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KEYWORDS: capital theory, interest, production structure, roundaboutness, labor intensity
One alternative offered by Hayek was to measure roundaboutness by way of the "period of investment" [Hayek, 1936, p.
If lengthening the structure of production has any relevance for capital theory, it is only as a placeholder for roundaboutness.
Furthermore, method 4 would result in an increase in the ratio of temporally shorter to longer production processes but would still require additional capital, which is consistent with the goal of increasing the roundaboutness of a production process.
While these two definitions of increased roundaboutness concern the production of capital exclusively there is also a third, less explored, way.
In other words, the relationship between roundaboutness and interest rates is captured by the Hicks-Macaulay duration.
Because there is no available measure of industrial roundaboutness, activities are grouped according to a mix of assumptions relating to their relative roundaboutness and a proxy of roundaboutness taken from Young's (2012) study of U.
It may also be the case that, between 1960 and 2010, some activities increased in their roundaboutness while others decreased, to the point that they should be re-categorized.
The idea is that roundaboutness is correlated with TIOR.
If I divide Young's ranking of roundaboutness into three groups, sorting them by more to less roundabout, construction appears in the upper section of the middle group rather than in the most roundabout group.
The corresponding reallocation of funds toward the higher stages of the production structure favors on average longer processes of production over shorter ones and hence allows for more roundaboutness in the structure and therefore a higher overall productivity.
One puzzle is what determines the split between increased roundaboutness and increased riskiness for any given reduction in interest rates below the natural rate.