What is meant by the lengthening of the structure of production?

Economics Economics Questions
1

I started reading America’s Great Depression last night and have a question.

What does Rothbard mean when he refers to the lengthening of the structure of production? For example, on p. 57, he says, “[T]o sustain a higher standard of living, the production structure—the capital structure—must be permanently ‘lengthened.’” I’ve heard this concept used several times before by other Austrians—Bohm-Bawerk comes to mind—but I’ve never fully understood what it meant.

It would seem to me that he is referring to an increase in complexity in the production process—in other words, division of labor. Adam Smith famously used the example of the pin factory to illustrate the advantages of the division of labor. Ten men, each doing a number of specialized tasks, could produce "upwards of 48,000 pins in a day” even though each one, if working on his own, “could not each of them have made 20, perhaps not one pin in a day.”

But it is possible to over-specialize. As an example, I could write the nouns and verbs of this post, contract out the adjectives and conjunctions, and hire a minimum wage worker to insert prepositions and articles.

So isn’t it possible to “lengthen” the structure of production too far? If the capital structure must be lengthened in order to obtain a higher standard of living, then there is some point at which it is impossible to obtain a higher standard of living, because labor has been divided to its maximum extent. Any further division would result in inefficiencies.

Or am I wrong in analogizing the “lengthening of the production structure” to the division of labor?

2

If you have the chance, good reading material for this is Rothbard’s Man, Economy, and State, Chapter 8, section 4, Capital Accumulation and the Length of the Structure of Production (its available in PDF).

For the Austrians, lengthening is somewhat akin to engaging in more time intensive production periods that either produce a greater amount of a good or a better quality good.

So lets say you want to write a book. Starting with primitive man (we’ll assume that he has the intellect to write a book), the most direct method is to grab some large leaves, mash up some berries and put it on a stick as ink, and start writing (even this takes production, because you have to find the appropriate materials, mash the berries, construct the crude quill instrument, etc etc). Combined with writing, this will create a book, but a poorly written/constructed book at that. For a primitive man whose time preference is so high (he save anymore and devote more time to invest in better methods-he has to feed himself), this might be all he can attain. Now he could produce a better quality book if he constructed a tool that could form the leaves into better “sheets of paper” and spend more time crafting a better writing instrument. That would be lenghtening the structure of production, because its taking a longer production period but in the end producing a better quality output. We could take it further and say, that he could construct a typewriter and paper, and then produce a book. That would surely lenghten the structure of production (for one man, let along a man on an island, to create a typewriter all by himself would take years). We could even take it further to our present day, and say that the man could create a laptop and a printer which would allow him to create a far superior product at blazing speeds. Of course the production period would be astronomical, and probably no man’s single time preference would allow him to engage such an endeavor.

The point is that production “plans” to produce a better product/greater quantity of a product tend to be longer. Man, because of time preference, always engages in the shorter methods first, so the only way to increase production is to go up. Not all longer production structures are better, but longer ones tend to be more productive. A lengthening in the structure of production doesn’t have to entail division of labor, although it usually can.

The illustration you described is a good example of the law of returns, which is that there is an optimal amount of a varying factor. Having one person per review a paper might increase the quality of the paper, but any more than that just takes to long and ruins its focus.

Technically it is possible to be unable to invest any more, but as Rothbard describes it, that would entail a Nirvana of sorts, something that we will never realistically experience. Man always has wants to satisfy, and so there will always be ways of satisfying those wants. The problem is time preference limits us from spending our time trying to satisfy those wants.

3

You may also see it stated as using a more “roundabout production process.”

Here is a lecture given by Jörg Guido Hülsmann at the Mises University 2010 which covers the basics, “The Division of Labor And Social Order”:

http://mises.org/media/5211

Edit: Also I just ran into another great example of lengthening the structure of production in one of the Mark Thornton speeches at MU2010. The example of milk.

