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An Empirical Application of the Austrian
School’s “Stages of Production”
Cameron M. Weber
Intro to “Stages of Production”
It scarcely, perhaps, requires to be proved that
the capitalist production of consumption
goods, although carried out in roundabout
ways and by many stages, does not, on that
account, cease to exhibit an intimately
connected and united work of production.
– Eugen v. Bohn-Bawerk (1888)
An Empirical Application of the Austrian
School’s “Stages of Production”
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Intro to Stages of Production
Calculating an ‘Average Period’
Stylized Facts
Empirical Analysis
What Went Wrong?
Simplified Two-Stage Analysis
Findings
Intro to “Stages of Production”
Adapted from Hayek 1931
Original Means of Production
(Double arrow represents
original means of production
added to each intermediate
product)
Time
Intermediate
Products
Output of Consumer Goods
Intro to “Stages of Production”
Adapted from Garrison 2001
Late stages of production
Output of
Consumer
Goods
Early stages of production
Stages of Production, Roundaboutness Increases Left to Right
1. Retailing
3. Manufacturing
2. Distributing
5. Mining
4. Refining
Intro to “Stages of Production”
Reproduction and expansion of economy due to generation of a surplus
and investment in more roundabout stages of production
Increased
Consumption
New investment in
more roundabout,
higher stage of
production
Society's
Reproductive
Consumption
Society's Reproductive Investment
Calculating an ‘Average Period’
Hayekian triangle with percentages
of investment in each
stage of production
1. 40%
2. 25%
3. 20%
4. 10%
5. 5%
Stages of Production, Production Time
1. Retailing
3. Manufacturing
2. Distributing
5. Mining
4. Refining
Calculating an ‘Average Period’
Hayek triangle showing capital structure in an economy
and corresponding "average period of production"
The average period of production is 2.15
Weight of each Production Stage in the Economy
1. 40
2. .25
3. .20
4. .10
1.
2.
2.15
3.
4.
Production Stage
1. Retailing
3. Manufacturing
2. Distributing
4. Refining
5. .05
5.
5. Mining
Stylized Facts
• In “early capitalism” government was around
4% of the economy, in “modern capitalism”
government is greater than 30% of the
economy
• “Modern capitalism” has shown a rise in the
FIRE sectors (finance, insurance and real
estate) compared to “early capitalism”.
Stylized facts from Edward Nell
Stylized Facts
US Real GDP, 1870-2006 ($ Billions)
12000
10000
Modern Capitalism
1948-Present
Early Capitalism
1870-1914
8000
6000
4000
2000
0
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2006
Empirical Analysis
Hayek triangle representation of stages of
production used in empirical analysis
1.
2.
1. Farm
2. Public
3. Non-Farm
Inventories
3.
4.
5.
4. Consumer
durables
5. Producer
durables
Equipment
6.
8.
7.
6. Farm
7. Institutional
8. Government
9.
10.
9. Residential
10. Non-residential
Structures
Carter and Sutch, Historical Statistics of the US, 1900 and 1958
Empirical Analysis
Methods used for calculating average period of production:
“Reproducible” Economy Methods
I.
II.
Excludes land
Excludes government and land
“Reproducible and Non-Reproducible” Economy Method
III.
Includes both government and land (e.g., all Carter and Sutch data)
“Means of Production” Method
IV.
Excludes land, housing, government and agriculture
Capital Structure for "Reproductive and Non-Reproductive" Economy (including Land
and Government)
Early
Capitalism
(1900)
Stage of
Production
1Farm inventories
2Public inventories
3Non-farm inventories
4Consumer durables equip.
5Producer durables equip.
6Farm structures
7Institutional structures
8Government structures
9Residential structures
10Non-residential structures
11Agriculture land
12Public land
13Residential land
14Non-residential land
Total
Average period of production
Dollars
($ Billions)
18.4
n/a
14.2
21.7
20.5
13.6
4.7
9.5
68.1
48.9
41.7
11.5
19
22.4
314.2
% of Total
5.86%
n/a
4.52%
6.91%
6.52%
4.33%
1.50%
3.02%
21.67%
15.56%
13.27%
3.66%
6.05%
7.13%
100.00%
8.35
Modern
Capitalism
(1958)
Dollars
($ Billions)
25.6
8.9
75.4
159.7
137.4
28.2
17.8
126.8
283.6
136.4
52.9
34.2
44.6
64.6
1196.1
% of Total
2.14%
0.74%
6.30%
13.35%
11.49%
2.36%
1.49%
10.60%
23.71%
11.40%
4.42%
2.86%
3.73%
5.40%
100.00%
7.57
What Went Wrong?
