Roundaboutness Is Not a Mysterious Concept: A Financial Application to Capital-Theory

Abstract

We apply the EVA terminology to the concepts of roundaboutness and average period of production in capital theory. By doing this we show that these terms have a clear and well understood financial interpretation. A financial application to capital theory helps to clarify obscure and controversial economic terms. We then extend our financial interpretation of roundaboutness and average period of production to the Austrian business cycle theory and show how this approach can be used to shed light on the subprime crisis.

Keywords: roundaboutness, average period of production, duration, modified duration, Macaulay duration

JEL Classification: B53, E23, E30