Austrian Capital Theory: The guest outlines a trade model built on Böhm-Bawerk’s average period of production (APP), emphasizing time structure in production as a driver of comparative advantage.
Interest Rates & Specialization: Countries with lower interest rates or stronger financial systems tend to specialize in sectors with longer APPs, though multiple equilibria and ranking reversals can occur.
Measurement Innovation: APP is proxied using work-in-process inventories relative to cost of goods sold, capturing the temporal intensity of production across industries.
Empirical Evidence: Data show countries with more developed financial markets disproportionately export in long-APP sectors, even after controlling for standard neoclassical factors.
Capital Aggregation Issues: The discussion revisits reswitching and heterogeneous capital, linking APP to the semi-elasticity of unit costs with respect to interest rates.
Supply Chain & Inflation: Oil and shipping disruptions can propagate through production networks with delayed pass-through, contributing to higher inflation and potential policy responses.
Macro Context: As a net oil exporter, the U.S. may experience mixed aggregate effects from higher oil prices, despite consumer pain at the pump and possible Fed tightening.
Investment Lens: No direct stock or sector pitches; insights are most relevant for trade-exposed sectors sensitive to financing costs and time-to-produce dynamics.
Transcript
[music] >> This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's [music] your host, Dr. Bob Murphy. Well, Paul, welcome to the Human Action podcast. >> Thanks, Bob. It's a pleasure to be here. >> So, let's take care of this at the beginning. Um on Twitter/X a while ago at this point, I saw somebody announcing that oh, these two Harvard economists have a paper that involves Böhm-Bawerk and I went and looked at it in the abstract right away it jumped out it was talking about the average period of production and we'll come back to this folks in a minute and say why that's um you know, a controversial element in Böhm-Bawerkian thought. And I made some snarky remark about like, oh jeez, even when the mainstream's interested in us they focus on the one thing that modern Austrians no longer, you know, dwell on. And so, I want to formally apologize that I was just being snarky and >> [laughter] >> All good. >> So, thanks for coming here and yeah, that I mean this is amazing that we've got two Harvard economists and it have this like the draft I'm looking at is like 103 pages of a paper about Austrian capital theory embedded in, you know, international trade and it's under review at the AER which is arguably like top journal in the world. So, this is a very special event. So, of course, folks Paul was nice enough to come here and and talk about it. Uh before we get into the paper though or the the draft, Paul, can I just ask you just a little bit about your background cuz I'm just curious. So, you grew up in Spain and then went to MIT. Can you explain like over in Spain what's the what like what is that MIT known for? Like is it does it have like what's the reputation? Is it considered ideological? Cuz coming from the right-wing Austrian perspective, you know, what we have our views of MIT, but I'm just curious in general for a young person going into economics in Spain how they view MIT. >> Right. So, I mean I'm not too sure how things are now. I mean it's we're talking sadly we're talking about 20 more than 25 years ago. So, obviously things change. Uh the short answer to your question uh is that back in '99, '98, '99 when I was deciding MIT was simply not known. Okay, so um you know, I don't think that um most people pay as much attention to academic institutions uh in the US as people here in the US would. Now, obviously I was at a uh very good university in in Barcelona. And the folks that had taught me knew about it and had views about it. But um it uh there was no sense in which ideology mattered too much in that decision. I mean, there were views that uh Chicago um you know, it's sort of I I think the it was more about the freshwater macro versus new Keynesian macro. Less so about more like right or left type of stuff. >> Mhm. >> Um but um but the short answer is that uh I had a hard time convincing my parents that this was a good decision. Uh not because of ideology, but simply they could >> They didn't object to the Cambridge capital controversy? >> Yeah, exactly. [laughter] They could not understand why uh uh having been admitted to Harvard, for instance, >> Right. >> um I was deciding to go to a place uh with an acronym that they had never heard about. Um so, that's the short answer. >> Okay, well, then if you don't mind me asking, why did you So, you you could have gone to Harvard to get your degree instead you chose MIT? >> Yes. >> Uh absolutely. Um So, um so, the short answer is uh well, this I don't know how short, but um I um Harvard admitted me um I think in part because I had a Fulbright scholarship. >> Mhm. >> So, um I don't think we operate this way any anymore here at Harvard, but back in the day, if you had some financial aid from back home, that that gave you a little bit of an advantage. Um and I was elated, right? But then MIT admitted me and