Macaulay’s D Better Captures What Austrians Have Struggled to Express in their Capital Theory

In the esoteric history of capital theory, as originated by Carl Menger and William Stanley Jevons and developed further at great length by Eugen von Böhm-Bawerk, one can find the concept “average period of production” (henceforth APP). It was formulated by Böhm-Bawerk to give concrete expression to the notion of “roundaboutness”—the idea that production projects that “take more time” will, if wisely chosen, be more productive than those that are shorter in duration.

For the Austrians, roundaboutness was a crucial manifestation of Adam Smith’s division of labor, thus a key ingredient in the explanation of the prosperity of capital-using economies. Though the idea of roundaboutness continued to exert some influence on economic thinking over the years, the APP all but disappeared. It was, for a while, a matter of some energetic controversy, featuring prominently in the debate between Böhm-Bawerk and his critics, a theme in what became known as one of the famous “capital controversies” that mark significant episodes in the history of capital theory. It had a rocky start and went downhill from then.

At first, it seems to be an intuitive concept. Given that production takes time, it would seem there had to be an APP. But intuition runs into serious difficulties the moment one tries to formulate this idea more precisely and to measure it. Indeed, serious problems arose as soon as Böhm-Bawerk proposed a measure of the APP. His specific formulation was decisively criticized. Nevertheless, the idea of “time embedded in production” continued to exercise the imagination of capital theorists and those working in related areas. Time is an important, though neglected, aspect of production, and this influences how production is treated in economic models. The (modern) Austrians continue to use the idea in their analyses of economic cycles. The APP makes a (sometimes implicit) appearance through the Mises–Hayek, or Austrian, business-cycle theory (ABCT). This theory has been influential to a greater or lesser degree since the 1930s and the Great Depression, with a notable renewed interest since the 2008 financial crisis. . . .

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 APP. Böhm-Bawerk attempted a purely physical measure of roundaboutness to capture 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 has existed at least since Hicks’s formulation of his average period in 1939, which, coincidentally, was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him “Duration.” Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle. It remains to be seen whether this will provide a basis for future work along these lines.


—Peter Lewin and Nicolás Caachanosky, “The Average Period of Production: The History and Rehabilitation of an Idea,” Journal of the History of Economic Thought 40, no. 1 (March 2018): 81-82, 96.