Capital and Entrepreneurship.
A Subjectivist Exposition of
Roundaboutness and the
Structure of Production
Antony Mueller
UCS Graduate Business School
University Caxias do Sul, Brazil antonymueller@yahoo.com

Variant Meanings of “Capital”
 Capital as Financial Capital
 Capital a Production Goods
 Capital as a Stock
 Capital as a Production Process
 Capital as a Productive Force
 Capital as a Factor of Production

Capital Theory
 Heterogeneity vs homogeneity of capital
 Structured vs. unitary
 Production process vs. fixed stock
 Separate productivity of factors of production vs Coordination and
Specialization
 Permanence vs. Non-permanence
 Absence of Entrepreneur vs. Pivotal
Role of Entrepreneurship

Roundaboutness – Umwegproduktion
Q
Roundabout
Production
Standard
Production
Available Time

RTP to
B t1
Q
New Roundabout
Production
Standard
Production
E
S

RP’
RP
SP
RTP
RTP n
RTP m
Sn Sm S

Roundaboutness and Stages of
Production (dAD = 0)
DoR
FP
-ΔD
+ΔD dAD = Change in Aggregate Demand
DR = Degree of Roundaboutness
FP = Final Product dD = Change in Demand

Modeling capital as “Hayekian triangle”
A simple Hayekian triangle – Stages of Production
Degrees of Consumption
Maturity Consumable
Output
SP1, ........ , SPx, .......... SPn Consumption
Stages of Production (SP)

Savings and economic growth in the Hayekian triangle
D
A C
B
C B A

Shortening of Production Structure
DR
FP
+dD
-dD

Unsustainable Production Structures
Central Planning Distortions
DR
FP
+dD
+dD

Soviet-Cuba Style Development
Policy = Guns and Butter Policy
+DR
+dD +dD
SoP

Imports-maintained Production
Structure
DR
FP
+dD
+dIM

DR
Growth-cum-debt development strategy in a three-stages model
FP
+dD
+dD
+dIM

DR
Forced Savings
+dEX
FP
-dD
+dD

Natural and cyclical production frontiers
P NPF
AD
CPF
Po
Q0 Output

Productivity-induced expansion
P
P0
P1
NPFo NPF’
Q0 Q1
AD
Output

Money-induced expansion in the loanable fund model
 i ICD/CCD
S S + dM dAD LF

Savings and credit supply and demand
S S+ΔM =
TCS i
CD i n im
En Em
TC

Productivity gains and inflation targeting – recipe for a boom bust cycle?
P NPF NPF’
AD
CPF
P3
CPF’
P0 P2
AD’
P1
Q0 Q3 Q1 Q2 Output

Government and consumption credit-driven expansion
 i I I+CC+GC S S + dM
 i0
I, C, G

Effect on production frontier
 P NPF’ NPF
CPF ‘
CPF
Q2 Q0 Q1
AD
AD’
Output



Credit expansion and credit crunch – financial markets
 i S - dM
I S
S + dM i’’
 i0
 i’ dAD’’ dAD dAD’
LF

Austrian Disaggregation
 PQ = Pc (Qc) + P I (Q I
1
+...+ Q I x
+ ... + Q I
N
)
 Keynesian Disaggregation:
 PQ = Y
 Y= C + I + G
 Monetarist Disaggregation:
 MV = PQ
 MV = YrP
 M = MB x m

Money side and goods side
M x V = Q x P
(MV/P) = Q
P
Q
Po
MV/P
Q

Money side and goods side –
Change of Q
M x V = Q x P
(MV/P) = Q
P
Qo Q1
Po
P1 MV/P
Q

Money side and goods side –change of M and/or V
M x V = Q x P
(MV/P) = Q
P
Q
P1
Po
MV/P’
MV/P
Q

Equation of Exchange
 Equation of Exchange
 MV = PQ
 Keynesian Model:
 MV = P (Qc + QI + QG)
 Monetarist Model:
 MB x m x V = P x Yr
 Disaggregated Model
 MB x m x V = Pc (Qc) + P I (Q I
1
+...+ Q I x
+ ... +
Q I
N
) + P
A
(Q
A
)

Classical, Monetarist, and
Keynesian View
 Classical Position:
 Auto-Stabilization through interest rate
 Keynesian Position:
 Destabilization through investment (paradox of thrift) – Stabilization through deficit spending
 Monetarist Position:
 Destabilization through money – Stabilization through stable money supply

Problem and its Solution
 Instability through money, banking and government
 Solution proposals
 Gold standard
 Commodity standard
 Denationalization of money
 Hundred per cent reserve requirement

Summary
 Causes of Instability in Keynesianism and
Monetarism: I and Ms
 Realb Business Cycle: Shocks, mainly external
 Instability in Austrian Economics: deviation of monetary rate of interest from natural rate
 Causes of instability in this model: Any kind of interventionism as to I, G, Ms, Md, i
 Cycle gets amplified because of Fractional
Reserve Banking

Main elements of this model
 Time preference
 Roundaboutness
 Stages of production
 Standard production
 Roundabout production
 Capital
 Entrepreneurship