A Robinsade For Austrian Capital Theory

I take the following long quote from Bohm-Bawerk.

"The entire sum of originary productive forces at Crusoe’s disposal … is a day’s labor which we shall assume to be a 10-hour workday… Let us assume that the fruit harvest [is] enough to enable our castaway to gather the subsistence minimum in nine hours a day, and enough in 10 hours to furnish him with adequate sustenance for complete health and vigor... Crusoe now has a choice between two lines of conduct. One alternative is ... to consume each day the fruits gathered by a full 10 hours’ work... The other alternative is to restrict himself to the subsistence minimum… In that event – but only in that event – he has a tenth hour open in which he makes hunting equipment for future use... Before there can be any real formation of capital, the productive forces necessary to its production must be saved up at the expense of the enjoyment of the moment.

...The ‘expense of the enjoyment of the moment’ need not always entail downright privation. ...If Crusoe’s labor were somewhat more productive, ...the choice offered might be between ‘adequate supply’ and ‘bounteous fare’. It is not a matter of the absolute magnitude of the minimal claims to enjoyment of the moment, but of their relative magnitude in comparison with ‘income’... The essential point is, that the current endowment of productive forces be not devoted entirely to the enjoyment of the ‘moment’ – the present period – so that a portion of them may be reserved for the service of a future period. Behavior of that kind must unquestionably be called a genuine saving of productive forces.

...It is [productive forces] and not the capital goods themselves which are saved up. We are saving of consumption goods, thereby saving up productive forces and thus can in the end use the latter in order to produce capital goods... To complete the act of forming capital it is of course necessary to complement the negative factor of saving with the positive factor of devoting the thing saved to a productive purpose or, in other words, to endow it with the status of an intermediate product... [O]ur Crusoe has continued throughout one month to consume each day only as much fruit as he could gather in nine hours and has devoted the tenth hour of each day to making hunting equipment. As a result ... he has a bow and some arrows and the possibility of obtaining his subsistence with far greater ease and in much greater abundance than before...

...He must choose another possibility if he is to preserve his capital at its previous level. He must devote at least one hour of his daily allotment of 10 working hours to the rehabilitation of his working equipment and may not spend more than a daily maximum of nine hours on hunting and fruit gathering... In order to preserve capital in status quo ante a certain quantity of the productive forces of the current period must be assigned to the service of the future. And that quantity must be at least equal to the total product of the productive forces of prior periods which is consumed during the current period... Consumption during the current period of the yield of all current and prior productive forces combined, must not exceed the total products that can be derived from the productive forces which accrue afresh in the current period." Bohm-Bawerk (1959: 103-104, emphases in original)

Difficulties arise in this story from applying it to a modern economy and addressing questions of how much. Crusoe’s labor is supposed to represent heterogeneous productive forces. The consumption goods saved and the intermediate capital goods produced stand in a certain ratio, as given by prices. Likewise, the ratio of the consumption goods given up in the current period and those thereby obtained in the future is a kind of price, that is, an interest rate. In a more fully elaborated story, more future-oriented consumers save more, drive the interest rate down, and incentivize managers of firms to adopt more capital-intensive, more roundabout techniques of production. This story cannot be sustained, as is demonstrated, for example, by the triple-switching example in Schefold (1980: p. 170).

References

• Bohm-Bawerk, Eugen von. 1959. Capital and Interest: Volume II: Positive Theory of Capital (Trans. By George D. Huncke). South Holland: Libertarian Press.
• Schefold, Bertram. 1980. Fixed capital as a joint product and the analysis of accumulation with different forms of technical progress. In L. L. Pasinetti, ed., Essays on the Theory of Joint Production, New York, Columbia University Press.