History of Economic Analysis part 91 doc

which in this field meets with particular difficulties, did not get beyond beginnings. The record of successful research practically begins in the 1920’s, especially in the United States where scarcity of material was an almost prohibitive obstacle before. 8 There is one more point, however, that cannot be left untouched. All the theories of entrepreneurial activity and of entrepreneurial gains that have been mentioned are functional. That is to say, they all started by attributing to entrepreneurs an essential function in the productive process, and they all went on to explain entrepreneurial gains by success in filling that function. No doubt, different authors defined this function in different ways. But Mr. Dobb’s later turn of phrase that entrepreneurs (‘undertakers’) are the people ‘who take the ruling decisions’ of economic life (op. cit. p. 54) might well serve as a common motto for them all. In describing the period’s work on this topic as one of its major contributions to economic analysis, we have placed ourselves on the same standpoint. 9 It is natural, however, in a matter that concerns the central figure of the capitalist economy and, moreover, in a matter on which reliable factual information is, for most economists, so difficult to acquire, that any functional theory must be under suspicion of ideological bias and that it must sooner or later be met by equally suspicious opposing theories, the burden of which is to establish that the entrepreneur fills no ‘productive’ function at all but merely preys upon the productive activity of A late contribution of note was C.A.Tuttle’s paper on ‘The Function of the Entrepreneur,’ American Economic Review, March 1927 (also see his survey, ‘The Entrepreneur Function in Economic Literature,’ Journal of Political Economy, August 1927). German work simply continued an old tradition, see, e.g., Victor Mataja, Der Unternehmergewinn (1884) and the earlier publication, J.Pierstorff, Die Lehre vom Unternehmergewinn (1875). It is a question of some interest why most of this literature should have been either American or German. Perhaps because the figure of the entrepreneur was at that time more prominent in the United States and in Germany than it was in England or France? Or perhaps also because at least the English economists took the entrepreneurial function and entrepreneurial profits so much for granted as to see little need for more analysis of them than they found in Marshall—just as most of them considered the problem of interest as satisfactorily settled? But I take the opportunity to call the reader’s attention to an important contribution which, if it does not exactly deal with the problems of the profits of enterprise, yet bears on them and so may be mentioned here: F.Lavington, ‘An Approach to the Theory of Business Risks,’ Economic Journal, June 1925. 8 One of the reasons for this was that, by and large, American business did not adopt adequate methods of depreciation and cost accounting until the crisis of 1907. Factual investigation into the facts of profits had, therefore, to work on rough indications that might easily mislead. 9 It should be emphasized at once, however, that, for those theories of entrepreneurial activity—or some of them—to be valid, it is not necessary to go beyond the proposition that this activity fills a function that is essential in capitalist society. How, by whom, and with what degree of efficiency analogous functions might be filled in any other organization of society, e.g., a socialist one, is an entirely different question. What the writers of that period thought about this does not affect at all the instrumental value of their theories as applied to the capitalist process. History of economic analysis 862 others. Such theories enjoy wide currency in the popular economics of our time. Our first question is: has any such theory been held by any economist of repute? The reader might think of Marx and the Marxists. If so, he mistakes the point that is at issue at the moment. Throughout the period there was a considerable number of economists who did not go along with the tendency toward a divorce of the entrepreneur from the capitalist and of the entrepreneurial gain from capital gain. All these economists continued to identify the entrepreneur, on principle, with the capitalist in the same sense as had A. Smith and Ricardo. For them, hence, the principal thing to explain was the return that accrues to capital. Of all the economists who retained this approach, the Marxists were, as a group, the most important. Thus, the Marxist theory of exploitation is a theory of the exploitation of labor by capital; and it is therefore correct, as is and has been the usual practice, to list this theory among theories of interest. The entrepreneur is undoubtedly present in the Marxist drama. But he is present behind the scenes and his gain is not a Marxist problem. It can be inserted into the Marxist system only by means of an un-Marxist reinterpretation. Even in Marx’s description of the process of concentration, it is big capitalists that prey upon—‘expropriate’—the smaller ones. So soon as