Roundabout method of production (1889)

Advanced by Austrian economist EUGEN VON BOHM-BAWERK (1851-1914), roundabout method of production describes the use of capital goods to increase future productivity of the factors of production.

Production efficiency often entails diverting labour and capital away from the immediate method of production in order to achieve a better method. A house painter may paint a door by hand, but a more efficient method would entail investing in spraying equipment, or developing an automated door-painting factory.

Source:
E von Bohm-Bawerk, Posilive Theorie des Kapitales (Innsbruck, 1889)

Roundaboutness, or roundabout methods of production, is the process whereby capital goods are produced first and then, with the help of the capital goods, the desired consumer goods are produced.^{[citation needed]}

Etymology

The term was devised by the Austrian School economist Eugen von Böhm-Bawerk, who maintained that it was consumer demand, and not necessarily the supply of savings, that would determine the capital investment in any industry.

Overview

Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value. This makes it unnecessary to postulate exploitation in order to understand the return on capital, although how the length of the production process in and of itself produces value remains unclear, as, if Böhm-Bawerk’s idea were correct, the more inefficient a capitalist manufacturer, the longer their production process and the more profit they would accrue. When in fact the additional costs they incur through their inefficient production process would prevent them from selling their output at the market price. In reality though time and profit do not have to be related in direct proportion across different industries; within a certain industry, the passage of time will allow for value to be added in the production process, in the absence of exploitation, while inefficient firms with inferior production systems may contribute the same value-added to output as superior firms with the same given inputs, but just in a longer period of time. Inefficiency therefore does not result in superior performance for a firm, but the passage of time that is necessary for all production processes to occur nevertheless is that feature of the process that explains value-added, not exploitation of labor.The Austrian economist Eugen von Böhm-Bawerk argued against both the Ricardian labor theory of price and Marx’s theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the labour theory of value point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed was the process itself, the roundaboutness, which necessarily involves the passage of time.

The concept has similarities to the later Keynesian theory developed in the 1930s.^{[citation needed]}

A disproof of roundaboutness in economies with compound interest was presented by Paul Samuelson^[1] during the Cambridge capital controversy.

The concept, interpreted as rising technical composition of capital, is also used by some Marxian authors.^[2]

References