I started talking to some people back in my university that were telling me, you know, that's actually the best PhD program, technically, blah blah blah, that's where you want to go. Um and MIT uh I don't know how why exactly they they saw something in I mean, I felt like they did really see something in me and they offered me without even me asking for it a full ride, basically. And they said, "Look, we want you to come here. Um we think that when you finish your PhD, you will want to stay in the US and be an academic in the US and the Fulbright scholarship uh has some ties and we don't want you to take it because we want you to be able to choose and that was four years down the line." And that was very persuasive. I went to Harvard and I told them, "Look, uh that's what they're telling me there. Um I'd love to come to Harvard maybe, but you know, that's uh obviously there's no strings attached uh after I finish at MIT." And Harvard, obviously, because probably my ranking was not all that high, I had been admitted precisely because of the funding, they basically said, "Well, you know, you have a Fulbright. Um if you want to come here, use a Fulbright." So, that's one of I mean, there were many other things, right? I mean, an MIT is really a fantastic PhD program and I'm not sure what I would have decided under equal uh financial packages, but you know, it obviously, if you can make a decision without tying your future, um that that sort of uh and that's what I did and and and it was clearly the right decision exposed in terms of um I had a blast there, the great program and God only knows what would have happened if I had gone elsewhere, of course. >> Right. Okay, great. So, then my next uh sort of just warm up question here before we dive into the paper is how did you get interested in you know Böhm-Bawerk and I guess capital theory more generally but like specifically in the Austrian Böhm-Bawerkian tradition because I imagine that at MIT they weren't courting you saying yes we definitely want someone to come here because there's a hole in our department that no one's working on Böhm-Bawerk. >> No, this this came this came much later. It came much earlier and much later. And earlier in the sense that um I I would imagine that relative to the median uh academic economist uh in in in in US universities I'm I'm a bit perhaps a bit more versed in the history of economic thought. Um when I I did my undergrad in economics uh in Spain as you may know there's much more specialization there so I took like dozens uh literally like more than 40 courses on economics. Um and less on other things. Um and uh one of those courses was on the history of economic thought which was taught by a very uh entertaining individual who had been in politics. Um and you know he was uh he was obsessed with Schumpeter and the Austrian school. He was one of the introducers of Schumpeter's ideas uh into um into Spain in the '50s, '60s, etc. And uh so he did a very entertaining course on the history of economic thought and we talked about you know Menger and Böhm-Bawerk and uh but Schumpeter and uh Hayek, Mises, etc. Right? So I I had a familiarity of where the school um at least up to the 19 '50s, '60s >> Mhm. >> uh where it fit in the history of economic thought. Um uh and I knew that how important it had been for like neoclassical economics for instance. And I've I've regularly kept sort of reading history of economic thought. Now that's like way back, right? Now if then do you have like 20 years of my career that are focused on very different things. I mean, I've been working on models of global production, multinational firms, uh uh contract theory applied to general equilibrium models, uh very little capital theory, um and and certainly not uh a lot of sort of history of economic thought. But then, 19 I sorry, 2019, I think, uh so not that long ago, um I was in Vienna. And I go to Vienna regularly cuz my wife is from Bratislava, which you may know is uh maybe 50 like 40 miles from Vienna. Uh so, I spend chunks of the summer there and uh and I co-organize with a good friend of mine there a a conference every year where they we bring up a bunch of international trade economists and have a couple of uh days of seminars. And I was always amused how uh folks go there go I don't know if you've been to Vienna, uh but it's sort of uh uh for for young folks that maybe don't like fully appreciate the history of the city that they're shocked just how monumental the city is, right? It's like, wait, Austria is a small country. Why does it have this absolutely stunning capital? And then you explain a bit about the empire and this and that. And then you're like, well, but you know, we're having this at the University of Vienna. You know, this is the cradle of like modern economics. And so, we were having sort of these discussions and over dinner we're having the discussion of just the importance of the Austrian school for the development of of economics. And a local professor there um recommended a book uh which is cited in in the footnote of of of this paper that you mentioned, uh which is by I brought it cuz I always forget names. Uh Janek Wasserman, I don't know if you've read this book. Uh it's The Marginal Revolutionaries: How Austrian