we realize this and accordingly exclude the Marxists as well as the other authors who adopted a similar view, 10 we have difficulty in finding any accredited exponents of what we may call the depredation theory of entrepreneurial gain. Veblen comes nearest to being an instance: though even in his case certain qualifications should be made, we may perhaps consider him as the scientific ancestor of the popular theory alluded to above. But modern scientific socialists do not qualify—as may be seen from the writings of Lange and Dobb. Under these circumstances, it is hardly worth while to raise the question whether functional explanations of the entrepreneur’s role and gain are ideologically vitiated or deserve to be discounted on the ground that their authors’ minds may have harbored apologetic intentions. 11 Unfortunately, this does not settle the matter. For in the first place, the functional theories do not cover the whole contents of the profit or loss item as known to business practice. This is so not only because this item also includes returns to owned factors—some of those theories, especially the older ones, following J.S.Mill’s example, did include these—but also because the entrepreneur, and even the mere manager, especially the owner-manager of a concern, is so placed as to be the recipient of (positive or negative) ‘leftovers’: the word residual as applied to his profit, has therefore more definite meaning than it has in the case of the other claimants to shares in total receipts. Moreover, the entrepreneur or owner-manager who stands between the commodity and factor markets has 10 On the same ground we exclude in particular various bargaining power theories that were also used primarily for the purpose of explaining capital profit. 11 Of course, this does not exclude the possibility that ideological bias is present in the Vision of the economic process that causes economists to emphasize the functional aspect at the expense of others in an analysis of a historical development. General economics 863 more opportunity for exploiting favorable situations 12 and is more vulnerable to other people’s doing the same thing than is anybody else. Total net profits in the sense of the gain item in an entrepreneur’s personal income statement are hence an agglomeration of elements of quite different nature, and they are not anything like as closely related to whatever it is that, adopting some particular theory, we may conceive ‘pure’ profits to be as other people’s total receipts are to their ‘functional’ incomes. The difference may be very considerable and constitutes a reason, though not the fundamental one, why we should not speak of a tendency of entrepreneurial gains toward equalization. The fundamental reason is that entrepreneurial gains are not permanent returns at all but emerge each time—to adopt the language of the Knight-Dobb theory—an entrepreneur’s decision in conditions of uncertainty proves successful and have no definite relation to the size of the capital employed. In other words, entrepreneurial gains, though always present like technological unemployment, yet arise, also like technological unemployment, from a sequence of events each of which, being unique, would not of itself cause permanent gains or unemployment. There is no mechanism to equalize such ‘individually temporary’ gains except at zero level. But many theorists of that epoch, explicitly or tacitly, did assume the existence of such a tendency simply because they had not completely got rid of the association of entrepreneurs’ gains with capital gains that can indeed, if allowance be made for risk, be shown to display such a tendency. This topic is difficult—though in a sense that differs from that in which the non-mathematical student of today finds modern theory difficult—and cannot be further pursued. But I want to add that, partly for this reason, we also should not speak of ‘supply of business ability.’ English authors and others did this because they were prone to assimilate what they significantly called earnings of management with wages. This language is capable of defense but should not induce us to draw supply curves for entrepreneurial services even if we believe in supply curves for any other kind of work. In the second place, it should be observed that, whatever their nature in other respects, entrepreneurs’ gains will practically always bear some relation to monopolistic pricing. Whatever it is that produces these gains, it must of necessity be something that, for the moment at least, competitors cannot parallel for, if they did, no surplus over costs (including entrepreneurial ‘wages’) could emerge. The successful introduction of a new commodity or brand is perhaps the best illustration of this. Moreover, there are means available to the successful entrepreneur—patents, ‘strategy,’ and so on—for prolonging the 12 A special case of this is what Professor Robert A.Gordon called the ‘gains of position’ that members of the executive group in a corporation may be able to make. See his Business Leadership in the Large Corporation (1945), p. 272. In the text above I mean, however, a much wider category of gains to which the