Mario J. Rizzo, ed. 

Time, Uncertainty, and Disequilibrium

Lexington, Mass.: D. C. Heath and Company, 1979, pp. 215-226


Waiting in Vienna

Comment on Leland B. Yeager’s “Capital Paradoxes and the Concept of Waiting”
Roger W. Garrison
Professor Yeager is eager for his fellow economists to adopt the term waiting as the name of the thing whose price is the rate of interest. He claims advantages of two kinds. By using the concept of waiting, (1) certain paradoxes in capital theory can be dissolved, (2) and certain parallels between the determination of the interest rate and the determination of other factor prices can be exploited. His chapter, taken as a whole, is a demonstration of another more general advantage of the concept. Thinking in terms of the supply and demand for waiting, Yeager was able to digest and interpret many technical and mathematical formulations of capital theory without allowing himself to get embroiled in the mathematics. In each case he is able either to provide an intuitive feel for the economic processes involved, that is, for what people are supposed to be doing, or to show that no intuitive interpretation is possible. We aren’t quite sure how much of this intuition to impute to waiting as a tool of analysis and how much to impute to the economist using this tool. But the two, taken together, yield results that the Austrian economists cannot afford to ignore.

          Yeager’s paper is divided into twelve sections, each of which contains analyses an insights that would merit some comment. I have chosen, however, to limit my comments to three broad areas. I will attempt first to provide and Austrian perspective on the concept of waiting and deal with the disadvantages of the term that Yeager himself itemizes. Second, I will deal with the eclectic view of interest rate determination and with Yeager’s criticism of the subjectivist position. my remarks about technique reswitching and capital reversing will be saved for last.
An Austrian Perspective on the Concept of Waiting
If Austrian theorists are hesitant to embrace the concept of waiting or abstinence, their hesitancy can be attributed, in large part, to the debates between John B.Clark and Eugen von Böhm-Bawerk at the turn of the century and between Frank H. Knight and Friedrich A. Hayek during the 1930s. In these debated both Clark and Knight insisted that waiting, or something very much like it, is a simple magnitude or homogeneous fund of clearly determined size and that it has an existence quite independent of the capital goods in which it is temporarily embodied.Endnote Most objections to the concept of waiting found in the Austrian literature are well-founded objections to this Clark-Knight vision.Endnote Professor Yeager is clearly on the Austrian side of these debates. He carefully differentiates his view of capital from the Clark-Knight view, and he rejects all mystical notions of capital with the statement that “Persons supply waiting by refraining from current consumption out of their incomes and wealth and instead making loans, owing capital goods, and doing other quite unmysterious things.”Endnote This statement reflects the vision of Gustav Cassel rather than those of Clark and Knight. We might note, however, that Böhm-Bawerk in his third volume of Capital and Interest found no less mystery in Cassel’s formulation He rejects Cassel’s concept of “waiting” primarily on the grounds that it has no independent existence.Endnote It cannot exist, that is, apart from individual capital goods, But that this is true is made clear in Cassel’s own Nature and Necessity of Interest,Endnote and it is now reaffirmed buy Yeager. The recognition of dependence in this sense does not require that the concept of waiting be rejected. Labor, after all, does no exist aprat from the individual performing it. This does no preclude our viewing labor as a factor of production and wages as the price of labor.

          Although Clark and Knight were responsible for turning the concept of waiting or abstinence into a red flag in the Austrians’ view, the Austrian resistance to these notions predates the writings of Clark and Knight. Böhm-Bawerk in his History and Critique of Interest TheoriesEndnote and Menger in his Principles of EconomicsEndnote were critical of the abstinence theory of interest. The contexts of their critical remarks, however, suggest that it is not the notion of waiting or abstinence per se that is being called into question. Rather, the primary message we get from both Menger and Böhm-Bawerk is that these concepts cannot serve to shore up the cost-of-production theory of value. The message is well taken but it leaves most all of Professor Yeager’s formulation intact.

          Professor Yeager does not insist that the concept of waiting as a factor of production be adopted at the expense of all other alternative concepts.Endnote In fact, he demonstrates that this view is fully compatible with the Austrian view of interest as the price differential between present goods and future goods.Endnote He then goes on to single out a number of analytical contexts in which it is useful to think in terms of the supply and demand for waiting. Where the concept does fit, we are shown, it fits very well.