Economics Economists Fought the War of Ideas. Okay? So, I read that in 2000 during COVID, actually. Um and I found it, you know, some of the stuff I knew, but some of the stuff I hadn't fully appreciated. Uh it was a fascinating read and that sort of started reading the chapters on Bomba work and like remembering what he was working on and it just sort of made a lot of sense. Uh This notion of thinking hard about the temporal dimension of production. Uh, thinking about the role of sort of time and sort of not only as a sort of a cost of time in the traditional way, but sometimes something that is necessary that is productivity enhancing. And and having thought a lot about sequential production processes and how they become global. I felt there was something some concepts there. Uh, that seemed potentially important that I hadn't seen in the type of formal work. Uh, that I that I typically I'm involved with. So that sort of led me to think, you know, uh You know, I do this with this, but I many other topics I see what's happening in the world. Mhm. And as an academic, um Uh, then I pay to think well we think, right? So so what's happening? Uh How do I think about it? What is the framework in my toolkit? That I'm going to grab to understand this. Most of the time I have a framework. We can debate whether it's the right one or not, but I I have a way to understand this to make sense of this. Uh To to to criticize it or to praise it to be worried about it or to be to be excited about it. Uh, but in this particular ideas I I didn't know of about a formal model that would sort of capture that. >> And that let me down that path. >> Okay, that great. Yeah, and that answers your question. I I saw you cite that book and you were sort of giving the history in the paper of still like what led us down this path and I I haven't read that particular book so I'll have to check that out. That's interesting. I I have been to Vienna. I was there um one time I gave some kind of a presentation in in actually the I don't know if they call it Central Bank, but like a bank office in Vienna. It was kind of funny cuz I was basically giving a presentation saying why the Central Bank shouldn't exist or something. But anyway, [laughter] so it was it was interesting. All right, well, let me I think maybe Paul um for the benefit of the listeners here, maybe I'll just read the abstract of your paper and then we can start going through. Obviously, we're not going to get into like equation 16 says such and such, but maybe just to give them the >> [laughter] >> the big the big picture. So, the title is an Austrian and Austrian's in quotation marks model of international specialization. So, it's Paul and then you've got a co-author Adrian Colazza, also from Harvard. And here's the abstract. We develop a general equilibrium model of international trade in which the temporal structure of production is a key determinant of comparative advantage. Building on Böhm-Bawerk's theory of capital, the model formalizes the idea that production processes with longer average periods of production or APPs entail higher financing costs due to the time lag between input payments and revenue realization. We embed this insight into a multi-sector Ricardian framework with endogenous interest rates. Under autarky, countries with more patient consumers or more developed financial markets exhibit lower equilibrium interest rates and higher wage rates. With international trade, these countries typically gain a comparative advantage in sectors with longer APPs. Though the model can also generate multiple equilibria and unconventional specialization patterns. We extend the framework to include trade costs, global value chain, and international capital market integration. And then finally, empirically, we present evidence showing that countries with more developed financial systems export disproportionately more in sectors with longer APPs even after controlling for standard neoclassical and institutional determinants of comparative advantage. All right, so there was You made me realize that I need to make it shorter. >> [laughter] >> Oh, was it yeah, there's probably some sort of period of period of round yeah, it was a roundabout exposition or summary of your paper. Um okay, so I I was going to be kind of snarky and say like, oh, so it's like Bambawale meets Krugman." Let me explain what I mean by that and then you can tell me like whether that Yeah, that's kind of right or if like no, that's totally wrong. But just for the cuz I think some of the listeners don't even know in terms of like modern >> Sure. >> trade like for example, Paul Krugman wins a Nobel Prize for his work on international trade and if you read some of his stuff where he's kind of like giving a a big picture summary of what has changed, I think part of it is something like this where for example, the case of the US, we can understand why if you're looking at Alaska versus Florida, Florida's going to send them oranges and Alaska's going to send them oil. That like just makes sense and that's you know, why is that? Well, it's obvious cuz of natural endowments. But more generally, you could have two identical regions with the workers are exactly identical whatever at time zero and if there are um