The Average Period of Production: History of an Idea

Abstract

Austrian capital theory tried to capture the intuitive and basically undeniable importance that time plays in economic life, but arguably was diverted down a blind alley with Böhm-Bawerk’s average period of production, a purely physical measure of 'roundaboutness' -- the length of the production process. Such a measure is a chimera. But the intuition is strong and the idea survived and reappeared at various points in the history of capital theory. Almost unknown to economists an alternative value measure of roundaboutness existed at least since Hick’s formulation of his average period (AP) in 1939, which, coincidentally was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him duration (D). Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what it was that the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle.

Keywords: capital theory, roundaboutness, average period of production, duration, modified duration

JEL Classification: B22, E23