same term might be applied, viz., gains that are not made in the fulfilment of the entrepreneurial ‘function’ but can be made by those who fill this function. I think it fair to say that the economists under discussion did recognize this phenomenon. It would indeed have been difficult for them not to do so. History of economic analysis 864 life of his monopolistic or quasi-monopolistic position and for rendering it more difficult for competitors to close up on him. Obviously, this may be linked up with the elements of the case that have been glanced at in the preceding paragraph in such a way as to yield a picture of reality that may, for practical purposes, differ but little from that drawn by a straight depredation theory. Rare birds indeed are the economists who give the proper weight to this set of facts and at the same time do not overstress them. It is here rather than in the fundamental question of theory involved that ideological bias as well as political interest assert themselves. On principle, a sponsor of a functional theory is at liberty to give as much weight to predatory activities as he pleases. 13 But most economists who wrote before 1914 may have underutilized this freedom as much as many of their successors have abused it. It must not be forgotten, however, that the widespread hostility to big business and to ‘trusts,’ so far as there was any analytic meaning to it, does imply equally widespread recognition of the facts referred to. (c) Capital. Once more we have to report advance, but advance almost wholly unconnected with the ‘revolution’ in value and distribution. 14 Throughout the period, economists of all countries displayed a propensity to adhere to the deplorable ‘method’ of trying to solve problems by means of hunting for the meaning of words. There was a controversy about the concept of capital, or rather there were several of them, in particular one in which the chief figure was Böhm-Bawerk and another in which the chief figure was Irving Fisher. 15 All this must not blind us to the fact that serious and not fruitless analytic work was actually done, partly even through the instrumentality of that unprepossessing ‘method.’ We briefly note the main points. First, as we know, Fisher defined capital as the stock of wealth that exists at any moment. Analysis stands to gain from this in two ways: it always gains when added emphasis is placed on the fundamental distinction between funds and flows; and in this particular instance, as Fisher’s argument shows, it gained a stepping stone between the economist’s capital concept and the accountant’s capital account. Most economists continued, indeed, to define capital as a 13 This is his advantage over sponsors of depredation theories who must hold, if their theory is to be distinctive, that entrepreneurs had nothing at all to do with the emergence of the modern industrial apparatus except to plunder it and to sabotage its working: this is of course easy to refute both by theoretical and historical analysis. 14 The period’s analysis of capital formation (saving and investment) will be discussed in sec. 5 below and in the next chapter. 15 Böhm-Bawerk’s contribution to this activity is contained in the 2nd vol. of Kapital und Kapitalzins, and Fisher’s in Nature of Capital and Income, and in all the authors cited in both. Parallel to this capital controversy went the controversy on income (which experienced a curious revival in our own day). German contributions were particularly numerous but I shall cite only R.Meyer, Wesen des Einkommens (1887) and for the rest refer the reader to Fisher. Since income did not as yet play the role it came to play in the Income Analysis of today, we shall not bother about this concept further. Let me, however, recall Fetter’s concept of Psychic Income (Principles, ch. 6) and Fisher’s development of the same concept (op. cit. ch. 10). General economics 865 stock of goods but as a particular category of goods rather than as the total stock. 16 Second, though ‘physical’ concepts still enjoyed greater popularity, non-physical ones began to intrude. Capital tended to become a fund or a sum of assets consisting of money or evaluated in money. This tendency shows well in the work of Menger, who at first, in his Grundsätze, defined capital as ‘goods of higher order,’ but later on (in his contribution to the theory of capital, ‘Zur Theorie des Kapitals,’ which he published in Jahrbücher für Nationalökonomie, July 1888) as ‘productive property…[considered] as a sum of money productively used.’ This foreshadows later tendencies, but we shall not go on to show how this point of view cropped up here and there because not much came of it at the time except in uninfluential instances. 17 The conception of capital as the discounted value of streams of expected returns put in appearance, in the wake of the works of Böhm-Bawerk and Fisher, in the guise of value of capital rather than of capital sans phrase. But it should be clear that this makes less difference than some later authors were inclined to think. 