Pointlessness of average period of production: A critique of Lewin and Cachanosky

Abstract

Peter Lewin and Nicolas Cachanosky seek to rehabilitate the concept of the average period of production (APP) introduced into Austrian capital theory by Böhm-Bawerk (1930). In their works, they argue that the financial concepts of Macauley’s Duration and Modified Duration are appropriate measures of the average period of production. For this reason, the most relevant aspects of the Austrian Business Cycle Theory (ABCT), i.e. the lengthening and shortening of the production structure, can be captured by them. In fact, the introduction of this concept into ABCT is pointless, since it only shows the sensitivity of the economy to changes in interest rates. Meanwhile, it does not help us understand a number of other phenomena that can be observed over the business cycle. By focusing on APP as represented by duration and modified duration, we are only referring to how the average value of all investments in the economy changes under the influence of a change in interest rates, ignoring other important phenomena that take place over the course of the business cycle.