economies of scale in the production technology, just through happenstance of one country goes down one path and another goes down a different path, you could see why 20 years later, they each have comparative advantages in different things and they specialize and export to each other not because the terrain or the resource endowments were different but just because, you know, path dependence and one thing specialized in one versus the other. So, you know, partly the models bec- you know, model things like that and you know, combine different types of literatures. So, is what you're doing just a particular example of that latter approach where you're saying one of the things that could make one country, you know, specialize in certain things is historically, they've invested in longer production processes? >> Yes and no, okay? So, uh everything you said is absolutely correct. It's a very nice description of uh of some of Paul Krugman's work. Um I would I would say um yes in the sense of we have the neo what we call neoclassical theories of specialization, Ricardian models, the Heckscher-Ohlin models. Uh and then the Krugman, what I'd like to call the the the Helpman-Krugman revolution, so-called new trade theory, was motivated by facts that we didn't see in the data that we that were visible in the data that were not rationalizable with neoclassical models. And you give a very good example of scale economies or sort of history matters and things like that. Um so in that vein, yes, what we're doing here is saying some of the traditional determinants of comparative advantage um you know a notion of capital abundance, of skill abundance, coupled with differences in say skill intensity across sectors are not sufficient in the sense that there's going to be residual variation in trade patterns that is explained by additional factors, right? And Krugman might be just accidents of nature or country size or something like that. Where I would say that I'm that I'm less we're less close to Krugman is in the sense that our model is actually um other than this Bomb Bather feature, it's absolutely neoclassical in the sense of having perfect competition, constant returns to scale. So there's no like every single assumption that Krugman built into models to kind of generate these new predictions, they're not there. Our model is actually in a lot of the papers in trying to um argue that despite being a model in which we're going to have labor and capital, okay, as in the Heckscher-Ohlin model, which is a one of the benchmark neoclassical models, the fact that we adopt this sort of Austrian notion of capital that is less tied to a homogeneous stock of physical capital, whatever that may be, and that would bring us to the famous capital controversies. If you think about capital as associated with working capital, with credit, Um, is necessary to kind of generate this sort of longer production uh line uh length, uh then you get predictions even in a otherwise neoclassical model that are quite distinct. Okay, so that is what I would sort of draw the distinction that yes, it's um it's a it's a twist on neoclassical theory, but it's within neoclassical theory. And then there's more subtle issues, which is maybe there's a connection in Krugman in that we also have multiple equilibria. You refer to multiple equilibria. There are multiple equilibria that have to do with uh with the nature of capital in this frameworks, which is very much an Austrian nature of capital, which is, you know, uh emphasizes the the dangers of over aggregate like aggregating capital into single things that may be convenient in some settings, but uh but may lead to uh rule out situations that may well arise as uh in equilibrium, uh which is what we illustrate in the paper. >> Okay, great. Um, let me ask you this then. Is your baseline result Are you starting with identical regions and just showing if except perhaps maybe for prep consumer preferences for the timing of consumption and saying the people that are more patient, this is how that's going to unfold or is that not your approach? Like do you >> You get You nailed it. That's that's I mean, we we do it more generally, but sort of that the baseline case would be this one where it's not like the two countries are completely identical. This There is a you know, which in a Krugman world you can generate trade in completely identical countries. We need some difference. We need some differ What's What's different here is that it's going to be coming from as you said exactly patience. Doesn't need to be only patience with our model allows for interest rate differences that are coming from variation in in in the efficiency of the financial system. >> Mhm. >> In some countries, uh funds are transferred from savers to investors in a more efficient way, right? There's less loss along the way. That would also generate interest rate differences. Uh but you need a little bit of a difference in that sense. Okay, and that's going to generate differences in availability of financial capital across countries. And that generates the interest rate differences and then the interest rate differences are going to affect the decisions of agents of just how long to kind of let production processes mature that are going