A Reply to Aguilar
Robert P. Murphy
Part I: The Legacy of Friedrich Hayek
Section V: Roundaboutness
In this section Aguilar makes the strong claim that B’hm-Bawerk was "unclear (and perhaps confused himself) about the concept, making it seem that longer processes were more productive because they were longer" (p. 15). Aguilar goes on to quotation passages from Hayek and then Skousen where this ambiguity is cleared up, so that even though "B’hm-Bawerk's opacity’had everyone going around about what he meant," by now "modern Hayekians seem to have this concept pretty well nailed down" (p. 15-16).
Now it's true that B’hm-Bawerk could at times be difficult. However, on this particular point I always found him to be crystal clear. For starters, Aguilar commits the popular mistake of conflating roundabout with longer. In practice the two will be interchangeable, but they are in fact different in the B’hm-Bawerkian scheme; he himself gives an example of a shorter process that is more roundabout and more productive than a longer one.7 Beyond this pedantic quibble, I demonstrate (with the quotation below) that B’hm-Bawerk was quite explicit in his response to an objection leveled by Fisher (which is similar to Aguilar's):
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Fisher denies the existence of an objective rule that is based on technical facts; I maintain that such an objective rule exists. According to Fisher, the appearance of a rule is the consequence of selection. I maintain that the regularity lies in existing facts before and independent of our selection. Fisher concedes a regularity merely in the production processes actually selected. I maintain that such a regularity exists in all processes eligible for selection’
Now let us assume, and I am convinced the facts are such, that at a certain state of technology the objectively most productive among the 1-year methods is excelled in productivity by the objectively most productive among the 2-year methods, which in turn is surpassed by the best 3-year method’Thus we arrive at a rule of increasing productivity of the best possible processes, a rule based on objective facts [that is] valid before and independent of every selection’ (III, pp. 49-51, italics original)
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If anything, it is Aguilar who is unclear, for he (following Keynes, who lampooned B’hm-Bawerk by inventing a productivity theory of "smelly" processes) makes it sound as if the higher productivity of longer processes is purely due to a selection argument. As the quotation above reveals, B’hm-Bawerk thought the correlation was far deeper than that, and that is why he maintained (despite Fisher's attacks) that his notorious "third ground" for the higher valuation of present goods was a genuinely independent one.
After this discussion, Aguilar then simply asserts that roundaboutness is the same thing as the specificity of capital goods, and that this in turn "is the only nail holding [the Austrian] theory down" (p. 16). I'm not sure that these terms really are so interchangeable, but fair enough. Aguilar then quotations Skousen who makes a common Austrian argument that the boom-bust cycle is crucially dependent on the specificity of capital goods. Aguilar replies:
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It sounds as if we can refute all of Hayekian business cycle theory with one counter-example, the boom and bust of a non-specific capital good’for instance, the dot.com bubble. Websites are capital because they are not valued directly but only as a means for obtaining the products they advertise. The dot.coms are highly non-specific, facilitating the sale of products at every stage of production’.When one can obtain anything on the internet that one desires, from machine tools to pornography, I defy Garrison to tell us in which of his five stages’the dot.coms belong. (p. 16)
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It's not clear to me how this example in any way refutes Skousen's point. It is still the case that if all capital goods were perfectly non-specific, then there couldn't possibly be a boom-bust cycle. Market actors might have to revise their expectations and consume fewer goods than they originally planned, but the adjustments would be immediate and the losses would only be in a relative sense.
The dot.com bubble in no way contradicts this. Were it not for the specificity of tangible capital goods, the Fed's gross mishandling of the monetary base (to stave off a Y2K panic) could not have caused the recession that occurred. If there is a sudden fad interest in Don Mattingly rookie cards, and then the interest soon drops just as quickly as it arose, the volatility in price for the cards wouldn't constitute a "boom-bust cycle" in the way Austrians use the term. To demand that Garrison place all dot-coms into one stage is as nonsensical as demanding that he so classify all tools or (more absurdly) all capital goods. Each particular website could classified, more or less.8
7 Specifically, he contrasts one process of apple production, in which one cuts a pole from another tree, versus the more direct (i.e. less roundabout) process of climbing the apple tree and plucking them by hand. See Capital and Interest, II, p. 82.
8 I grant that Callahan and Garrison's own article on the dot-com "boom and bust" is not entirely compatible with my arguments above. Even so, I'm sure they would both agree that if all capital goods were totally non-specific, then whatever happened after Y2K would not have been a true business cycle. To give another nod to Aguilar, I do see a problem for Callahan and Garrison: Unless the dot-coms all fall to one side of the fulcrum point in the capital structure, then shouldn't some (e.g. Amazon.com) have moved inversely from others (e.g. Mines4U.com)?