          We ought to be able to make some generalization about when the concept of waiting es and is not appropriate. I am tempted to say that it is appropriate for the theory of interest but not for the theory of capital This seems to be the gist of some of Hayek’s scattered comments on the issue.Endnote The distinction is unhelpful, though, without further clarification. Important propositions in Austrian capital theory hinge on the fact that some capital goods are specific or have limited uses and on the fact that there are complementary relationships between some of the elements of the capital structure. To the extent that these aspects of capital are central to our analysis, the concept of waiting obscures rather than captures the essence of the theory. This is only to say that if our theory is dependent of the heterogeneous nature of capital, then we do not want to use a term that is specifically designed to conceptually homogenize the factually heterogeneous elements. But to the extent that we want to call attention to the common and essential aspect of all capitalistic modes of production, then the concept of waiting seems preferable to any other.

          We need only mention some of the alternative terms aimed a conceptually homogenizing capital to recognize their inferiority. we’ve all run afoul of Crusonia plants and shmoos and of capital jelly and putty-clay production processes. These are all purely physical conceptions totally detached from choosing and acting individuals. We can conceive of Crusonia plants growing wild and of shmoos running loose, but such conceptions have nothing to do with capital. It is impossible to conceive of waiting, however, apart from the individually who decide to wait. And waiting can take as many different forms as there are different kinds of capital–and more. Professor Yeager shows how the concept of waiting helps us to break away from misleading physical conceptions and to see the element of commonality between capital goods and such things as inventories of consumer goods, durable consumer goods, and the holding of land.Endnote

          To his point I have been treating the notion of waiting and abstinence as synonyms and contrasting them with purely physical notions of capital. This is consistent, I think, with Professor Yeager’s own treatment of the terms. We might note, though, that Frank Knight viewed the shift from abstinence to waiting as a step backwards in the development of capital theory.Endnote The reasons for this assessment re not immediately obvious. It is really necessary to understand Knight’s vision of capital formation to follow his discussion of the relative merits of the terms abstinence and waiting. What he actually said can be capsulized as follows:
          The choice between investing and consuming is absolute.
          When savers “abstain” from consumption in order to create capital, they abstain.
          To call this “waiting” is misleading and false.Endnote
These three statements don’t quite pass muster as a syllogism, but if we know Knight, we know what he means. Capital in the Knightian vision is perpetual.Endnote Knight couldn’t conceive of an end to the waiting associated with, and hence, he preferred the term abstinence. If we go along with Knight in associating a finite time period to the term waiting and an infinite time period with the term abstinence, then we must reject the latter term along with the notion of perpetual capital. Waiting is the more suitable term.

          The disadvantages of the term waiting that Professor Yeager itemizes are more imaginary than real. He points out that the term is asymmetrical in that its meaning is not the same or both sides of the market. The supplier supplies waiting, but the demander demands to avoid it.Endnote Actually, waiting in this respect is just like labor.; The demander of labor does not demand to do labor: he demands to avoid it. Rather than being a disadvantage, this asymmetry plays up another parallel between waiting and labor as factors of production.

          Professor Yeager frets a little over the fact that waiting (and abstinence) are not appraisal-free terms. They convey the idea of irksomeness.Endnote I question whether this built-in connotation is a disadvantage at all. Labor, we can note, has the same connotation. This simply reflects people’s attitudes towards waiting and laboring. The idea that waiting and laboring are irksome is on a par with the idea that the market rate of interest and the wage rate are greater than zero. To see the appropriateness in this respect of viewing interest as the return to waiting requires only that we contrast it with terms having different connotations. Could we conceive of interest, for instance, as the return to lounging, or as the return to loafing? Exploitation theorists could undoubtedly get some mileage out of these terms, but they serve only to distort what the term waiting describes.

          There is one problem with the term that Professor Yeager only hints about., and this has to do with the units in which waiting is measured. Clearly, waiting, both in his formulation and in Cassel’s, stands for the product of value and time. It is measured in dollar-years. Yet, waiting in the ordinary sense of the term is measured in time units only. The term, then , can be misleading in this respect. In fact, this is the problem in several of the passages in Capital and Interest that were cited by Professor Yeager. Böhm-Bawerk as able to shift almost imperceptibly from dollar-years to years as his unit of measure. This is what gave rise to much of what Professor Yeager called the “sheer clowning around with questions about what it is that the supposed waiters are waiting for.”Endnote

          The unit problem is our clue to another, more substantive question concerning the role of waiting in Austrian capital theory. At issue here is the relationship between the concepts of waiting and capital. Professor Yeager seems to be saying that although the two terms are not perfectly synonymous, waiting is a “sense” of capital and in many analytical contexts the latter term can be replaced with the former. It can be argued, though, that, in the context of Austrian capital theory, waiting and capital are complementary concepts. Professor Yeager’s view of waiting as a substitute concept has its roots in the writings of Cassel, while the complementary view can be traced to William Stanley Jevons.Endnote

