On the Necessity of Organizing Production Around the Needs of Consumers, Not Around the Needs of Producers

 One of the great ideas of liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. 

This position follows with compelling logic from the consideration that all production is carried on only for the sake of consumption, that it is never a goal but always only a means. The reproach made against liberalism that it thereby takes account only of the consumer viewpoint and disdains labor is so stupid that it scarcely needs refutation. Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress. 

—Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006), 164-165.

The “Correct” Length of the Roundabout Method of Production Is Determined by the Size of the Subsistence Fund or the Period of Time for which this Fund Suffices

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides laborers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. The population would in any case have an interest in stretching the roundabout method of production as long as possible, as every “cleverly chosen” lengthening of the roundabout method of production results in increased output. The extent to which the roundabout method of production can be lengthened is restricted, however, by the limited nature of the subsistence fund. The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. 

It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices. If a shorter roundabout method of production were begun with a subsistence fund that suffices for one year, then the output would be smaller than it could have been. However, if the roundabout method of production is too long, then it could not be completed without interruption. 

—Richard von Strigl, Capital and Production, trans. Margaret Rudelich Hoppe and Hans-Hermann Hoppe, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2000), 6-7.

In the “Mengerian” Approach to Capital and Interest the ENTIRE Explanatory Burden Is Assigned to Consumer Valuations

In that controversy [Cambridge Capital Controversy] mainstream neoclassical theory was under relentless attack by economists seeking to reverse the marginalist revolution and to return to the classical perspective. The critics, especially insofar as they were following Sraffa (1960), argued for an economics in which the objective conditions of production determine economic events, with virtually no role assigned to consumer demand. We wish to emphasize that what was overlooked in that debate was the existence of a third theoretical approach (a “Mengerian” approach) to capital and interest issues, in which the entire explanatory burden is assigned to consumer valuations.

—Israel M. Kirzner, author's introduction to Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 5.

The Worst Outgrowth of the Use of the Mythical Notion of Real Capital Was the Spurious Problem of the Productivity of Real Capital

 Mises’s adoption of Menger’s concept of capital made it possible for him to avoid the pitfalls in interest theory that stem from the capital-income dichotomy. In everyday lay experience the ownership of capital provides assurance of a steady income. As soon as capital is identified as some aggregate of factors of production, it becomes tempting to ascribe the steady income that capital ownership makes possible as somehow expressing the productivity of these factors. This has always been the starting point for productivity theories of interest. Knight’s permanent-fund-of-capital view of physical capital is simply a variant of those theories that view interest as net income generated perpetually by the productivity of the abstract capital temporarily embodied in particular lumps of physical capital. The capital stock, in this view, is a permanent tree that spontaneously and continuously produces fruit (interest). Mises was explicit in concluding that this erroneous view of interest results from defining capital as an aggregate of produced factors of production. “The worst outgrowth of the use of the mythical notion of real capital was that economists began to speculate about a spurious problem called the productivity of (real) capital.” It was such speculation, Mises made clear, that is responsible for the “blunder” of explaining “interest as an income derived from the productivity of capital.”

—Israel M. Kirzner, “Ludwig von Mises and the Theory of Capital and Interest,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 143-144.

In Theorizing on Capital, Hayek Uses the Wieserian Device of a COMMUNIST SOCIETY (!) Subject to an Omniscient Dictator

But the Mengerian tradition was developed in very different directions by his brilliant followers, Eugen von Böhm-Bawerk and Friedrich von Wieser, and by their own students and followers. Without tracing out this doctrinal development in any detail, suffice it to say that today the term “Austrian economics” is used to designate two very different paradigms. One derives from Wieser and may be termed the “Hayekian” paradigm, because it represents an elaboration and systematization of the views held by F. A. Hayek, a student of Wieser’s at the University of Vienna. Although it is yet to be generally recognized by Austrians, Wieser’s influence on Hayek was considerable and is especially revealed in the latter’s early work on imputation theory, which sought to vindicate the Wieserian (as against the Böhm-Bawerkian-Misesian) position that the imputation problem must be solved within the context of an exchangeless economy subject to the control of a single will yet somehow able to calculate using (subjective) value as the “arithmetic form of utility.”³

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³That there is no possibility of economic calculation and rational or purposeful allocation of resources within an economy based on division of labor where one will alone acts is, of course, the essence of Mises’s critique of socialism. Perceiving the unbridgeable gulf between his own and Wieser’s position on the possibility of directly imputing values to higher-order goods in the absence of monetary exchange, Mises, in his Notes and Recollections wrote that “[Wieser’s] imputation theory is untenable. His ideas on value calculation justify the conclusion that he could not be called a member of the Austrian School, but rather was a member of the Lausanne School.”

Also, Hayek, explicitly following Wieser, conceives the main problem of capital theory to be to explain how it is that the nonpermanent resources constituting the capital stock can yield a permanent net (physical) return. This Wieser-Hayek method of describing the quaesitum [something sought for, end or objective] of capital theory loads the dice in favor of explaining the interest return on capital in terms of productivity (rather than time-preference) considerations and, at the same time, diverts attention from what Böhm-Bawerk brilliantly perceived to be the fundamental question that must be satisfactorily answered by a correct theory of interest and was so answered by Mises’s pure time-preference theory: What is the cause of the difference in value between goods which differ only in their temporal availability? 

In theorizing on capital, moreover, Hayek makes significant use of the Wieserian device of a communist society subject to the control of an omniscient dictator, a device which reflects a paradigmatic lack of concern with problems of monetary appraisement and calculation. 

—Joseph T. Salerno, “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6, no. 2 (1993): 114, 114n. 

De-Homogenizing Mises and Hayek: Hayek Favors the Productivity Explanation of Interest Instead of the Fetter-Mises Subjectivist Theory

A major reason for the neglect of this model is that in the United States, where the Austrian School experienced a renaissance in the second half of the twentieth century, the scholars adopted the Fetter-Mises subjectivist theory of interest instead of a productivity theory. The time preference theory of interest was endorsed by Rothbard ([1962] 2009), Garrison (1979), Kirzner (1993), and other authors (see Pellengahr 1996). Hayek (1941), on the other hand, very explicitly chose the productivity explanation of interest, even though he thought that time preference could also play a (minor) role in the determination of interest.³¹ As a result, his model—interpreted by Hayek as a validation of the productivity theory of interest—was largely overlooked.

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³¹ “Of the two branches of the Böhm-Bawerkian school, that which stressed the productivity element almost to the exclusion of time preference, the branch whose chief representative is K. Wicksell, was essentially right, as against the branch represented by Professors F. A. Fetter and I. Fisher, who stressed time preference as the exclusive factor and an at least equally important factor respectively.” (Hayek 1941, 420)

—Renaud Fillieule, “The Macroeconomic Models of the Austrian School: A History and Comparative Analysis,” Quarterly Journal of Austrian Economics 22, no. 4 (Winter 2019): 558-559.