Extracting Drinking Water Was a Favorite Böhm-Bawerkian Example of “Roundabout Production”

Most important of all, time was a key factor in the decisions made by business firms about how to produce goods and services. Firms might use production techniques that yield goods relatively quickly; unfortunately, these methods usually yield few goods. Alternatively, the firm could use more roundabout techniques of production, wait longer for the goods to be produced, and in the end get more goods. To take one of Böhm-Bawerk’s favorite examples, we can extract drinking water from a spring either by hand, by bucket, or by pipes. Each successive method of production is more roundabout; and each method is also more efficient and yields more water.

Roundabout production means using more tools or capital to produce final goods for the consumer, producing more intermediate goods, and having production take place in many different stages. . . .

However, the notion of roundabout production contains a key insight — production involves a trade-off between having things soon, but having few things, and having more things, but having them in the distant future. One could have more goods in the future by giving up consumption for a long period of time; or one could consume goods now, but have fewer goods over the long haul.

Böhm-Bawerk analyzed this choice in terms of the subjective time preferences of economic agents. People decided whether they wanted goods now or whether they preferred to give up something now in order to get more in the future; and business owners determined whether more or less roundabout techniques are employed in producing goods based on whether they wanted to make some money now or more money in the future.

This idea of subjective time preference also provides the basis for Böhm-Bawerk’s theory of interest. Böhm-Bawerk first laid the groundwork for his theory of interest by presenting and critiquing all previous theories. This was done in Volume 1 of his (1884) Capital and Interest, which showed that prior attempts to explain interest based on the productivity of capital, the abstinence from consumption, or the exploitation of workers, lacked any merit and made little sense. Volume 2 (1889) then went on to present a theory of interest based on time. It also tried to show that a positive rate of interest was inevitable and therefore justified.

—Steven Pressman, Fifty Major Economists, 2nd ed. (London: Routledge Taylor and Francis, 2006), 122-123.