          In his formulation of what came to known as the Jevonian investment figures, JevonsEndnote made the critical distinction between the two complementary concepts:

[we must distinguish] between the amount of capital invested and the amount of investment of capital. the first is a quantity of one dimension only–the quantity of capital; the second is a quantity of two dimensions, namely, the quantity of capital, and the length of time during which it remains invested.
Jevons’s terminology is unfortunate, but his meaning is clear. His first term corresponds to capital; his second corresponds to waiting. Both terms come into play in his discussion of the investment figures. Capital, which he expressed in pounds, is represented by the heights of the figures; waiting, which he expressed in pound-years, is represented by the total area.Endnote

          Hayek developed his structure-of-production triangles before he was aware of the Jevonian investment figures.Endnote He found it necessary, though, to make a similar distinction. His exposition required that he make reference to the width of the triangle at various points along the time axis as well as the total area of the triangle.

          In the formulations of Jevons and Hayek, the concept that waiting replaces is not the amount of capital, but the degree of roundaboutness. Professor Yeager seems to dismiss this view on the grounds that “[w]aiting ... has the two dimensions of time and value units, whereas roundaboutness, conceived as some average period of production ... has a single dimension of time units.”Endnote But roundaboutness, conceived as the total period of production, has precisely the same units as waiting, namely, dollar-years. The association of waiting with roundaboutness can also be found in Mises’s and Rothbard’s discussions of capital accumulation and the length of the structure of production. Mises writes of “processes in which the period of production and therefore waiting time are longer.”Endnote Rothbard makes reference to Böhm-Bawerk’s use of the phrase “more round about processes, “ but prefers to use the alternative phrase “processes that require longer waiting periods.”Endnote

          In sum, the amount of waiting can be associated with the degree of roundaboutness. It does no replace the concept of capital but is complementary to it. This view in no way discredits professor Yeager’s discussion of the concept. it simply provides a perspective that may be more palatable to Austrian theorists.
The Time Preference Theory of Interest vs. the Eclectic View
Dealing with capital and interest theory in terms of the supply and demand for waiting has one advantage that the Austrian theorists should not overlook. It puts the time preference theory of interest into its proper perspective. This theory, which is associated with Fetter, Mises, Rothbard, and Kirzner, is generally believed to entail an extremely radical subjectivist position. By working in terms of the supply and demand for waiting, we are reminded that it is neither more nor less radical than subjectivist value theory in general. In a brief digression let me attempt to make clear just what subjectivist value theory is and what it is not. Austrian theorists have learned over the past several years that it is necessary for them to state that they are not solipsists, that the material world has an objective existence, and that there is such a thing as technology. What they deny is that value is inherent in any part of the material world. Value, rather, refers to a relationship between the valuing minds of individuals and the various elements of the material world. Economic value is determined by the interaction of numerous valuing minds. Stated in this way the subjectivist position doesn’t seem very radical at all. What twentieth-century economist would deny it?” What seems to be unique to Austrian economics is the consistent application of value theory.

          The Austrian theorists recognize that value, whether associated with the demand side of the market or with the supply side, must be reckoned in the utility dimension. This is to say that both blades of the Marshallian scissors are made out of the same stuff.Endnote Professor Yeager goes a long way towards endorsing this view when he rejects the common practice of equating supply curves with objective factors and demand curves with subjective factors.Endnote But the notion that costs are objective seems to slip back into his reasoning. In one passage he explicitly includes “opportunity costs” among the “objective elements.”Endnote In another he suggests that for value theory to be subjective it must explain the relative prices of goods exclusively in terms of their marginal utilities.Endnote This just isn’t so. We can agree with Professor Yeager that the price relationship between pins and televisions sets (to use his example) cannot be determined from their marginal utilities alone. We must also consider the marginal utilities of the goods that were forgone in order that the pins and television sets could be produced. That is, we must consider the costs. The costs, though, are nothing but forgone utilities and are just as subjective as the marginal utilities of the pins and televisions sets.

          The same contrast between the subjectivist view and the eclectic view can be made in terms of the intertemporal market.Endnote Again, it would be wrong to claim that the subjectivists are concerned only with one side of the market. Their concern is that both sides are made out of the same stuff, namely, subjective evaluations.