Cows used to be milked by every farmer, placed in glass bottles, and delivered to houses every morning. This is a very direct approach to serving milk needs. Over time the milk farmers invested in factories to get the milk from the cows, and the milk is shipped to grocery stores all over using large trucks, from there each individual who wants milk goes to the grocery store to pick it up instead of having it delivered.

The milk factory makes it possible to produce much more milk than each individual farmer, and the distribution to many grocery stores is much more efficient than delivering to each house every morning. As you can see the capital being invested in the industry allows you to produce much more than you otherwise would have.

4

Thanks guys, I think I have a grasp of the concept now. I will check out the lectures/text you have mentioned.

Inuitively, I find this doubtful. It seems to me that there must be some area, not just theoretically in a false-assumptions “Nirvana” model but in the real world, in which a further lengthening of the structure of production would actually lead to decreased efficiency. I don’t have any idea what this could be though and I could very well be wrong. Has anyone attempted to refute Rothbard in this area?

5

I meant (and so did Rothbard) in more of the general investment category. There will always be area for new investment, because we don’t live in a Nirvana. Imagine the far off future where a world is complete paradise etc etc, there will still be investment to make things better or allow humans to travel to new far off places.

Rothbard admits that not all longer production processes are more productive then others. On page 537:

“The first processes to be used will be those most productive (in value and physically) and the shortest. No one had maintained that all long processes are more productive than all short processes…Similarily, there are numerous long processes which are not productive at all or which are less productive than shorter processes. These longer processes will obviously not be chosen at all.”

6

“Technically it is possible to be unable to invest any more, but as Rothbard describes it, that would entail a Nirvana of sorts, something that we will never realistically experience”

Is it even possible theoretically?

For example, you can always invest more in researching ways of improving your production processes.

7

@ Aquila:

I like this example.

Crusoe is gathering berries by hand (no factors of production, no capital goods). He lives from hand to mouth, gathering just enough to sustain himself each day. This is subsistence living.

He decides to build sticks to use on the trees, and nets to gather the berries when they fall down. But it will take time to build the sticks and nets. He must eat during this time. So he saves a few berries each day. After several days, he has saved enough to eat for three days, the time required to build his sticks and nets (factors of production).

This is an example of 1) time preference (he prefers to delay current consumption in order to consume more in the future). This is revealed as the interest rate in an unhampered market, 2) a pool of real savings (the berries used during the construction process), and 3) entrepreneurial risk (his plans could fail) but he decides it is worth the effort.

After three days, the sticks and nets are completed and he goes to work. His productivity has greatly increased. He now gathers enough berries in 1/2 of a day to feed himself for the entire day. This opens up new opportunities for investment (build a hut, cistern to catch rain water, etc). His living standard rises.

This rise in living standards was made possible by the lengthened structure of production.

The initial production structure (gathering by hand) was very short; no waiting period, what he gathered he immediately ate. The new production structure required time to save the berries and time to construct the factors of production. This lengthened structure, requiring a waiting period before consumption could begin based on new production, was made possible by time preference, the pool of real savings and entrepreneurial risk taking.

Grayson wrote an excellent article on the subject. Mises or Bust.

8

You are describing the effect of a central bank’s expansion of the money supply and the artificial lowering of the interest rate signal.

Entrepreneurs see the signal that funds are available to invest in long term projects. In an unhampered market, the interest rate signals the availability of real savings.

When the central bank intervenes, the structure of production is artificially lengthened, not supported by real savings (the boom). There is a disconnect between deferred consumption and investment in capital goods. The real savings needed to support the lengthened structure do not exist. When this is revealed, the structure must return back to a shortened period of production (bust).

If Crusoe starts to build a raft (six months) instead of sticks and nets (three days) he will run out of real savings and will have to go back to subsistence living until savings can be rebuilt.

Why would he make this mistake? Central bank manipulation of the money supply and the resulting distortion of the interest rate signal.

9

a short way to describe the idea is that given the exact same starting materials, and asked to build as many of the same homogenous good as possible; ceteris paribus, the person given more TIME will have the greater output.

10

This thread has been extremely enlightening.

Thank you all for contributing!