to generate differences in production structure. >> Okay, so again I'm taking the readers along for the ride here Paul. Okay, so I realize yes, you cover a lot of stuff. I mean it's 103 pages with a lot of appendices and stuff. So it's a bit you cover a lot of material. But um but you Yes, one way of thinking of it is just to get a to the listeners and also like trained economists too who are just curious like what are these people what are these guys doing? Well, I want to check this paper out. So yeah, one baseline result is again two otherwise identical people or you know groups at time zero except that the consumers in one you know discount future utility less than the other ones do and so they're willing to save more. That can cause these things. But now am I right in thinking that like oh you could say okay, but where does the Böhm-Bawerkian capital theory come in? So the production technology in your framework the people input labor hours um and the the the gap like the duration like how long the labor hours are gestating in the production process before the finished good comes out that's like one of the choice variables, right? And >> Yes, I mean it's um the the Böhm-Bawerkian what do you call Böhm-Bawerkian? That's a big that's a big word. Um aspect yeah, comes from the the links the link between the the length of production. Okay, how many periods I mean we have continuous time but it doesn't matter just how the interval you know, how many seconds you spend in production and the productivity. Um and and that's a little bit of a history dependence of the paper because in the initial version of the paper which I started on my own and by the way Adrian my co-author is my student here and he joined the team at some point. He's making great contributions so it made sense to bring them along. >> [snorts] >> Um we we started with this link, right? Then if you read the the current version of the paper, a lot of the results uh really are more about the time-phased nature of production. That That some things for whatever reason they take longer than others, okay? And as long as there's interest rate differences across countries, obviously that's going to penalize but longer production processes more than shorter ones if it's if you're facing a higher interest rate. So, you know, obviously the time-phased nature of production is something that we associate with Böhm-Bawerk, uh but at some level goes back to Ricardo, uh and um and and Marx. Uh they wrote about that quite a bit. I mean, I think about Böhm-Bawerk as sort of really taking this idea and and running with it and arguing, well, um that happens, but it's also important for understanding productivity. You want to understand how interest rates are determined, this productivity effects uh might be relevant for that. Um so, you know, that's that's in there, but but a lot of it is more basic, linking to the capital controversy, which is the time-phased nature of production generates a lot of complications in thinking about what capital is and how do you how you can aggregate it. >> Okay. So, then my next question, just to clarify exactly how the Böhm-Bawerkian and I don't think I made that up, I think I seen other people use that. Uh element makes your your approach distinct. Um let me put it this way, couldn't a standard neoclassical growth theorist say, "What what do you mean? Like, if you had a like a Solo model or something and then you would posited that people had different uh intertemporal preferences and you you know, had them separated, I could see how the one people that they used to have a higher savings rate so they accumulate more of the homogeneous capital stock and that increases >> Yeah. >> you know, the the level of consumption, you know, anyway, could is there some reason that no if if capital is homogeneous even though saving more makes production higher 20 periods out that doesn't give rise to the specific things you're seeing? >> Right, great question. So, you sound a bit like my referee with my referees. >> [laughter] >> Hopefully not referee two. >> Yeah, you're referee two. I could tell. Um Um Yeah, no that's a good question. So, um the way I think it is as follows. Uh if you take a solo model, uh which is a dynamic version of a model with a like a homogeneous K, that maps to the actual model where also K is a homogeneous thing. And then you have predictions, let's say countries with lots of K relative to labor are going to uh produce and export capital intensive goods. And you you test the theory by trying to measure uh this big K at the country level, which is hard. Mhm. Um and then at the production level, at the industry level, you'd want to get a measure of capital spending, like spending on in on structures, on uh equipment, etc. relative to labor payments, right? We're saying uh yeah, maybe that might have some predictive power, but this story is different. It's like don't try to measure physical capital, maybe credit measures of credit over GDP, say, might be the or measures of financial development is how efficient financial systems are. This is the relevant country dimension. And and at the industry or product level, what you want is not a measure of uh the capital intensity in a physical sense, but a measure of the