18 Third, the majority of writers kept to the triad of factors—of which ‘capital’ was one—and to the parallelism between the items of this triad and the items of a corresponding triad of incomes (entrepreneurial income standing apart). This also applies to Marshall despite his formal introduction of a fourth factor, organization. Now, all the analysts who kept to that triad and to that parallelism had in fact a strong analytic interest—it is ridiculous to speak of a political one—to define capital in a way that would qualify it to stand, in production and distribution, on a par with the labor factor and the land factor. They also had an analytic interest that was indeed weaker but still strong to deal with capital as a homogeneous quantity, the increase and decrease of which would have an unambiguous meaning. Some achieved this, quite illogically, by putting a capital factor expressed in dollars alongside of a labor factor expressed in labor hours and of a land factor expressed in acres—a practice for which instances 16 A number also worried themselves—unnecessarily as I think—about the distinction between social and private capital. 17 We may, however, note in passing that monetary concepts of capital carry the no doubt minor advantage that they bear a relation to Capitalism which physical concepts per se do not. Outside of the circle of Marxists and of economists more or less influenced by Marxist doctrine, the term Capitalism was hardly ever used. Marx, as we know, defined as capitalist an economy in which physical capital is owned by people other than the workmen. One might think that this should have induced non-Marxist economists to find characteristics of their own for the capitalist economy. But this was not the case unless we are content with such labels as private-enterprise economy or private-property economy, which do not differ much from the Marxist one. 18 It is perhaps owing to Böhm-Bawerk’s not wholly felicitous way of expressing himself that his critics often failed to notice that this idea—that capital value is the result of a discounting process (‘capitalization’ in a special sense) is one of the main points in his capital theory. History of economic analysis 866 can be found even in the 1930’s. 19 In any case, however, it should be clear that, on principle, any such quantification of capital is quite inadmissible 30 long as capital means an assemblage of physical goods—factories, machines, lubricants, raw materials, and the like. Such an assemblage of goods can never be considered as a quantity in the ordinary sense of the term but only in the sense in which a matrix may be referred to as a ‘complex quantity.’ 20 Nor is this all: the same applies to the land and the labor factors that are not homogeneous quantities either. And still this is not all. The elements of these three ‘complex quantities’ or matrices are not clearly separated from one another but shade off into one another: a railroad track, though made by man, behaves like a natural agent; the skill of a lawyer is—or may be looked upon as—the result of ‘investments,’ and so on. In our own day all this has been brought home to us, with unsurpassable energy, by Professor Knight, who accordingly described ‘the entire notion “of factor of production”’ as ‘an incubus on economic analysis’ that ‘should be eliminated from economic discussion as summarily as possible.’ 21 Our agreement with him must, however, be qualified in two directions. In the first place, in asserting his perfectly correct view of the matter, Professor Knight was being seriously unjust to past performance and unnecessarily so. As has been explained above, the triad of factors is one of those things whose introduction constitutes one step in advance though, at a later stage of analysis, its elimination may constitute another. 22 In the second place, it would hardly be easy to eliminate the factor idea entirely. For the condemnation Professor Knight passes upon it may be expressed by saying that he admits an indefinite variety of factors 23 within which there is no economically significant difference. But, disregarding the difficulties of presentation that would arise from the adoption of this view, there are significant differences within the world of requisites of production that are not less real and important because no sharp dividing lines exist between them. Even an attempt to take account of these differences by reasoning on an ideally pure (and homogeneous) labor, an ideally pure (and homogeneous) natural agent, and 19 J.B.Clark’s more sophisticated attempt to quantify capital will be mentioned presently; it is not considered in this place in order not to divert the reader’s attention. 20 In order to understand this, the non-mathematical reader need only look up the first page of ch. 2 and the first page of ch. 6 of Bôcher’s Introduction to Higher Algebra, without troubling about what follows in either case. The term complex as used in this connection must not be confused with its meaning in the phrase ‘complex number.’ 21 The quotation is from Econometrica, January 1938, p. 81. 