Mario J. Rizzo, ed.
Time, Uncertainty, and Disequilibrium
Lexington, Mass.: D. C. Heath and Company, 1979,
pp. 215-226
Waiting
in Vienna
Comment on Leland
B. Yeager’s “Capital Paradoxes and the Concept of Waiting”
Roger W. Garrison
Introduction
Professor Yeager is eager for his fellow economists
to adopt the term waiting as the name of the thing whose price is the rate
of interest. He claims advantages of two kinds. By using the concept of
waiting, (1) certain paradoxes in capital theory can be dissolved, (2)
and certain parallels between the determination of the interest rate and
the determination of other factor prices can be exploited. His chapter,
taken as a whole, is a demonstration of another more general advantage
of the concept. Thinking in terms of the supply and demand for waiting,
Yeager was able to digest and interpret many technical and mathematical
formulations of capital theory without allowing himself to get embroiled
in the mathematics. In each case he is able either to provide an intuitive
feel for the economic processes involved, that is, for what people are
supposed to be doing, or to show that no intuitive interpretation is possible.
We aren’t quite sure how much of this intuition to impute to waiting
as a tool of analysis and how much to impute to the economist using this
tool. But the two, taken together, yield results that the Austrian economists
cannot afford to ignore.
Yeager’s paper is divided into twelve sections, each of which contains
analyses an insights that would merit some comment. I have chosen, however,
to limit my comments to three broad areas. I will attempt first to provide
and Austrian perspective on the concept of waiting and deal with the disadvantages
of the term that Yeager himself itemizes. Second, I will deal with the
eclectic view of interest rate determination and with Yeager’s criticism
of the subjectivist position. my remarks about technique reswitching and
capital reversing will be saved for last.
An Austrian Perspective
on the Concept of Waiting
If Austrian theorists are hesitant to embrace
the concept of waiting or abstinence, their hesitancy can be attributed,
in large part, to the debates between John B.Clark and Eugen von Böhm-Bawerk
at the turn of the century and between Frank H. Knight and Friedrich A.
Hayek during the 1930s. In these debated both Clark and Knight insisted
that waiting, or something very much like it, is a simple magnitude or
homogeneous fund of clearly determined size and that it has an existence
quite independent of the capital goods in which it is temporarily embodied.
Most objections to the concept of waiting found in the Austrian literature
are well-founded objections to this Clark-Knight vision.
Professor Yeager is clearly on the Austrian side of these debates. He carefully
differentiates his view of capital from the Clark-Knight view, and he rejects
all mystical notions of capital with the statement that “Persons supply
waiting by refraining from current consumption out of their incomes and
wealth and instead making loans, owing capital goods, and doing other quite
unmysterious things.”
This statement reflects the vision of Gustav Cassel rather than those of
Clark and Knight. We might note, however, that Böhm-Bawerk in his third
volume of Capital and Interest found no less mystery in Cassel’s
formulation He rejects Cassel’s concept of “waiting” primarily on
the grounds that it has no independent existence.
It cannot exist, that is, apart from individual capital goods, But that
this is true is made clear in Cassel’s own Nature and Necessity of
Interest,
and it is now reaffirmed buy Yeager. The recognition of dependence in this
sense does not require that the concept of waiting be rejected. Labor,
after all, does no exist aprat from the individual performing it. This
does no preclude our viewing labor as a factor of production and wages
as the price of labor.
Although Clark and Knight were responsible for turning the concept of waiting
or abstinence into a red flag in the Austrians’ view, the Austrian resistance
to these notions predates the writings of Clark and Knight. Böhm-Bawerk
in his History and Critique of Interest Theories
and
Menger in his Principles of Economics
were
critical of the abstinence theory of interest. The contexts of their critical
remarks, however, suggest that it is not the notion of waiting or abstinence
per se that is being called into question. Rather, the primary message
we get from both Menger and Böhm-Bawerk is that these concepts cannot
serve to shore up the cost-of-production theory of value. The message is
well taken but it leaves most all of Professor Yeager’s formulation intact.
Professor Yeager does not insist that the concept of waiting as a factor
of production be adopted at the expense of all other alternative concepts.
In fact, he demonstrates that this view is fully compatible with the Austrian
view of interest as the price differential between present goods and future
goods.
He then goes on to single out a number of analytical contexts in which
it is useful to think in terms of the supply and demand for waiting. Where
the concept does fit, we are shown, it fits very well.
We ought to be able to make some generalization about when the concept
of waiting es and is not appropriate. I am tempted to say that it is appropriate
for the theory of interest but not for the theory of capital This seems
to be the gist of some of Hayek’s scattered comments on the issue.