say working capital intensity, or more directly, uh a measure of of just how long uh on average, this average period of production, uh how long does it take to kind of collect revenue uh relative to when you're spending on inputs, right? And and and that variation, you could say, well, that's isn't that physical capital intensity? It need not be. Okay, that we show in the paper that that this connection might break. And in the data actually, surprisingly, we can talk more about empirically how we measure the APP, our measure of the APP turns out to be negatively correlated with standard measures of capital of physical capital intensity. So, that's why I see empirically, it is it is a distinct source of comparative advantage. It's not about machines, it's not about uh buildings and things like that enhancing productivity more in some sectors than others. It's really about the temporal dimension of production and the associated working capital needs and how it interacts with the financial system in in different countries. >> Okay. That is very interesting. And And yeah, just so you know, Paul and for the listeners, too, right, I wanted to kind of work through like the theory and then a big chunk at the end I want to give you time to explain empirically like why do you think this approach is is fruitful. But let let me read something from your paper that prompted me to ask you that so you make sure you understand where I'm coming from. You got [clears throat] this line, "These peculiarities arise because while financial capital is homogeneous and freely mobile across sectors, the physical capital goods it finances are heterogeneous within and across sectors due to variation in the temporal structure of production." And so, that that's why I was wondering like is it how how how much do your results depend on like why your results differ from a standard model that really you are not just assuming that oh yeah, you can summarize the capital stock at time T with you know, big K subscript T as opposed to there's cuz cuz that's a just so you know, Paul, that's a standard thing that Austrians a lot of times when they're trying to explain to people well, why is our why do people why should people care about the Austrian school? And most of us go, "Oh, cuz capital goods are heterogeneous." And some people are like, "Yeah, yeah, yeah, whatever. We we kind of know that." And so, anyway, that's partly why I'm wondering like how critical is that to what you're doing in this paper? >> Um it depends on what you uh uh want to take from the paper, right? So, if if you just if um, when we talk [clears throat] about the empirics and what we look into the data, what we find in the data, uh, it would be, um, um, you know, this idea that indeed in the data, uh, longer production processes tend to be carried out in, uh, in in in countries with lower interest rates. I don't think those differences are crucial, okay? It means that we could have, uh, this is a prediction that comes out very cleanly, precisely, when, even though measuring the aggregate K could be complicated, um, um, uh, the natural way to aggregate them uh, would deliver uh, roughly the right answer. In the paper, we also show that um, in situations in which that aggregation becomes trickier, >> Mhm. >> um, the model generates a series of more surprising results. For instance, uh, we show that it could be the case that uh, countries with lower interest rates, um, could actually, uh, um, end up, uh, producing goods, uh, that when you measure working capital intensity, uh, that working capital intensity is not higher, okay? So, that there's there's some sort of, uh, what we call ranking reversals that can arise in the situation. Perhaps more interestingly, uh, whether a country, um, you know, whether the more patient country, say, uh, ends up with a lower interest rate or not, uh, it's it's a bit less obvious. There's multiple equilibria. Because if you happen to be, and I'll try to explain this, uh, in in in plain words. Suppose you're a country with, you know, patient uh, consumers, then you you tend to think that in that country interest rates are going to tend to be lower. But suppose that leads to according to the model that country to specialize in lots of sectors that have long production processes. >> Mhm. >> Well, that's going to entail a lot of demand for financial capital because we need to sustain these long production processes. With limited capital mobility across countries, that's going to generate a lot of local demand for capital which might bid up the interest rate. And it's not inconsistent that then you'd end up with a higher interest rate. >> Mhm. >> And then you no longer have competitive advantage in in this long production processes. Okay, so then you can get into this loops where you end up with with a patient country actually with a higher interest rate which which is not something you'd get in like a solo style looking neoclassical model. So, you know, what we haven't done in the paper yet is okay, how what's the evidence for this sort of new like completely new um predictions that are hard to generate in neoclassical models. We haven't done that. The predictions we have I'd say are distinct from available frameworks because they tell us