22 Professor Knight should be the first to recognize this, because the foremost early sponsor of the triad, J.B.Say, used it precisely for asserting the plurality of factors and the very view of distribution that Professor Knight himself adopts, namely, the view that ‘distribution’ is simply the pricing of productive services. The triad may have been a crude tool to use for these purposes but it certainly was an effective one. The other instances of serious injustice, to be mentioned presently, occur in Knight’s criticism of Böhm-Bawerk’s doctrine that has been closely followed. 23 In strict logic, the number of these factors would have to be infinite, for conceptually they form a continuum. General economics 867 an ideally pure (and homogeneous) type of capital good—say shovels, one exactly like the other—would hardly have to be listed among the most heinous of the offenses theorists have ever committed against realism. The reader should carefully observe, however, that this argument is not intended to carry us back to the standpoint of the economists alluded to at the beginning of this paragraph. All I wished to convey is that segregation of physical capital goods from labor and land is not inherently objectionable and that it may serve useful purposes in the analysis of structural relations within the economy. I did not wish to defend the particular purpose that was foremost in the minds of those economists, namely, the purpose of constructing an entity called (physical) capital, the price of whose services would constitute interest just as the price of the services of labor constitutes wages and the price of the services of natural agents constitutes rent. We are not concerned with interest just now. 24 But in order to avoid misunderstandings I want to say at once that I consider that theory of interest completely untenable 25 and the triad arrangement, so far as it serves the purposes of that theory, wholly unfortunate. However, though a majority of economists adhered to the triad schema, the tendency was away from it even among sponsors of ‘physical’ capital concepts. Menger’s concept of goods of ‘higher order’ (consumers’ goods being goods of the lowest order) has often been mentioned in this connection. But the strongest attack upon the triad came from Böhm-Bawerk. He not only destroyed, by one of the most brilliant of his many efforts in criticism, the theory of interest alluded to above, but he also fought the idea that ‘physical’ capital is a distinct factor of production, capable of being treated on the same plane with the ‘original’ factors, labor and natural agents. 26 Both the analytic motive and the wisdom of this reduction of the triad to a dyad are open to doubt but, so far as it exerted any influence at all, it certainly served to discredit the triad. This dyad must, of course, be distinguished from a different one that is more in line with Professor Knight’s views and became more and more popular 24 As has been pointed out by Professor von Hayek (The Pure Theory of Capital, p. 5), capital analysis has been crippled all along by too exclusive emphasis on the problem of interest that tended to crowd out all other problems of physical capital. In the work cited, the reader finds plenty of examples of these other problems. 25 Of course, in the economic system everything is related to everything. Therefore the statement above does not amount to saying that the structure of the set called physical capital is irrelevant to interest. 26 It is therefore regrettable to find that a theorist of Mr. Kaldor’s rank should have expressed the exactly opposite view of Böhm-Bawerk’s theory of capital in sentences that clearly violate both the letter and the spirit of Böhm-Bawerk’s analysis (Econometrica, April 1938, p. 163). And it is surprising that he should have supported this view by the question: ‘if this [namely, to show that capital is a distinct factor of production and that capital and interest can be brought into the framework of production and distribution theory on the same plane as labor and land] is not what the theory was aiming at, what was its purpose?’ A colleague of Professor von Hayek should not have found it difficult to answer this question. For the rest, I beg to remind Mr. Kaldor of the fact that Böhm-Bawerk was the author of a theory of interest that is most appropriately called a premium (Agio) theory. History of economic analysis 868 as that period wore on: an increasing number of economists decided to assimilate natural agents with capital goods on the ground that the former’s peculiarities, if any, did not warrant separate treatment. 