The distinction is unhelpful, though, without further clarification. Important
propositions in Austrian capital theory hinge on the fact that some capital
goods are specific or have limited uses and on the fact that there are
complementary relationships between some of the elements of the capital
structure. To the extent that these aspects of capital are central to our
analysis, the concept of waiting obscures rather than captures the essence
of the theory. This is only to say that if our theory is dependent of the
heterogeneous nature of capital, then we do not want to use a term that
is specifically designed to conceptually homogenize the factually heterogeneous
elements. But to the extent that we want to call attention to the common
and essential aspect of all capitalistic modes of production, then the
concept of waiting seems preferable to any other.
We need only mention some of the alternative terms aimed a conceptually
homogenizing capital to recognize their inferiority. we’ve all run afoul
of Crusonia plants and shmoos and of capital jelly and putty-clay production
processes. These are all purely physical conceptions totally detached from
choosing and acting individuals. We can conceive of Crusonia plants growing
wild and of shmoos running loose, but such conceptions have nothing to
do with capital. It is impossible to conceive of waiting, however, apart
from the individually who decide to wait. And waiting can take as many
different forms as there are different kinds of capital–and more. Professor
Yeager shows how the concept of waiting helps us to break away from misleading
physical conceptions and to see the element of commonality between capital
goods and such things as inventories of consumer goods, durable consumer
goods, and the holding of land.
To his point I have been treating the notion of waiting and abstinence
as synonyms and contrasting them with purely physical notions of capital.
This is consistent, I think, with Professor Yeager’s own treatment of
the terms. We might note, though, that Frank Knight viewed the shift from
abstinence to waiting as a step backwards in the development of capital
theory.
The reasons for this assessment re not immediately obvious. It is really
necessary to understand Knight’s vision of capital formation to follow
his discussion of the relative merits of the terms abstinence and waiting.
What he actually said can be capsulized as follows:
The choice between investing and consuming is absolute.
When savers “abstain” from consumption in order to create capital,
they abstain.
To call this “waiting” is misleading and false.
These three statements don’t quite pass muster
as a syllogism, but if we know Knight, we know what he means. Capital in
the Knightian vision is perpetual.
Knight couldn’t conceive of an end to the waiting associated with, and
hence, he preferred the term abstinence. If we go along with Knight in
associating a finite time period to the term waiting and an infinite time
period with the term abstinence, then we must reject the latter term along
with the notion of perpetual capital. Waiting is the more suitable term.
The disadvantages of the term waiting that Professor Yeager itemizes are
more imaginary than real. He points out that the term is asymmetrical in
that its meaning is not the same or both sides of the market. The supplier
supplies waiting, but the demander demands to avoid it.
Actually, waiting in this respect is just like labor.; The demander of
labor does not demand to do labor: he demands to avoid it. Rather
than being a disadvantage, this asymmetry plays up another parallel between
waiting and labor as factors of production.
Professor Yeager frets a little over the fact that waiting (and abstinence)
are not appraisal-free terms. They convey the idea of irksomeness.
I question whether this built-in connotation is a disadvantage at all.
Labor, we can note, has the same connotation. This simply reflects people’s
attitudes towards waiting and laboring. The idea that waiting and laboring
are irksome is on a par with the idea that the market rate of interest
and the wage rate are greater than zero. To see the appropriateness in
this respect of viewing interest as the return to waiting requires only
that we contrast it with terms having different connotations. Could we
conceive of interest, for instance, as the return to lounging, or as the
return to loafing? Exploitation theorists could undoubtedly get some mileage
out of these terms, but they serve only to distort what the term waiting
describes.
There is one problem with the term that Professor Yeager only hints about.,
and this has to do with the units in which waiting is measured. Clearly,
waiting, both in his formulation and in Cassel’s, stands for the product
of value and time. It is measured in dollar-years. Yet, waiting in the
ordinary sense of the term is measured in time units only. The term, then
, can be misleading in this respect. In fact, this is the problem in several
of the passages in Capital and Interest that were cited by Professor
Yeager. Böhm-Bawerk as able to shift almost imperceptibly from dollar-years
to years as his unit of measure. This is what gave rise to much of what
Professor Yeager called the “sheer clowning around with questions about
what it is that the supposed waiters are waiting for.”
The unit problem is our clue to another, more substantive question concerning
the role of waiting in Austrian capital theory. At issue here is the relationship
between the concepts of waiting and capital. Professor Yeager seems to
be saying that although the two terms are not perfectly synonymous, waiting
is a “sense” of capital and in many analytical contexts the latter
term can be replaced with the former. It can be argued, though, that, in
the context of Austrian capital theory, waiting and capital are complementary
concepts. Professor Yeager’s view of waiting as a substitute concept
has its roots in the writings of Cassel, while the complementary view can
be traced to William Stanley Jevons.
