The “Hayekian Triangle” Is a Faulty Tool Because “Stages of Production” Is a Confused Concept

Although the concept of “stages of production” is often illustrated by an example; e.g., mining, refining, manufacturing, distributing, and retailing, this is not analytically satisfactory. These are but arbitrary categories. Any specific production process can be broken down into ever more discrete stages, or combined into fewer of them. The limit to the number of stages is set only by the number of individual human actions involved. Thus, the number of stages depends upon the judgment of the individual decision maker analyst. This is not to deny that the concept may be useful in providing the flavor of production through time, but it is not analytically sound in the sense necessary to be measured along the horizontal axis of a triangle that purports to represent the structure of production from an analytical (in this case, geometrical, and, therefore, mathematical) perspective.

Further, these examples are intrinsically confusing. Consider steel in this regard. If anything “deserves” to be located in an early stage of production, this item certainly does: it is the backbone of so much else, and these other productions cannot take place until the steel comes along on line. However, steel also occurs in very late orders of production. Indeed, steel may be found throughout the structure of production. For example, it is used pretty much at every stage in the production of bread, and its delivery to the final consumer. So, where does steel properly go? At an early stage of production? All through out?

—William Barnett II and Walter Block, “On Hayekian Triangles,” Procesos de Mercado: Revista Europea de Economía Política 3, no. 2 (Autumn 2006): 59-60.