          By attempting to treat purely technical factors as a co-determinate of the interest rate, Professor Yeager is misled into believing that we can postulate a purely technical change and then deduce its effect on the market rate of interest. He postulates a general increase in physical productivity and then deduces that the interest rate will rise.Endnote We should note here that this is the conclusion yielded by standard Fisherian analysis. It doesn’t follow at all from an analysis in terms of the supply and demand for waiting. If we adopt the analytical framework proposed by Professor Yeager, we would have to ask: Which direction and to what extend do the supply and demand curves shift? One the whole, do people prefer to wait more in order to magnify the effects of the technical change, or to wait less even though this will dampen the effects of the technical change” Nor can we say for sure which way the interest rate will go. Frank FetterEndnote points this out in his discussion of the effects of a general increase in physical productivity. He begins by recognizing that:

technical productivity has some influence upon the comparison of present and future gratifications, and hence upon the rate of interest .... Technical productivity is one of the facts, physical, moral, and intellectual, which go to make up the whole economic situation in which time preference is exercised.
Fetter goes on to point out that an increase in productivity increases capital values and, hence, wealth. He suggests that to the extent that increased wealth is associated with a fall in time preferences, a lower rate of discount and a lower rate on interest would result.Endnote Thus, the subjectivists’ conclusion is seen to be incompatible with the standard Fisherian or eclectic view, but fully compatible with the view that the interest rate is determined by the supply and demand for waiting.
Capital Reversing and Technique Reswitching
Professor Yeager uses the notion of waiting as a factor of production to dissolve the Cambridge paradoxes associated with capital reversing and technique reswitching.Endnote He shows that, even within the analytical framework of the Cambridge school, the reswitching of techniques is not necessarily paradoxical. The amount of capital or waiting involved in the Cambridge examples depends not only on the technique used, but also on the interest rate itself. It is plausible that a continual falling of the interest rate could bring about a reswitching of techniques. That is, the economy could switch from technique A to technique B and then back to A. But because of the interest rate effect on capital values, the amount of waiting would increase as the interest rate falls–with neither switch point constituting an exception.

          The new vantage point provided by the concept of waiting should not be allowed to blind us to the root problem in all the reswitehing literature. This whole literature owes its existence to the illegitimate use of the comparative-statics method in the analysis of a dynamic market process. The illegitimacy is frequently acknowledged by the reswitching theorists themselves. Geoffrey C. Harcourt,Endnote for instance, prefaces his extended analysis with the following caveat to the reader:

Following Joan Robinson’s strictures that it is important not to apply theorems obtained from the analysis of differences to situations of change ... modern writers have been most careful to stress that their analysis is essentially the comparison of different equilibrium situations one with another and they are not analyzing actual processes.
In 1975, Robinson penned an article titled “The Unimportance of Reswitching.”Endnote I take her to be saying that the “unimportance” follows directly from these “strictures.” But Robinson and Harcourt notwithstanding, reswitching theorists have not been careful in this respect at all. They repeatedly attempt to pass off comparative-statics analysis as if it were dynamic analysis. Typically, some mention is made of the static-dynamic problem in the introduction or in a footnote presumably to blunt criticism along these lines. They then plunge headlong into a discussion of a single economy that undergoes successive changes in production techniques in response to a continuous (and somewhat mysterious) fall int eh rate of interest. The analysis is usually complete with detailed calculations of the economy’s output during the transition periods. At the first switch point the output is relatively high; at the subsequent reswitch point the output is relatively low. Professor Yeager refers to these transitional outputs as spurts and slumps.Endnote Samuelson called them splashes,Endnote and, in a slightly different context, Professor Hicks used the terms crescendoes and diminuendos.Endnote

          The point here is that if Harcourt’s caveat is to be taken seriously, all this analysis of transitional outputs is completely spurious. It we are not to be misled by our own analysis, we must recast it in a comparative-statics mold. We must imagine that there are three societies economically isolated from one another. Drawing on Samuelson’s arithmetic,Endnote we can imagine that the interest rate is below 50 percent in the first society, between 50 percent and 100 percent in the second, and above 100 percent in the third. What the reswitching literature demonstrates is that we can also imagine, without being inconsistent, that one technique is the more profitable for the society with the intermediate rate of interest while a second technique is the more profitable in both of the other two societies. In this form the analysis is ridded of all its difficulties. The differences in interest rates can be attributed to differences in time preferences. There are no perverse changes in the capital structure because there are no changes at all. The question of transitional outputs simply does not arise. there are no spurts and no slumps. But if the difficulties are gone, so too are the appeal and the mystery. so too is the challenge to Austrian capital theory. Reswitching becomes a very sterile concept. In fact the term itself, which connotes a temporal relationship, is clearly a misnomer. Int eh comparative-statics mold there is no switching at all. Possibly the only challenge left is on of finding a new name for reswitching that captures the barrenness of the concept.

