Last modified: 2018-06-20
Abstract
In the ‘60s of the 20th century, due to the results of the Cambridge capital controversy, it became clear the rate of interest cannot be understood as the price for the use of a factor of production. In particular, in Samuelson’s words: "the simple tale told by Jevons, Böhm-Bawerk, Wicksell, and other neoclassical writers – alleging that, as the interest rate falls in consequence of abstention from present consumption in favor of future, technology must become in some sense more “roundabout,” more “mechanized,” and “more productive” – cannot be universally valid." (Samuelson 1966, p. 568.)
However, the temptation to regard capital as a factor of production and the rate of interest as the price for its use re-appears periodically. More precisely, in the present paper, we shall focus on a proposition concerning the inverse relationship between the rate of interest and the ‘degree of roundaboutness’ of the production processes in use. Within that argument, the ‘degree of roundaboutness’ refers to the neo-Austrian average period of production introduced for the first time by Hicks in Value and Capital (1946) and further developed in Sargan (1955), von Weizsäcker (1971) and Malinvaud (2003).
We shall try to show that this new notion of average period of production cannot be regarded as a good measure of the employment of a production factor. In particular, on the one hand, the inverse relationship between the rate of interest and this new degree of roundaboutness does not prevent the possibility of re-switching of production methods. On the other, in case of re-switching, the most roundabout method is, paradoxically, the least productive: it is the method that gives the smallest net output per worker.