27 Finally, we must notice the boldest of all attempts that has ever been made to quantify physical capital, J.B.Clark’s. He also included land in his concept of capital goods. But alongside this concept he set up another, Pure Capital, that was to denote a fund of abstract productive power. Had he defined this pure capital in monetary (or any value) terms, the construction would be readily understandable. But he thought of it as a physical thing, the meaning of which he tried to convey by analogies. A waterfall consists, in any given fraction of a second, of individual drops of water, but these individual drops pass on and are replaced by others and yet the waterfall as such remains the same waterfall. Similarly, pure capital consists at any moment of individual capital goods; those individual goods (or most of them) are indeed destroyed and replaced by others, yet pure capital as such remains (or may remain in a steady state) the same pure capital. Of course, it is possible to express in this way any set of elements, such as population, that renews itself 28 so long as one does not delude oneself into believing that such a construction will solve any problems. Clark, however, allowed himself to be so deluded and confidently believed that he had established the existence of a permanent factor of production, capable of yielding a net income. Fourth, the event in this field that attracted most attention internationally, and has ever since proved a fertile source both of controversy and of positive work, was the publication of Böhm-Bawerk’s theory of capital. Since Jevons had anticipated the main ideas, it will be convenient to start from his chapter on the theory of capital (Theory of Political Economy, ch. 7). There, Jevons declared that he was going to follow the ‘classic’ (Ricardian) tradition with which he professed himself in fundamental agreement. 29 Noticing, however—as had Marx—that Ricardo’s capital concept embraced such disparate things as wage goods on the one hand and plant, equipment, and raw materials on the other, he suggested that the term capital should be confined to the wage goods only, apparently for the same reason that induced Marx to separate 27 Such an arrangement, according to purpose, may or may not be convenient. And this is all that should be said about it. Actually there was a prolonged discussion on whether inclusion of land in capital was ‘right’ or ‘wrong,’ exactly as if a real issue had been involved. The interest that economists displayed—in this instance as in so many others—in a wholly imaginary ‘problem’ is, however, the only thing worth noticing about this discussion, and we need not stay in order to examine arguments or counter-arguments. 28 F.Divisia called such sets ensembles renouvelés. 29 Considering the essentially essayistic or ‘sketchy’ character of the whole book, I venture to suggest the hypothesis that, when starting to write on the subject of capital, Jevons realized that it had nothing to do with the department of theory that he believed himself to have revolutionized. He therefore actually intended to deal with capital on ‘classic’ lines. As his ideas developed, he cannot have failed to notice that he was chalking out novel ones. But careless as he was, he allowed the introduction to stand as it had been written before he fully knew what he was going to say. General economics 869 these wage goods as variable capital from the rest, the constant capital. Asking himself the question how best to define the distinctive function of this wage-good capital, he very naturally hit upon the answer, which was indeed anything but new, that it served to support labor 30 —had he wished he might just as well have said to exploit labor—during the time it takes to finish the job on which workers are being actually employed. But at this point another current of ideas sets in that was not explicitly present in the argument of the Ricardians. 31 Capital, so Jevons tells us, ‘allows us to expend labour in advance.’ And command over wage-good capital is therefore a prerequisite for introducing ‘whatever improvements in the supply of commodities lengthen the average interval between the moment when labour is exerted and its ultimate result or purpose accomplished’ (p. 248; Jevons’ italics), for example, for building a railroad. The time we can ‘finance’—which in the Jevonian argument is the same thing as the time for which we have enough wage goods to support the labor that, directly and indirectly, is employed in building the road—is therefore one of the circumstances that restrict our choice between methods of production, hence a determinant of the resulting product. This time, which now enters both the production process and the concept of capital, must, however, be thought of to include not only the time of construction and production but, in case the product consists of durable goods or of a stream of goods, also the time of ‘uninvestment’ We are thus led to distinguish between ‘amount of capital invested’ and ‘amount of investment of capital,’ the latter being determined ‘by multiplying each portion of capital invested at any moment by the length of time for which it remains invested’ (p. 249). The well-known explanatory diagrams follow, as well as explanatory examples. This is, or suggests, a novel conception of the time-structure of the productive apparatus. The reader himself would do well to look up Jevons. In addition, I venture to ask him two things: to disregard details and to concentrate on the fundamental idea; and to admit that so far this idea is not obvious and complete nonsense. 32 Reasons have been offered for believing that Böhm-Bawerk’s theory of capital was subjectively original. But it will be convenient to treat this theory as if it were nothing but an elaboration of the Jevonian ideas. 