          In his section on the consumption paradox, Professor Yeager clearly recognizes the misleading use of the comparative-statics method by reswitching theorists.Endnote He first makes a heroic attempt to make some sense out of the mysterious movements of interest rates. is the fall in the interest rate caused by an increase in thrift? No, the subsequent pattern of consumption suggests that it isn’t. Could the shifts constitute movements away from unstable equilibria? No, there seems to be evidence to the contrary. Aren’t the reswitching theorists really only comparing alternative steady states rather than analyzing a process of change? Yes, this seems to be it. In his won words: “References to changes in the interest rate and switches in technique serve stylistic convenience only.”Endnote Recognizing that comparative-statics analysis has been dressed up in a dynamic garb, Professor YeagerEndnote blows the whistle on the Cambridge theorists:

People who insist on crying paradox over examples of [reswitching] have an obligation, it seems to me, to spell out what they suppose to be happening in enough detail to disclose crucial assumptions and to permit comparison of their story with the real world. Standard theory need not be embarrassed by stories that do not even say how the interest rate is determined an changed, why one economy might be in a steady state employing one technique and another similar economy in a steady state employing another, or how an economy might make a transition between such states.
My only complaint is that Professor didn’t blow the whistle quite loud enough. We may be able to strengthen the impact of his conclusion and gain a better appreciation for it by imagining the use (or misuse) of a similar “stylistic convenience” in the hard sciences. We can refute Darwinian theory, for instance, by constructing a species reswitching model. That is, a species reswitching model will have the same implications for the theory of evolution as technique reswitching models have for the theory of capital. Let me suggest how we can construct the model. We all know that the polar bear is an animal well adapted for living near the North Pole or near the South Pole. The alligator, by contrast, is more suited for the tropical climate of equatorial regions.

          We openly recognize that, strictly speaking, we are discussing alternative life forms that exist in separate parts of the world at a give point in time. But, for the sake of stylistic convenience, we want to ask what happens to an animal as we descend through the degrees of latitude form +90o down through 0o than then on down to -90o. Well, the animal starts out a s polar bear. But before the latitude of 0o is reached, it turns into an alligator. More significantly, by the time we reach -90o, it turns back into a polar bear! (This is stylistic convenience run amok.) If we had to, we could identify the switch and reswitch points with the Tropic of Cancer and the Tropic of Capricorn respectively. It should be apparent that this species reswitching model casts grave doubt on the theory of evolution and on the notion of the survival of the fittest. To demonstrate this conclusively, we must first decide–using any criteria we choose, so long as we don’t make reference to climatic conditions–which of the two life forms, the polar bear or the alligator, is the fitter. But we can’t have it both ways. If we decide that the alligator is fitter than the polar bear, then the switch at the Tropic of Cancer is in full accordance with Darwinian theory. This means, of course that the reswitching that goes on at the Tropic of Capricorn is a perversity. Thus, we have demonstrated the possibility, if th the likelihood, the at less fit will survive.

          So much for Charles Darwin. We can paraphrase Samuelson here and say that “If all this causes headaches for those nostalgic for the old time parables of evolutionary theory, we must remind ourselves that scholars are not born to live an easy existence. We must respect, and appraise, the facts of life.”Endnote

          As a final payoff to this exercise, we now have specific manifestations of such things as spurts and crescendos. A spurt is all that white hair we have left over when we switch from a polar bear into an alligator. A crescendo is a few extra teeth and a long sweeping tail that are left over when we switch back. A thorough investigation of this should keep neo-Darwinian species reswitching theorists busy for years.
Concluding Remarks
Let me conclude my remarks by returning to the principal theme of the paper. The concept of waiting as a factor of production is not at all new to the students of economics. Unfortunately, this tool of analysis has, more times than not, been in the hands of those hostile to subjective value theory in general and to Austrian capital theory in particular. Professor Yeager has demonstrated that the hostility is not inherent in the tool itself. He has thoroughly exorcized it of its mystical qualities; he has shown that the concept of waiting complements rather than challenges Böhm-Bawerk’s treatment of capital and interest; and he has demonstrated how the alternative concept can be useful in several different analytical contexts. Both Austrian theorists and Cambridge reswitchers can study Professor Yeager’s chapter with great profit.