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100 Piero Sraffadirectly required for its production, plus its commodity inputs; theoperation is then repeated on the latter, until we have a series (aslong as we like) of dated labour inputs and a residuum (as small aswe like) of commodities. Sraffa (1960: 34) calls this procedure ‘reductionto dated quantities of labour’. We can then compute the averageperiod of production by taking a weighted average of the intervalsof time between the date of each direct labour input and the dateon which the output is obtained, where for each interval the correspondingamount of direct labour input is utilised as weight, once thetotal amount of labour directly or indirectly required to obtain thecommodity under consideration has been set equal to one. 5 Austriancapital theory then interprets the average period of production as ameasure of the quantity of capital employed in the production process,thus considering ‘time’, together with labour, as the factors ofproduction.The rate of interest is thus obtained by the balancing of two forces.On the one hand we have the supply of capital, namely waiting, correspondingto the readiness of economic agents to postpone consumption:the length of time agents are willing to wait is assumed to be apositive function of the rate of interest. On the other hand, we have thedemand for capital, namely the relationship between additional waiting(increased length of the average period of production) and additionalproduct; the postulate of decreasing marginal productivity implies adecreasing relation between the average period of production and therate of interest. Thus, the rate of interest can be considered as the priceof ‘capital’, determined by the usual mechanism of equilibrium betweensupply and demand.This construction is criticised by Sraffa (1960: 37–8). The point isthat the average period of production is computed without allowingfor compound interest; when it is considered, the results may changedramatically. Thus Sraffa shows that if the inputs of the various productiveprocesses are reduced to dated quantities of labour, when the rate ofprofits changes we can have ‘complicated patterns of price-movementswith several ups and downs’. This is shown with an example, where theprice of product a (‘old wine’) at first rises, then falls, then rises againrelatively to product b (‘oak chest’) as the rate of profits increases fromzero to its maximum value. The reversals in the direction of the movementof relative prices, in the face of unchanged methods of production,cannot be reconciled with any notion of capital as a measurable5For an algebraic treatment cf. Kurz and Salvadori (1995: 437).Critique of the Marginalist Approach 101quantity independent of distribution and prices’. 6 The difficulty hadalready been sensed by Wicksell (1901), but later exponents of theAustrian school went on utilising the notion of the average period ofproduction. In particular, Hayek (1931a) built his analysis of employmentand the trade cycle on it.The full implications of Sraffa’s criticism were not immediatelygrasped. In a review of Sraffa’s book, Harrod (1961) tried to defendthe average period of production by pointing out that it can alwaysbe calculated, given the rate of profits. Apparently, Harrod failed torealise that in such conditions the average period of production canno longer be used to explain the distribution of income, for its verydefinition depends on an exogenously given rate of profits, as Sraffa(1962) pointed out in a short reply to Harrod. This, of course, is preciselythe import of Sraffa’s original criticism of the Austrian methodof measuring ‘capital’.The difficulties illustrated above must be borne in mind also whenevaluating later attempts at utilising dated quantities of labour forthe analysis of dynamic issues. Reference here is to the so-called ‘neo-Austrian’ approach proposed by Hicks (1973) for the analysis of suchissues as the transition between different technologies. In fact, Hicks’smodel involves both the use of a static framework for the analysis ofdynamic issues and a serious underevaluation of the capital theorydifficulties mentioned above. Let us consider this issue in somewhatmore detail.Sraffa’s analysis makes it clear – and indeed the point was deniedneither by Böhm-Bawerk nor by Hayek – that the reduction to datedquantities of labour is a theoretical construct, simply presenting in adifferent way the technology which underlies the Sraffian system ofsimultaneous equations illustrated earlier (§ 3.2) and not a historicalreconstruction of the way in which the different means of productionhave actually been obtained. Marginalist capital theory aims atdetermining static equilibrium solutions, hence marginalist analysisof technical change refers to static substitution between capital andlabour; technological changes over historical time are not considered.This should be borne in mind for two reasons. First, it is clear6A critique similar to Sraffa’s was developed by Garegnani (1960), with a directanalysis of the theories of the various authors who made similar attempts toconstruct a theory of distribution based on this conception. The criticisms ofthe average period of production are now generally accepted. Cf. for exampleSamuelson (1966).