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.

New Capital Can Be Formed Exclusively by “Free Capital”

We will now distinguish between three forms of capital:

1. Free capital: This is the subsistence fund (supply of consumer goods) which is made available for the support of roundabout methods of production;
2.  Intermediate products: These are raw materials in the various stages of processing prior to the finishing of the consumer good (raw materials take on the shape of “maturing” consumer goods in the course of processing);
3.  Fixed (stable) capital: (“relatively durable factors of production”: machines, etc.); These are produced factors of production that can be used for a number of individual production processes.

Intermediate products and fixed capital are goods which are characteristic of roundabout methods of production. We will label them with the term “capital goods.” In contrast, consumer goods as such are never capital; they only assume the function of capital if they are used in the specific way we previously described with the term “reproductive consumption,” i.e., if they serve to support roundabout methods of production. Intermediate products and free capital serve to support the individual production processes and can thus be labeled “liquid” capital in contrast to “fixed” capital. Yet, one must pay attention to the fact that liquid capital is also employed in the process of producing fixed capital.

The production process at work in roundabout methods of production is determined by the employment of these three forms of capital. The fact that originary factors of production can initially be used in the production of intermediate products which mature only in the course of time into finished products, is made possible by a supply of free capital. A special form of roundabout method of production is present if in addition—and this again is only possible under the condition of a supply of free capital—originary factors of production are employed in the production of fixed capital, which later in turn produces the finished product by incorporating intermediate products and additional originary factors of production. However, because the production of a capital good is only possible with the help of a subsistence fund which supports a process that has not yet produced any consumer goods, every capital good must have been preceded by free capital. The capital good is produced as a result of the expenditure of free capital.

Thus, new capital can be formed exclusively by free capital. New capital can only come into existence because finished consumer goods are “saved” and employed so that they permit the choice of a roundabout method of production. This not only applies to the case of building up new capital, intended to increase the economy's supply of capital; it also applies to the renewal of all capital that has been invested in the economy. Every roundabout process of production begins with the investment of free capital, and every further step in the production process implies a new expenditure of free capital.

—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), 27-28.