Long and Short Processes

Some lengthy or roundabout processes are physically efficient. But so are some short processes.

Lengthy processes are not physically efficient because they are long.

Some, probably most, lengthy processes would be physically very inefficient, for there are such things as spoiling or wasting with time.[1]

With a given labour force, there is a definite limit to the quantity of labour embodied in roundabout processes which can be used to advantage.

Apart from other considerations, there must be a due proportion between the amount of labour employed in making machines and the amount which will be employed in using them.

The ultimate quantity of value will not increase indefinitely, relatively to the quantity of labour employed, as the processes adopted become more and more roundabout, even if their physical efficiency is still increasing.

A lengthy process would become advantageous only if the desire to postpone consumption were strong enough to make full employment require so much investment as to involve a negative marginal efficiency of capital.

In such an event, we would employ physically inefficient processes, provided they were sufficiently lengthy so that the gain from postponement would outweigh their inefficiency.

We should in fact have a situation in which short processes would have to be kept sufficiently scarce for their physical efficiency to outweigh the disadvantage of the early delivery of their product.

A correct theory, therefore, must be reversible so as to be able to cover the cases of the marginal efficiency of capital corresponding either to a positive or to a negative interest rate.

I think, only the scarcity theory outlined above can do this.

There are various reasons why different services and facilities are scarce (and therefore expensive) relative to the quantity of labour involved.

For example, smelly processes command a higher reward because people will not do them otherwise.

So are risky processes.

But we do not devise a productivity theory of smelly or risky processes as such.

In short, not all labour is accomplished in equally agreeable attendant circumstances.

Conditions of equilibrium require that articles produced in less agreeable attendant circumstances (characterised by smelliness, risk or the lapse of time) must be kept sufficiently scarce to command a higher price.

But if the lapse of time becomes an agreeable attendant circumstance, which is a quite possible case and already holds for many individuals, then, as I have said above, it is the short processes which must be kept sufficiently scarce.

Given the optimum amount of roundaboutness, we shall select the most efficient roundabout processes which we can find up to the required aggregate.

But the optimum amount should provide at the appropriate dates the consumers’ demand.

In optimum conditions, production should be so organised as to produce in the most efficient manner with delivery at the dates expected by consumers.

It is no use to produce for delivery at a different date from this.

My theory is applicable to both contingencies.

If the interest rate were zero, there would be an optimum interval for any given article between the average date of input and the date of consumption, for which labour cost would be a minimum.

• A shorter process of production would be less efficient technically.
• A longer process would also be less efficient by reason of storage costs and deterioration.

If the interest rate exceeds zero, the cost will be increased by the interest charges and by the diminished efficiency of the shorter method of production. This cost increases with the length of the process.

In this way:

• the optimum interval will be shortened
• the current input to provide for the eventual delivery of the article will have to be curtailed until the prospective price has increased sufficiently to cover the increased cost.

If the rate of interest falls below zero (assuming this to be technically possible), the opposite is the case.

Given the prospective consumers’ demand, current input today has to compete with the alternative of starting input at a later date.

Consequently, current input will only be worth while when the greater cheapness, by reason of greater technical efficiency or prospective price changes, of producing later on rather than now, is insufficient to offset the smaller return from negative interest.

In the case of the great majority of articles, it would involve great technical inefficiency to start up their input more than a very modest length of time ahead of their prospective consumption.

Thus, even if the rate of interest is zero, there is a strict limit to the proportion of prospective consumers’ demand which it is profitable to begin providing for in advance; and, as the rate of interest rises, the proportion of the prospective consumers’ demand for which it pays to produce to-day shrinks pari passu.