In his formulation of what came to known as the Jevonian investment figures,
Jevons
made the critical distinction between the two complementary concepts:
[we
must distinguish] between the amount of capital invested and the amount
of investment of capital. the first is a quantity of one dimension only–the
quantity of capital; the second is a quantity of two dimensions, namely,
the quantity of capital, and the length of time during which it remains
invested.
Jevons’s terminology is unfortunate, but his meaning
is clear. His first term corresponds to capital; his second corresponds
to waiting. Both terms come into play in his discussion of the investment
figures. Capital, which he expressed in pounds, is represented by the heights
of the figures; waiting, which he expressed in pound-years, is represented
by the total area.
Hayek developed his structure-of-production triangles before he was aware
of the Jevonian investment figures.
He found it necessary, though, to make a similar distinction. His exposition
required that he make reference to the width of the triangle at various
points along the time axis as well as the total area of the triangle.
In the formulations of Jevons and Hayek, the concept that waiting replaces
is not the amount of capital, but the degree of roundaboutness. Professor
Yeager seems to dismiss this view on the grounds that “[w]aiting ...
has the two dimensions of time and value units, whereas roundaboutness,
conceived as some average period of production ... has a single dimension
of time units.”
But roundaboutness, conceived as the total period of production, has precisely
the same units as waiting, namely, dollar-years. The association of waiting
with roundaboutness can also be found in Mises’s and Rothbard’s discussions
of capital accumulation and the length of the structure of production.
Mises writes of “processes in which the period of production and therefore
waiting time are longer.”
Rothbard makes reference to Böhm-Bawerk’s use of the phrase “more
round about processes, “ but prefers to use the alternative phrase “processes
that require longer waiting periods.”
In sum, the amount of waiting can be associated with the degree of roundaboutness.
It does no replace the concept of capital but is complementary to it. This
view in no way discredits professor Yeager’s discussion of the concept.
it simply provides a perspective that may be more palatable to Austrian
theorists.
The Time Preference
Theory of Interest
vs. the Eclectic View
Dealing with capital and interest theory in terms
of the supply and demand for waiting has one advantage that the Austrian
theorists should not overlook. It puts the time preference theory of interest
into its proper perspective. This theory, which is associated with Fetter,
Mises, Rothbard, and Kirzner, is generally believed to entail an extremely
radical subjectivist position. By working in terms of the supply and demand
for waiting, we are reminded that it is neither more nor less radical than
subjectivist value theory in general. In a brief digression let me attempt
to make clear just what subjectivist value theory is and what it is not.
Austrian theorists have learned over the past several years that it is
necessary for them to state that they are not solipsists, that the material
world has an objective existence, and that there is such a thing as technology.
What they deny is that value is inherent in any part of the material world.
Value, rather, refers to a relationship between the valuing minds of individuals
and the various elements of the material world. Economic value is determined
by the interaction of numerous valuing minds. Stated in this way the subjectivist
position doesn’t seem very radical at all. What twentieth-century economist
would deny it?” What seems to be unique to Austrian economics is the
consistent application of value theory.
The Austrian theorists recognize that value, whether associated with the
demand side of the market or with the supply side, must be reckoned in
the utility dimension. This is to say that both blades of the Marshallian
scissors are made out of the same stuff.
Professor Yeager goes a long way towards endorsing this view when he rejects
the common practice of equating supply curves with objective factors and
demand curves with subjective factors.
But the notion that costs are objective seems to slip back into his reasoning.
In one passage he explicitly includes “opportunity costs” among the
“objective elements.”
In another he suggests that for value theory to be subjective it must explain
the relative prices of goods exclusively in terms of their marginal utilities.
This just isn’t so. We can agree with Professor Yeager that the price
relationship between pins and televisions sets (to use his example) cannot
be determined from their marginal utilities alone. We must also consider
the marginal utilities of the goods that were forgone in order that the
pins and television sets could be produced. That is, we must consider the
costs. The costs, though, are nothing but forgone utilities and are just
as subjective as the marginal utilities of the pins and televisions sets.
The same contrast between the subjectivist view and the eclectic view can
be made in terms of the intertemporal market.
Again, it would be wrong to claim that the subjectivists are concerned
only with one side of the market. Their concern is that both sides are
made out of the same stuff, namely, subjective evaluations.
