Friedrich August von Hayek, On the Relationship between Investment and Output (June 1934)

Hayek’s six-section article connects two approaches to capital: valuation through discounted future products and analysis through the periods for which productive factors are invested. It clarifies the relationship between the Marshallian and Austrian approaches, treating them as complementary accounts of production through time. The rate of interest is largely taken as given; its determination remains outside the principal argument.

I hope to show in the course of this article that neither of the two aspects without the other is sufficient to give a satisfactory explanation of the actual relationship.

The argument distinguishes the time required to produce a consumable good from the duration over which a durable good supplies services. These temporal conditions require different analytical starting points, although both connect present investment with future output.

It is necessary to begin by drawing a clear distinction between the two different ways in which time may be a condition to the production of the ultimate services to the consumer.

For goods in process, Hayek begins with an “investment function,” describing the distribution of labour across periods preceding completion. Labour represents a uniform original productive factor. Under stationary conditions, the construction can represent either successive inputs contributing to one finished product or the future maturation of labour invested simultaneously at different stages. This differs from the “output function,” which describes when resulting quantities of consumer goods become available. Equal quantities of labour invested for unequal periods cannot simply be assigned equal shares of output.

Introducing value connects the two functions through compounding at a given interest rate. Factors committed for longer periods receive correspondingly larger attributed products. The functions describe a particular arrangement of production, rather than alternative techniques and their effects on total output. Capital’s value consequently cannot be read directly from physical quantities of intermediate goods. Nor can a single average investment period, independent of interest, adequately represent a distribution of commitments across time.

For durable goods, the direction of inference is reversed. The expected stream of services is initially given; discounting establishes the investment periods attributable to the labour embodied in the good. A constant service stream need not imply a uniform temporal distribution of investment. Changes in interest alter that distribution even when the services remain unchanged. Together, the analyses substantiate Hayek’s opening formulation:

THE value of the stock of capital conceived as the discounted value of the expected future products, or conceived as the result of investing factors of production for definite periods, are, of course, essentially different ways of representing the same thing.

Section V examines the economic significance of these constructions. Entrepreneurs must consider when returns mature as well as their expected value. Where inputs can move between stages, equilibrium equalizes discounted marginal products, not physical products alone. Where technical proportions are fixed, adjustment occurs through changes in the relative scale of industries. Hayek thereby distinguishes physically identifiable contributions from value imputations dependent on the wider economic system.

Lower interest can encourage earlier-stage investment or the production of durable goods whose distant services become more valuable. Lengthening production, however, entails a transition during which consumer output is temporarily reduced. Corresponding changes in expenditure can keep prices aligned with costs; investment induced by interest departing from equilibrium can instead generate discrepancies between output and demand. Temporal structure thus matters for explaining adjustment, not merely for representing stationary production.

Section VI rejects the identification of current investment with the historical processes that produced existing capital. Such correspondence holds only under stationary conditions. Actual capital embodies unforeseen changes and repeated adaptations of inherited equipment. Capital goods are neither wholly specific nor freely convertible: their alternative uses differ, and changing circumstances affect their relative values unevenly.

The conclusion is forward-looking. Existing capital supplies an uneven stream of future services, while current labour must complete and replace those services at appropriate dates if output is to be maintained. Inherited equipment constrains investment without needing to resemble what is now being produced. Hayek presents capital as temporally structured and historically conditioned, linking valuation to concrete commitments while explaining why changes in relative capital values redirect present production.