Professor Knight and the "Period of Production"

Fritz Machlup’s “Professor Knight and the ‘Period of Production’” is a single-author theoretical article in capital theory and business-cycle theory. Its polemical target is Frank H. Knight’s attack on Böhm-Bawerkian and Hayekian “period” concepts; its constructive thesis is that these concepts are indispensable if purged of misleading terminology and stationary-state abuses. The article proceeds from capital maintenance, to the meaning of the production period, to technical complications, to special cases such as demand shifts and inventions, and finally to the credit cycle.

Machlup first rejects Knight’s claim that capital is “perpetual.” In a stationary model capital maintenance may be assumed, but it cannot be smuggled in when the problem is precisely whether capital is maintained, enlarged, or consumed.

Capital is not necessarily perpetual.

The same point governs Machlup’s critique of simultaneity. For some stationary-state problems one may treat production and consumption as simultaneous, but capital theory concerns choices among present and future services. Stationary abstractions are legitimate only if their fictional status is kept visible.

But the “as if” character of such heuristic suppositions must never be forgotten.

Machlup then reconstructs the “period of production” as the time interval between current productive services and the consumable services dependent on them. He accepts that the name is misleading and prefers “period of investment,” but he refuses Knight’s conclusion that the concept is useless. The relevant period is not the absolute historical duration of production, nor the technical construction time of plant, nor average durability. It is an average over inputs, and even that average is only a first approximation, since the temporal distribution of inputs matters.

The “shape of the investment function” would tell what the simple “average investment period” conceals.

Against confusions that divide waiting time by output, Machlup insists that the period belongs to the input side: productive services carry “consumption distances.” Hence a larger output does not mechanically shorten the production period.

An “average period in terms of total output” is meaningless.

The article’s central conceptual move is to shift attention from accumulated capital goods to current investment decisions. Existing equipment is a datum inherited from past investment; the economic problem is the present allocation of available services among nearer and more distant consumable results.

The investment function (the only significant one as an economic problem) refers wholly to the current investment.

This move also leads Machlup to broaden Böhm-Bawerk’s formulation. The analysis should not be confined to “original” land and labor; machine services, land-use services, and labor services alike enter current investment. He further distinguishes anticipated from historical production periods, capital goods from capital disposal, technical stages from time stages, and new capital construction from maintenance. These distinctions let him handle cases Knight treats as refutations: adding durable goods may lengthen the investment period even if average durability does not rise, while inventions and demand shifts affect the period only through saving, losses, replacement funds, and capital requirements.

The invention neither shortens nor lengthens the investment period.

The final sections show the relevance of this apparatus for cycle theory. Credit expansion, whether under full employment or unemployment, makes the investment period longer than it would be under voluntary saving and replacement funds alone. The crisis is not explained simply by monetary mismanagement or a psychological rush for liquidity, but by a mismatch between expenditure plans and the time structure of production.

The “internal forces” consist in a divergence between the individual time preferences (as expressed in the proportions in which the money incomes are saved and invested or spent for consumers’ goods) and the time structure of production.

Machlup does not deny that deflation, liquidity preference, factor immobility, and wage rigidity deepen depression. But these are not substitutes for the investment-period analysis. They explain the violence and unemployment of the downturn, not the intertemporal maladjustment that makes readjustment necessary.

To explain unemployment (through wage stickiness) is one thing; to explain the business cycle is another.

The article’s relevance lies in this defense of a refined Austrian capital theory: the “period” concept is not a crude measure of technical delay, but a way to analyze how saving, credit, capital maintenance, and production plans distribute services through time.