A typical view in the Austrian school of economics is that processes which are longer and require more capital to be performed are more productive. Whereas this view can in general be proven correct, the way it is presented is very often misleading. Two fundamentally different types of processes are confused for each other and based on this a correct conclusion is reached by using wrong arguments. In short: being right for a wrong reason.

The typical flow of arguments can be found in many Austrian economics textbooks, in this particular case taken from De Soto[1]. It goes like this:

Robinson Crusoe lives alone on an island and out of necessity must produce all his food himself. What he does to survive is to pick berries. Unfortunately his abilities to gather berries are limited and he can find just so many on any given day. If however he uses a stick so that he could reach berries higher in the trees he will improve his productivity many times. For this purpose Robinson must save some berries, so that they can sustain him during the time he spends for the production of a suitable stick. In economic terminology: Robinson must save, so that he could invest his time in creating a suitable tool. Once Robinson has successfully saved berries and later produced a stick his productivity rises manifold. However from here the following conclusion is reached, quote:

“Even thought Robinson Crusoe is undoubtedly much more productive harvesting berries with his wooden stick than he is with his bare hands, there is also no doubt that the process of berry production using a stick is a more lengthy one in terms of time (it includes more stages) than the production process of berry picking by hand. Production processes tend to increase in length and duration (i.e. to become more complex and include more stages) as a result of the saving and entrepreneurial activity of humans: and the longer and more time-consuming these processes become, the more productive they tend to be. ”

The problems with the above quoted are several. Let us first note that the author’s definition of what productivity is is given by how many berries Robinson gathers in a single day.

The first problem with the above view is that the author makes a wrong comparison, i.e. he compares apples with oranges. The author compares the process of berry picking by hand with a process of production of a stick and using it for berry picking. The problem is that, whereas the first process can be described with a single word, i.e. “production”, the second one can not. The second process consists of two different phases, namely: an investment phase and a production phase. From this point of view such a comparison is simply wrong.

The second problem is that, even if we neglect the wrong comparison somehow, the two processes are not equally productive at all times (measured by using author’s own definition of productivity). The “berry picking by hand” process produces let us say 10 berries each day. The “production of a stick and using it for berry picking” does not have this quality. For the first several days it produces zero, null berries. Its productivity at the beginning is not only missing, but is negative since Robinson eats 10 berries each day (every investment process consumes resources). Only after the stick has been created is Robinson able to start gathering 100 berries per day (for instance). If we measure the productivity of the two processes during the first several days, then the simple process is more productive. If we measure it after the stick is ready, then the second one is more productive. The author has chosen the latter. Had he chosen to compare the processes at the beginning he would have reached the diametrically opposite conclusion. The simple outcome is that, when using the author’s own definition of productivity, the  “production of a stick and using it for berry picking” process is more productive if and only if the capital to be used (a stick) has already been created. The latter however reduces the initial statement of the author to a much simpler one known since centuries ago, namely, that one is more productive by using capital (machines, tools, etc.) than without it. Adding the time of stick production to the production of berries is simply wrong and one can not conclude from here that “longer processes are more productive”, although the latter is generally true. This absolutely correct conclusion simply does not follow logically from the author’s example.

Saying simply: “The longer one works, the more one tends to produce” would be a perfectly legitimate justification why processes which take longer time are generally more productive (all other things being equal). One can not compare the creation of a pin by hand and its creation by a machine (it would be a bad comparison). All what would follow from such a comparison is that using a machine makes one more productive. However if we  spend more time working  on creating  pins we would produce more (while using or not using a machine in the process). The simple statement the author should have made is that the more time one works and the more capital one uses the more productive one is.

Let us describe the problem in economic theory terms. The author has mistaken the process of investment (producing a stick) for the process of producing intermediate goods (such as flour, from which bread is made). Investment processes are never productive, they are consumptive in nature. Only after the investment is finished can it bear fruits. However the process of producing intermediate goods (what a stick is not) is productive always. One must never confuse the former for the latter.

 

[1] Jesus Huerta de Soto, “Money, Bank Credit, and Economic Cycles”