we should be measuring K aggregate K and the variation across sectors in working capital intensity differently than we had been doing in the actual in model. Uh but we are not testing the sort of um uh funky results that we can get because of that thing. >> Okay, fair enough. >> What's the evidence? Yes, super quickly. I mean, you may know you know, there's this sort of related literature on reswitching effects. Samuelson had a very you know, the summing up paper, classical paper showing funky stuff can happen >> Mhm. >> uh when you think you can aggregate K and you can't, right? So, um we know that's true and and actually Samuelson was one of the few people going on record saying, you know, Joan Robinson was right. Um you know, similarly, I guess the Austrians were right in that it's typically not possible to to aggregate K. Um and here's proof of that. Now, the literature as you say that they moved on, and people say, "Whatever." Why? Well, because maybe we think these are funky situations that are not typically arising, and you know, we understand it's all approximations. We're just models are just an abstraction of reality. And yes, it's not exactly right, but maybe ballpark right. So, I I'm not sure I have a view on this whether these sort of funky things that can arise here are first-order importance or not. Uh um but uh but we thought that this is interesting. We might as well lay it out. Maybe people will pick it up and and test it in the future. >> Okay, great. So, you actually just segued right into one of the things I was going to ask you anyway, Paul. So, let me bring the the viewers along to make sure they're not getting lost. Okay, so partly why I was pleasantly surprised to see people, you know, nowadays working on stuff and and referring the average period of production was that a standard history of thought treatment says this is just dead. Like, Mark Blaug in his history of economic thought, um I think he This might not be an exact quote, but it's definitely close to it. When he's talking about Austrian capital theory, he says that this this reswitching controversy was the the nail in the coffin of Böhm-Bawerk's original conception. And so, just for the people at home here, the the big idea is um the idea is, okay, if you take labor and natural resource inputs, and if you're willing to invest them in physical processes that take longer, in general, you can always find a higher physical yield, right? That if you know, you want to get water out of the stream, if you just go with your bare hands and keep walking back and forth to your hut, you're not going to get many gallons per hour that way. But, if you first take the time to go fashion a shovel and you dig a ditch and you do this and that, you know, it might take you a year to get that whole thing up and running, but once you do, the amount of gallons per hour of your expenditure, all things measured, is is much higher, right? So, the longer you're willing to, you know, make the production process take, the the more yield you can get in physical terms for the amount of inputs you put in. Okay? And so, then and then Böhm-Bawerk, you know, tries to link that to, oh, so that's why a more capitalistic country that, you know, they save more, they invest more in the longer processes, they have a higher standard of living. And all of that kind of makes sense. But, the reswitching controversy, what they discovered in the famous, you know, Cambridge capital controversies in the uh mid-20th century, is that you can come up with very simple examples. And Samuelson came up with a simple one, and he was throwing in the towel, by the way. He was He had been on the wrong side of the debate originally and said, okay, yeah, yeah, these critics were right. Sh um saying that you can imagine a production thing where uh at high interest rates, one production process is favored over another, and then an intermediate range of interest rates, it flips that a different one is, you know, more cost-effective. But, then if you push interest rates down even more, it flips back to the other one. And so, he's saying there's no unambiguous way to rank production processes in terms of being more or less capitalistic in physical terms. Hence, this story to try to connect like, oh yeah, the capitalists save more and lowers interest rates, and that's good for the workers, and that kind of justifies ideologically the the interest payments to the capital No, that's all crazy because you can we can just show that doesn't work in general. So, I'll stop there, Paul. So, and then, you know, Block said, yep, see, nail in the coffin. Böhm-Bawerk was wrong. Do something else if you want to talk about capital and interest theory. And so, you guys are bringing that up again. So, what's what's going on? >> Yeah, no, I mean, I two answers. So, so the short one is sort of um you know, discarding a theory because of sort of some unconventional results that can happen in in in in particularly carefully chosen examples. I mean, I I don't think that's uh that's necessarily a conclusion that you can draw and you could do [clears throat] the same with uh solo style aggregate K theory and uh Heckscher-Ohlin models if you have things called factor intensity reversals, which can absolutely