Wicksell, Åkerman and von Stackelberg Carried on Böhm-Bawerk’s Theory by Dropping Several of His Restrictive Assumptions

Wicksell and Åkerman carried on von Böhm-Bawerk’s theory by successively dropping several of the restrictive assumptions mentioned above. K. Wicksell in his book Über Wert, Kapital und Rente [1893] introduced a second factor of production, land, and at the same time a second consumption good. In Vorlesungen über Nationalökonomie, Vol. I [1913] he used compound interest instead of simple interest calculation. This difference is important since in this case — contrary to von  Böhm-Bawerk’s model presented above — the length of the average production period is not independent of the interest rate. Consequently, Wicksell did not employ the concept of the average production period. 

While von Böhm-Bawerk and Wicksell were concerned with continuous-input-point-output models, Åkerman [1923/24] analyzed the point-input-continuous-output case which applies to the most important kind of capital goods, namely durable capital goods. 

We shall base our presentation on the further development of Austrian capital theory not on the contributions of Wicksell and Åkerman, but on an article by von Stackelberg [1941/43], which can be viewed as a culmination of the traditional Austrian theory. In this article not only the questions put forward by Wicksell and Åkerman are analyzed, but the problem of recycling of goods is dealt with as well. Despite its fundamental importance for the development of Austrian capital theory this article is, as far as we know, entirely unknown in the English speaking and almost entirely unknown in the German speaking literature. Since it appeared only in the German languarge, it will be inaccessible for most readers. For this reason, as well, it seems useful to present it here in greater detail. 

Von Stackelberg like von Böhm-Bawerk analyzed a stationary ecoomy. He dropped the last four assumptions of von Böhm-Bawerk’s model, A2.8-A2.11. Thus, he showed how recycling, durable capital goods and compound interest calculation can be taken into account and how the controversial concept of the average production period can be dispensed with.

—Malte Faber, Introduction to Modern Austrian Capital Theory, Lecture Notes in Economics and Mathematical Systems 167 (Berlin: Springer-Verlag, 1979), 20-21.

The First-Round Effect May Explain the Formation of Asset-Price Bubbles, E.g. the 2000s Real Estate Booms in Spain and in Ireland

The first-round effect may also explain the formation of asset-price bubbles since they are the best evidence that prices do not rise evenly and proportionally, as in Friedman’s notion of helicopter money, but rather unevenly and disproportionately, as described by Cantillon and Austrian economists. Indeed, if money was neutral and the quantity theory of money held, asset-price bubbles—meaning the relative overvaluation of particular asset prices—would not exist. They occur due to the expansion of credit and its continuous inflow to a given asset market, in line with the Cantillon effect. Importantly, there are strong arguments that asset-price bubbles threaten financial stability and that they can lead to a deeper recession in comparison to a business cycle not accompanied by a financial bubble. Meanwhile, central banks, including the ECB, do not take into account asset-price inflation, instead focusing on price stability narrowly defined as stability of the CPI. Hence, it seems that central banks should change their stance on this matter and also monitor asset prices—otherwise, there is a risk of conducting an overly loose monetary policy, leading to imbalances in the economy and financial instability despite stable consumer prices and thus an apparent neutrality of money (as the proposals for price stabilization are based on the notion of neutrality of money). 

This is exactly what happened in the euro area in the 2000s. Although the CPI rate did not significantly exceed the ECB’s target in the first half of the decade, the loose monetary policy of the central bank (interest rates too low for too long, at least for some countries of the euro area) led to a business cycle, and real estate booms in countries of the euro area where the growth in the money supply was the highest (or where the new money mainly went), in particular Spain and Ireland.

—Arkadiusz Sieroń, “Hayek and Mises on Neutrality of Money: Implications for Monetary Policy,” in Banking and Monetary Policy from the Perspective of Austrian Economics, ed. Annette Godart-van der Kroon and Patrik Vonlanthen (Cham, CH: Springer International Publishing, 2018), 157-158.

The Term “Neutral Money” Gained Recognition in the English Language Literature through Hayek’s Publications

The neutrality of money means the lack of effects of monetary phenomena on real variables.³ There are a few different notions of neutrality of money, depending on how one defines “monetary phenomena.” Probably the most important notion, which we call “dynamic neutrality,” implies that changes in the supply of money only affect nominal variables, while real variables, such as relative prices, production, or employment, remain unaffected. Conversely, the non-neutrality of money means changes in the money supply have an impact on real phenomena.

The concept of neutrality of money is a central economic issue widely discussed from the very beginning of economics as a science. It is sufficient to mention the quantity theory of money formulated at first by Locke, which basically states that the level of prices is always in proportion to the quantity of money. It was probably formulated and believed by classical economists as a reaction against mercantilists’ inflationism, but that reaction was exaggerated and hampered the genuine development of monetary economics. The quantity theory of money is true but only from the point of view of comparative statics. One economy with twice the money supply of another but with no other differences should have twice as high a general price level. However, it does not follow that doubling the money supply only leads to doubling all prices. For the neutrality of money to hold from the dynamic perspective, several conditions must be fulfilled.⁵

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³ The term “neutral money” gained recognition in the English language literature through Hayek’s publications. However, it was in use earlier among Continental economists.

⁵ According to Hayek (2008a [1935]), there are three conditions for the neutrality of money: constant total money stream, perfectly flexible prices, and long-term contracts based on a correct anticipation of future price movements.

—Arkadiusz Sieroń, “Hayek and Mises on Neutrality of Money: Implications for Monetary Policy,” in Banking and Monetary Policy from the Perspective of Austrian Economics, ed. Annette Godart-van der Kroon and Patrik Vonlanthen (Cham, CH: Springer International Publishing, 2018), 154.

A Serious Shortcoming of Böhm-Bawerk’s Theory of Capital Was Its Limitation to Circulating Capital Only

A serious shortcoming of Böhm-Bawerk’s theory of capital was its limitation to circulating capital only. Not surprisingly, several attempts were made by economists working in the Austrian tradition to overcome this limitation and to extend the analysis to fixed capital (see, in particular, Åkerman, 1923-24; Wicksell, 1923; and Hayek, 1941). Studying the problem of fixed capital within an Austrian framework of the analysis was also a major concern of John Hicks in Capital and Time (1973).

According to Hicks, fixed capital goods ‘are “durable-use goods”; their essential characteristic is that they contribute, not just to one unit of output, at one date, but to a sequence of units of output, at a sequence of dates.’ Because fixed capital gives rise to intertemporal joint production, the flow input-point output conception underlying Böhm-Bawerk’s approach to capital theory has to be replaced by that of ‘flow input-flow output’ processes. As Hicks put it:

While the old Austrian theory was ‘point output’ (its elementary process having a single dated output), we shall use an elementary process that converts a sequence (or stream) of inputs into a sequence of outputs. Our conception of capital-using production is thereby made much more general.

—Christian Gehrke and Heinz D. Kurz, “Hicks’s Neo-Austrian Theory and Böhm-Bawerk’s Austrian Theory of Capital,” in Capital, Time and Transitional Dynamics, ed. Harald Hagemann and Roberto Scazzieri, Routledge Studies in the History of Economics 96 (London: Taylor & Francis e-Library, 2008), 84.