Roundaboutness
Encyclopedia
Roundaboutness, or roundabout methods of production, is the process whereby capital goods are produced first and then, with the help of the capital goods, the desired consumer goods are produced.
The term was devised by the Austrian School
economist Eugen von Böhm-Bawerk
, who maintained that it was consumer demand, and not necessarily the supply of savings, that would determine the capital investment in any industry.
The Austrian
economist Eugen von Böhm-Bawerk
argued against both the Ricardian labor theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel
, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the labour theory of value point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed was the process itself, the roundaboutness, which necessarily involves the passage of time
.
Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value. This makes it unnecessary to postulate exploitation
in order to understand the return on capital, although how the length of the production process in and of itself produces value remains unclear, as if Böhm-Bawerk's idea were correct, the more inefficient a capitalist manufacturer, the longer their production process and the more profit they would accrue. When in fact the additional costs they incur through their inefficient production process would prevent them from selling their output at the market price. Rather than accruing higher profits therefore, they would accrue none at all. In reality though time and profit do not have to be related in direct proportion across different industries; within a certain industry, the passage of time will allow for value to be added in the production process, in the absence of exploitation, while inefficient firms with inferior production systems may contribute the same value-added to output as superior firms with the same given inputs, but just in a longer period of time. Inefficiency therefore does not result in superior performance for a firm, but the passage of time that is necessary for all production processes to occur nevertheless is that feature of the process that explains value-added, not exploitation of labor.
The concept has similarities to the later Keynesian theory developed in the 1930s. A disproof of roundaboutness in economies with compound interest was presented by Paul Samuelson
during the Cambridge capital controversy
.
The concept, interpreted as rising technical composition of capital, is also used by some Marxian
authors.
The term was devised by the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
economist Eugen von Böhm-Bawerk
Eugen von Böhm-Bawerk
Eugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of the Austrian School of economics.-Biography:...
, who maintained that it was consumer demand, and not necessarily the supply of savings, that would determine the capital investment in any industry.
The Austrian
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
economist Eugen von Böhm-Bawerk
Eugen von Böhm-Bawerk
Eugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of the Austrian School of economics.-Biography:...
argued against both the Ricardian labor theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the labour theory of value point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed was the process itself, the roundaboutness, which necessarily involves the passage of time
Time
Time is a part of the measuring system used to sequence events, to compare the durations of events and the intervals between them, and to quantify rates of change such as the motions of objects....
.
Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value. This makes it unnecessary to postulate exploitation
Exploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...
in order to understand the return on capital, although how the length of the production process in and of itself produces value remains unclear, as if Böhm-Bawerk's idea were correct, the more inefficient a capitalist manufacturer, the longer their production process and the more profit they would accrue. When in fact the additional costs they incur through their inefficient production process would prevent them from selling their output at the market price. Rather than accruing higher profits therefore, they would accrue none at all. In reality though time and profit do not have to be related in direct proportion across different industries; within a certain industry, the passage of time will allow for value to be added in the production process, in the absence of exploitation, while inefficient firms with inferior production systems may contribute the same value-added to output as superior firms with the same given inputs, but just in a longer period of time. Inefficiency therefore does not result in superior performance for a firm, but the passage of time that is necessary for all production processes to occur nevertheless is that feature of the process that explains value-added, not exploitation of labor.
The concept has similarities to the later Keynesian theory developed in the 1930s. A disproof of roundaboutness in economies with compound interest was presented by Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
during the Cambridge capital controversy
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
.
The concept, interpreted as rising technical composition of capital, is also used by some Marxian
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
authors.