33 To begin with we have to discard the difficulty that arises from the fact that Böhm- Bawerk, though his subsistence fund plays exactly the same role as 30 Only labor—it was a strange lapse for the great foe of the labor theory of value to overlook, in this argument, all other requisites of production. 31 It may, however, have been induced by other writers, such as Hearn, whose Plutology (1863) Jevons quoted in this chapter as he did in others. 32 This request may sound strange but is amply motivated by some arguments proffered in the discussion of the 1930’s. I might even add another request, viz. to admit that ‘duration,’ in the sense that is obvious from our text, is not just a technical detail without economic relevance. 33 Its affinities with Ricardian and Marxian ideas are, however, obvious (see above, ch. 5. sec. 4). History of economic analysis 870 Jevons’ wage-good capital, 34 defined his capital as intermediate products. We accept Jevons’ concept but cannot dismiss this point without emphasizing Böhm-Bawerk’s conception of intermediate products (such as tools and raw materials) as consumers’ goods in the process of maturing (Taussig’s ‘inchoate wealth’). There is depth in this conception that is not found in Jevons. 35 Next, recalling the emphasis placed by Jevons on the relation between the stretch of time that his wage-good capital allows us to ‘finance’ and the use of superior methods of production, we find the same idea embodied with added emphasis in Böhm-Bawerk’s concept of the ‘roundabout process of production’ (Produktionsumwege), that is, production of consumers’ goods via the production of intermediate goods. The extra productivity (Mehrergiebigkeit) of superior technology is linked so closely with the insertion of additional stages of production and this, in turn, with the extension of the time during which a given investment remains locked up that we are set wondering whether, leaving aside relatively unimportant exceptions (which he went out of his way to recognize), Böhm-Bawerk was in a position to admit the occurrence of improvements that shorten that time instead of extending it. 36 He postulated, 34 Böhm-Bawerk’s subsistence fund even suffers from the same defect—that was later on removed by Wicksell—namely, that it is merely a fund for supporting labor (conceived as homogeneous exactly like Ricardo’s) and not also for the payment of the services of natural agents (possibly also of capital itself). But the reason for this was merely a desire to simplify a problem that taxed his technical aptitude as it was. 35 Also, something is to be said for the other side of Böhm-Bawerk’s medal. His intermediate products are inchoate consumers’ goods. But, looked at from the other side, they are accumulated productive services (as they had been for the ‘classics’—hoarded labor). This raises indeed the question of the ‘resolution’ of capital into the ‘services of the two original factors,’ of which Böhm- Bawerk made so much and of which his critics have made still more. Owing to the fact that no intermediate product can, since gorilla days, ever have been produced by labor and services of natural agents alone, such a resolution may not be admissible. But neither is it necessary, as will be shown near the end of this section. 36 In view of the unending stream of criticisms that have been leveled at Böhm-Bawerk on this score, two points should be borne in mind. First, as we shall see presently, Böhm-Bawerk characterized his roundabout process by a figure that does not represent pure time. His ‘period of production’ may increase when the clock time taken by the productive process does not increase— this is the case of ‘broadening’ vs. ‘lengthening’ the capital structure—or even when it decreases. Second, Böhm-Bawerk should have made it clear that his reasoning applies only to ‘improvements’ that have been from the first within the producers’ technological horizon. Inventions that widen this horizon should be excluded as they always are in the ordinary theory of production for which the technological horizon (‘state of the arts’) is a datum. But it is the intrusion of inventions—of methods of production that are new, not in the sense that they had not been operated before but in the sense that they had not been known before—which will be seen, on examination, to provide the cases where the adoption of ‘superior’ technique is attended by a shortening of the ‘period of production’ even in Böhm-Bawerk’s sense. So long as we move within a given and constant technological horizon, Böhm-Bawerk’s postulate is far from absurd. In order to show this, let us start from a state in which the economy is in perfect (competitive) equilibrium; and General economics 871 . instrumental value of their theories as applied to the capitalist process. History of economic analysis 862 others. Such theories enjoy wide currency in the popular economics of our time. Our. problems of the profits of enterprise, yet bears on them and so may be mentioned here: F.Lavington, ‘An Approach to the Theory of Business Risks,’ Economic Journal, June 1925. 8 One of the. in the Vision of the economic process that causes economists to emphasize the functional aspect at the expense of others in an analysis of a historical development. General economics 863 more