 4, for the delay that indirect production requires.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The bucket figures are round invented numbers chosen so the pattern can be checked by eye. They are not measurements of anything.
- Whether roundaboutness can be ranked at all independently of the interest rate is disputed, and lesson seven of this course is about that dispute.