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” 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”

Calculating an ‘Average Period’

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

Empirical Analysis 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.Excludes land II.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) Modern Capitalism (1958) Stage ofDollars Production($ Billions)% of Total($ Billions)% of Total 1Farm inventories % % 2Public inventoriesn/a % 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 land196.05% % 14Non-residential land % % Total % % Average period of production

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 time- preference ? ((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

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 longer- stages require more price flexibility.

Capital Structure based on "Late" and "Early" Stages of Production Early Capitalism (1900) Modern Capitalism (1958) Stage ofDollars Production($ Billions)% of Total($ Billions)% of Total 1Farm inventories % % 2Public inventoriesn/a % 3Non-farm inventories % % "Late" stage10.38%9.19% 4Consumer durables equip % % 5Producer durables equip % % 6Farm structures % % 7Institutional structures % % 8Government structures % % 9Residential structures % % 10Non-residential structures % % 11Agriculture land % % 12Public land % % 13Residential land196.05% % 14Non-residential land % % "Early" stage89.62%90.81% Total % %

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) Modern Capitalism (1958) Stage ofDollars Production($ Billions)% of Total($ Billions)% of Total 1Agriculture land % % 2Public land % % 3Residential land196.05% % 4Non-residential land % % 5Farm inventories % % 6Public inventoriesn/a % 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