• Under-reporting of assets (non-residential
structures) due to Income Tax (1913) and Estate
Tax (1914), therefore is data problem ?
• Imputation problems (price rigidities) due to
650% increase in market share of the State in the
economy, therefore is actual decrease in timepreference ?
((30%-4%)/4%) = 6.50 = 650%
What Went Wrong?
We must look at the price system as such a
mechanism for communicating information if
we want to understand its real function—a
function which, of course, it fulfils less
perfectly as prices grow more rigid.
Hayek (1945), “Use of Knowledge in Society”
Simplified “Two-Stage” Analysis
Adapted from Garrison 2001
Late stages of production
Output of
Consumer
Goods
Early stages of production
Stages of Production, Production Time
1. Retailing
3. Manufacturing
2. Distributing
4. Refining
5. Mining
Simplified “Two-Stage” Analysis
Removes counter-incentives for asset reporting
under welfare state tax scheme because there
is incentive to over-report Cost of Goods Sold
and under-report Long-Term Assets.
Removes imputation problems because longerstages require more price flexibility.
Capital Structure based on "Late" and "Early" Stages of Production
Early
Capitalism
(1900)
Modern
Capitalism
(1958)
Stage of
Production
1Farm inventories
2Public inventories
3Non-farm inventories
"Late" stage
Dollars
($ Billions)
18.4
n/a
14.2
4Consumer durables equip.
5Producer durables equip.
6Farm structures
7Institutional structures
8Government structures
9Residential structures
10Non-residential structures
11Agriculture land
12Public land
13Residential land
14Non-residential land
"Early" stage
21.7
20.5
13.6
4.7
9.5
68.1
48.9
41.7
11.5
19
22.4
6.91%
6.52%
4.33%
1.50%
3.02%
21.67%
15.56%
13.27%
3.66%
6.05%
7.13%
89.62%
159.7
137.4
28.2
17.8
126.8
283.6
136.4
52.9
34.2
44.6
64.6
13.35%
11.49%
2.36%
1.49%
10.60%
23.71%
11.40%
4.42%
2.86%
3.73%
5.40%
90.81%
314.2
100.00%
1196.1
100.00%
Total
% of Total
5.86%
n/a
4.52%
10.38%
Dollars
($ Billions)
25.6
8.9
75.4
% of Total
2.14%
0.74%
6.30%
9.19%
Findings
Increase in “late stage” of production from
89.62% of capital stock in 1900 to 90.81% in
1958 is not significant enough to refute
possibility that time-preference has increased
in modern welfare state.
Flatiron Building (1902)
View from Empire State Building (1950s)
Addendum
• If we use land values as the earliest stage of
production (which makes sense in terms of
economic development from hunter-gather
forms of human organization to today’s
capitalism), then the result is a longer average
period of production from “early” to modern
capitalism using the full disaggregated model
Capital Structure for "Reproductive and Non-Reproductive" Economy
- Revised with Land as Earliest Stage
Early
Capitalism
(1900)
Stage of
Production
1Agriculture land
2Public land
3Residential land
4Non-residential land
5Farm inventories
6Public inventories
7Non-farm inventories
8Consumer durables equip.
9Producer durables equip.
10Farm structures
11Institutional structures
12Government structures
13Residential structures
14Non-residential structures
Total
Average period of production
Dollars
($ Billions)
41.7
11.5
19
22.4
18.4
n/a
14.2
21.7
20.5
13.6
4.7
9.5
68.1
48.9
314.2
% of Total
13.27%
3.66%
6.05%
7.13%
5.86%
n/a
4.52%
6.91%
6.52%
4.33%
1.50%
3.02%
21.67%
15.56%
100.00%
8.38
Modern
Capitalism
(1958)
Dollars
($ Billions)
52.9
34.2
44.6
64.6
25.6
8.9
75.4
159.7
137.4
28.2
17.8
126.8
283.6
136.4
1196.1
% of Total
4.42%
2.86%
3.73%
5.40%
2.14%
0.74%
6.30%
13.35%
11.49%
2.36%
1.49%
10.60%
23.71%
11.40%
100.00%
9.47