Ten authors, singly and in groups of two, three, and four, have conspired
to produce seventeen papers on capital theory. Contributors in addition
to the editor are Peter Bernholz, Werner Boge, Werner Guth, Ingo Pellengahr,
John L. R. Proops, Winfried Reiss, Gunter Stephan, Ernst-Ludwig von Thadden,
and Franz-Josef Wodopia. Mathematical exercises, together with some history
of economic thought and some lessons from the natural sciences, make up
volume 277 of the series of "Lecture Notes in Economics and Mathematical
Systems." The papers, six having been published previously, embroider upon
themes put forth in Faber's Introduction to Modern Austrian Capital
Theory, which appeared in 1979 as volume 167 of the same series.
In a broader sense the Studies represent a continuation of the work begun by Eugen von Bohm-Bawerk and formalized by Friedrich A. Hayek. The attention to and respect for theoretical constructs involving multiperiod production processes have waxed and waned over the decades since Bohm-Bawerk first introduced the notion of roundaboutness. Possibly the most easily demonstrated proposition in capital theory is that the intertemporal structure of production of a market-oriented, industrialized economy cannot adequately be represented by a single number, such as the average period of production. As such demonstrations accumulate, economists become more sharply divided between those who systematically ignore the issues of capital theory and those who seek more adequate means of dealing with the relationships between consumer time preferences and the time dimension in the economy's production structure.
The framework of intertemporal general equilibrium, initially conceived by Hayek in the late 1920s (and made available to English-speaking economists only recently ), underlies much of the modeling done by Faber and the other contributors. Mercifully, the models are constructed so as to skirt the barren controversies of recent decades over technique reswitching and capital reversing. Instead, the concept of roundaboutness is augmented by concepts of "efficiency" and "superiority" [p. 102] in an effort to establish that the interest rate is positive and to analyze the intertemporal structure of production. The concepts of "nontightness" and "reachability" [p. 139], identified as neoclassical counterparts to the Austrian formulation, are judged inferior in that they do not explicitly incorporate a time dimension. Ideas drawn from several different papers support this judgment: Explicit attention to the time dimension allows for distinctions between continuous and discrete time, between finite and infinite time horizons, and between open- and closed-loop processes--depending upon whether or not the process itself generates exploitable information.
These and similar distinctions presented in full mathematical dress are what give the book its dominant flavor. But there is more. Faber offers a useful introductory chapter in which distinctions are made between "Traditional," "Neo," and "Modern" strands of Austrian capital theory. The inclusion in this chapter of the "Austro-American School," in which Israel Kirzner, Ludwig Lachmann and Murray Rothbard hold membership, represents a broadening of Faber's vision in comparison to the 1979 volume.
Ingo Pellengahr, who is largely responsible for this broadening, contributes two chapters in which he identifies these same theorists as members of the "Modern Austrian Subjectivist School." The most fundamental issue that separates this group from their British and European cousins concerns the role of productivity in the theory of interest. Drawing on the theories of Frank A. Fetter as well as Ludwig von Mises, some of the Modern Austrian Subjectivists (Kirzner and Rothbard) exposit and defend a pure-time-preference theory of interest. In his own treatment, Pellengahr recognizes that (1) a positive rate of time preference is both necessary and sufficient for the interest rate to be positive and (2) the technical productivity of roundabout production processes is neither necessary nor sufficient for the interest rate to be positive. He affords credence, however, to the more orthodox neo-Austrians, who give equal billing to productivity and time preference in theorizing about the interest rate. His discussion includes an uncritical presentation of some hypothetical examples provided by Leland Yeager and Paul Samuelson, each of which hinge upon considerations of physical productivity. Pellengahr attempts a reconciliation between the Austrian Subjectivists and the neo-Austrians by distinguishing between an essentialist theory, which establishes that the rate of interest is positive, and a functionalist theory, which determines the magnitude of the interest rate.
In the final chapter, "Time Irreversibilities in Economics: Some Lessons from the Natural Sciences," Faber and Proops provide an insightful survey of the economics of time. They identify six approaches, which they label "Static," "Comparative Static," "Reversible Time," "Risk--Irreversible Time," "Uncertainty--Irreversible Time," and "Teleological Sequence--Irreversible Time." They then indicate in a tabular format the ability of different theoretical frameworks to accommodate the three categories of time irreversibility. Of the four frameworks considered (General Equilibrium, Austrian Capital Theory, Austrian Subjectivism, and Evolutionary Economics), only Austrian Subjectivism is able, according to the authors, to accommodate all three categories. (This judgment is consistent with that of O'Driscoll and Rizzo , whose distinction between "Newtonian" time and "Bergsonian" time separates, in effect, the first three approaches listed above from the last three.)
Faber's Studies could be criticized on several grounds. Some of the authors are too quick to make assumptions for the sake of mathematical convenience; there is too much math for math's sake; and capital theory in the hands of Modern Austrian capital theorists is in danger of becoming its own subject matter. Also, it must be said that most of the papers could have benefited form a final polishing by the authors, and all of them from more careful copyediting. But these dissatisfactions aside, the volume represents an important contribution to our understanding of the economics of time and of the intertemporal structure of production.
1. Hayek, Friedrich A. "Intertemporal Price Equilibrium and Movements in the Value of Money" , in Hayek, Money, Capital, and Fluctuations: Early Essays, ed. by Roy McCloughry, Chicago: University of Chicago Press, 1984.
2. O'Driscoll, Gerald P., J., and Mario Rizzo, The Economics of Time and Ignorance. Oxford: Basil Blackwell, 1985.