By attempting to treat purely technical factors as a co-determinate of
the interest rate, Professor Yeager is misled into believing that we can
postulate a purely technical change and then deduce its effect on the market
rate of interest. He postulates a general increase in physical productivity
and then deduces that the interest rate will rise.
We should note here that this is the conclusion yielded by standard Fisherian
analysis. It doesn’t follow at all from an analysis in terms of the supply
and demand for waiting. If we adopt the analytical framework proposed by
Professor Yeager, we would have to ask: Which direction and to what extend
do the supply and demand curves shift? One the whole, do people prefer
to wait more in order to magnify the effects of the technical change, or
to wait less even though this will dampen the effects of the technical
change” Nor can we say for sure which way the interest rate will go.
Frank Fetter
points this out in his discussion of the effects of a general increase
in physical productivity. He begins by recognizing that:
technical
productivity has some influence upon the comparison of present and future
gratifications, and hence upon the rate of interest .... Technical productivity
is one of the facts, physical, moral, and intellectual, which go to make
up the whole economic situation in which time preference is exercised.
Fetter goes on to point out that an increase in productivity
increases capital values and, hence, wealth. He suggests that to the extent
that increased wealth is associated with a fall in time preferences, a
lower rate of discount and a lower rate on interest would result.
Thus, the subjectivists’ conclusion is seen to be incompatible with the
standard Fisherian or eclectic view, but fully compatible with the view
that the interest rate is determined by the supply and demand for waiting.
Capital Reversing
and Technique Reswitching
Professor Yeager uses the notion of waiting as
a factor of production to dissolve the Cambridge paradoxes associated with
capital reversing and technique reswitching.
He shows that, even within the analytical framework of the Cambridge school,
the reswitching of techniques is not necessarily paradoxical. The amount
of capital or waiting involved in the Cambridge examples depends not only
on the technique used, but also on the interest rate itself. It is plausible
that a continual falling of the interest rate could bring about a reswitching
of techniques. That is, the economy could switch from technique A
to technique B and then back to A. But because of the interest
rate effect on capital values, the amount of waiting would increase as
the interest rate falls–with neither switch point constituting an exception.
The new vantage point provided by the concept of waiting should not be
allowed to blind us to the root problem in all the reswitehing literature.
This whole literature owes its existence to the illegitimate use of the
comparative-statics method in the analysis of a dynamic market process.
The illegitimacy is frequently acknowledged by the reswitching theorists
themselves. Geoffrey C. Harcourt,
for instance, prefaces his extended analysis with the following caveat
to the reader:
Following
Joan Robinson’s strictures that it is important not to apply theorems
obtained from the analysis of differences to situations of change ... modern
writers have been most careful to stress that their analysis is essentially
the comparison of different equilibrium situations one with another and
they are not analyzing actual processes.
In 1975, Robinson penned an article titled “The
Unimportance of Reswitching.”
I take her to be saying that the “unimportance” follows directly from
these “strictures.” But Robinson and Harcourt notwithstanding, reswitching
theorists have not been careful in this respect at all. They repeatedly
attempt to pass off comparative-statics analysis as if it were dynamic
analysis. Typically, some mention is made of the static-dynamic problem
in the introduction or in a footnote presumably to blunt criticism along
these lines. They then plunge headlong into a discussion of a single economy
that undergoes successive changes in production techniques in response
to a continuous (and somewhat mysterious) fall int eh rate of interest.
The analysis is usually complete with detailed calculations of the economy’s
output during the transition periods. At the first switch point the output
is relatively high; at the subsequent reswitch point the output is relatively
low. Professor Yeager refers to these transitional outputs as spurts and
slumps.
Samuelson called them splashes,
and, in a slightly different context, Professor Hicks used the terms crescendoes
and diminuendos.
The point here is that if Harcourt’s caveat is to be taken seriously,
all this analysis of transitional outputs is completely spurious. It we
are not to be misled by our own analysis, we must recast it in a comparative-statics
mold. We must imagine that there are three societies economically isolated
from one another. Drawing on Samuelson’s arithmetic,
we can imagine that the interest rate is below 50 percent in the first
society, between 50 percent and 100 percent in the second, and above 100
percent in the third. What the reswitching literature demonstrates is that
we can also imagine, without being inconsistent, that one technique is
the more profitable for the society with the intermediate rate of interest
while a second technique is the more profitable in both of the other two
societies. In this form the analysis is ridded of all its difficulties.
The differences in interest rates can be attributed to differences in time
preferences. There are no perverse changes in the capital structure because
there are no changes at all. The question of transitional outputs simply
does not arise. there are no spurts and no slumps. But if the difficulties
are gone, so too are the appeal and the mystery. so too is the challenge
to Austrian capital theory. Reswitching becomes a very sterile concept.
In fact the term itself, which connotes a temporal relationship, is clearly
a misnomer. Int eh comparative-statics mold there is no switching at all.
Possibly the only challenge left is on of finding a new name for reswitching
that captures the barrenness of the concept.
In his section on the consumption paradox, Professor Yeager clearly recognizes
the misleading use of the comparative-statics method by reswitching theorists.
He first makes a heroic attempt to make some sense out of the mysterious
movements of interest rates. is the fall in the interest rate caused by
an increase in thrift? No, the subsequent pattern of consumption suggests
that it isn’t. Could the shifts constitute movements away from unstable
equilibria? No, there seems to be evidence to the contrary. Aren’t the
reswitching theorists really only comparing alternative steady states rather
than analyzing a process of change? Yes, this seems to be it. In his won
words: “References to changes in the interest rate and switches in technique
serve stylistic convenience only.”
Recognizing that comparative-statics analysis has been dressed up in a
dynamic garb, Professor Yeager
blows the whistle on the Cambridge theorists:
People
who insist on crying paradox over examples of [reswitching] have an obligation,
it seems to me, to spell out what they suppose to be happening in enough
detail to disclose crucial assumptions and to permit comparison of their
story with the real world. Standard theory need not be embarrassed by stories
that do not even say how the interest rate is determined an changed, why
one economy might be in a steady state employing one technique and another
similar economy in a steady state employing another, or how an economy
might make a transition between such states.
My
only complaint is that Professor didn’t blow the whistle quite loud enough.
We may be able to strengthen the impact of his conclusion and gain a better
appreciation for it by imagining the use (or misuse) of a similar “stylistic
convenience” in the hard sciences. We can refute Darwinian theory, for
instance, by constructing a species reswitching model. That is, a species
reswitching model will have the same implications for the theory of evolution
as technique reswitching models have for the theory of capital. Let me
suggest how we can construct the model. We all know that the polar bear
is an animal well adapted for living near the North Pole or near the South
Pole. The alligator, by contrast, is more suited for the tropical climate
of equatorial regions.
We openly recognize that, strictly speaking, we are discussing alternative
life forms that exist in separate parts of the world at a give point in
time. But, for the sake of stylistic convenience, we want to ask what happens
to an animal as we descend through the degrees of latitude form +90o
down through 0o than then on down to -90o. Well,
the animal starts out a s polar bear. But before the latitude of 0o
is reached, it turns into an alligator. More significantly, by the time
we reach -90o, it turns back into a polar bear! (This is stylistic
convenience run amok.) If we had to, we could identify the switch and reswitch
points with the Tropic of Cancer and the Tropic of Capricorn respectively.
It should be apparent that this species reswitching model casts grave doubt
on the theory of evolution and on the notion of the survival of the fittest.
To demonstrate this conclusively, we must first decide–using any criteria
we choose, so long as we don’t make reference to climatic conditions–which
of the two life forms, the polar bear or the alligator, is the fitter.
But we can’t have it both ways. If we decide that the alligator is fitter
than the polar bear, then the switch at the Tropic of Cancer is in full
accordance with Darwinian theory. This means, of course that the reswitching
that goes on at the Tropic of Capricorn is a perversity. Thus, we have
demonstrated the possibility, if th the likelihood, the at less fit will
survive.
So much for Charles Darwin. We can paraphrase Samuelson here and say that
“If all this causes headaches for those nostalgic for the old time parables
of evolutionary theory, we must remind ourselves that scholars are not
born to live an easy existence. We must respect, and appraise, the facts
of life.”
As a final payoff to this exercise, we now have specific manifestations
of such things as spurts and crescendos. A spurt is all that white hair
we have left over when we switch from a polar bear into an alligator. A
crescendo is a few extra teeth and a long sweeping tail that are left over
when we switch back. A thorough investigation of this should keep neo-Darwinian
species reswitching theorists busy for years.
Concluding Remarks
Let me conclude my remarks by returning to the
principal theme of the paper. The concept of waiting as a factor of production
is not at all new to the students of economics. Unfortunately, this tool
of analysis has, more times than not, been in the hands of those hostile
to subjective value theory in general and to Austrian capital theory in
particular. Professor Yeager has demonstrated that the hostility is not
inherent in the tool itself. He has thoroughly exorcized it of its mystical
qualities; he has shown that the concept of waiting complements rather
than challenges Böhm-Bawerk’s treatment of capital and interest; and
he has demonstrated how the alternative concept can be useful in several
different analytical contexts. Both Austrian theorists and Cambridge reswitchers
can study Professor Yeager’s chapter with great profit.
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