happen with well-behaved uh production functions that also generates all sorts of funky results. And we didn't discard the theory because of that. Okay, so that's answer number one. Answer [snorts] number two, perhaps more constructively. So, um part of what we do in the paper is is is formally derive an APP measure, which is not new actually. It's somewhat distinct from uh the Böhm-Bawerk one because of continuous discounting like the compounding of interest rates. But, this is something [clears throat] that actually you can trace it back at least uh to Hicks, his Value and Capital, 1939. Uh he has chapters on the average period of production and shows exactly how one should measure it with properly with uh discounting. And what we show, which we were very excited about, we thought we were the first ones to point this out and then I found a paper I'll tell you the story later in the 19 the 1970s paper that makes it very clear that this notion of the average period of production, despite all these things that you mentioned with Samuelson and stuff, there's always a very tight connection between this definition of the APP and how interest rates affect production costs. Okay? Technically, the I don't know if you want technical stuff, but what we call the semi-elasticity of the unit cost of production to the interest rate uh d log c over dr, that is exactly equal to this definition of the APP. Okay? Which tells you that if you want to measure how sensitive costs are to interest rates, formally, that is exactly what you want to be measuring. And it's a formal definition that is very much tied to Böhm-Bawerk, except for this sort of better treatment of compounding, uh which, you know, can you know, can trace it back uh to Hicks, okay? And that's very important because in neoclassical trade theory, um that derivative, I mean, how uh factor costs, in this case, interest rates affect uh costs is what determines comparative advantage. If a country uh has comparative advantage in capital-intensive goods, it's because changes in the rental rate of capital uh affect capital-intensive goods more than labor-intensive goods. That sensitivity is key. And And that's the sense in which, yes, the APP, we're aggregating all this complicated stuff into a number for a production process, right? It's an object. It's a real number. >> Mhm. >> Um but that's actually the key thing to to figure out where that thing should be produced, okay? If it's in a high or low interest rate country. So, that's the sense in which, even though funky stuff can happen, okay, and I alluded to Samuelson in terms of multiple equilibria, this and that, the link between interest rates and and and where high or low APP sectors should be produced, that is uh that is not subject to kind of funky counterexamples. So, that's the sense in which I'm And by the way, I mean, Hicks, but um I have it in front of me. Uh I'm sure you're familiar with Peter Lewin. Lewin, is that right? >> Yeah, and Nicolas Cachanosky, yeah. >> Yeah, they have a very nice paper, which I also discovered in this time, which we cited, which which makes a very similar type of point, like um actually, it's not that, okay? I don't think they make this uh semi-elasticity point that I'm mentioning, which is key in our paper. Uh but uh but but they but I I didn't get a sense reading that paper. These are pretty well-known Austrian economists. I didn't get a sense that the APP was dead. Okay, that there was at least a sub-community of the Austrian school that was still believing in in this concept. >> Oh, yeah, there I I may have over spoke there. Right. So, for folks so, Peter Lewin and Nicolas Cachanosky and I have I've had Nicolas on live interview Peter as well. And and right, that's one of the things they do. They do a lot on like the intersection of financial economics and Austrian capital theory. And yeah, one of their things was to say if you giving a way that you can correctly uh deal with the average period of production in a way that doesn't isn't subject to these reversals and it does what you want. Also, uh Paulo just as a fun anecdote, there's this Austrian um economist Roger Garrison, he recently passed. Um and his original training had been in engineering. And so, one of his complaints was he said that, you know, economists don't keep track of units and that used to annoy him in the you know, in the capital literature that they didn't keep the units track consistent. But he always thought that the capital reswitching thing was like a big nothing burger cuz he said, yeah, that's just showing that um a quadratic, you know, the quadratic formula has two solutions. Like big deal, you know. So, he he never thought that that was uh a big deal one way or the other. Okay, so I I thank you for going I'm glad I I asked you that to go through that. So, maybe can you and you kind of already said it a little bit but just for completeness, can you summarize to say if someone's like, okay, what's the what's the payoff? Why do I want to wade through this paper? Empirically, what kind of things do you think that your approach can shed light on where is again that the standard explanations from the neoclassical or even the new trade theory people don't quite fit the patterns that we see in some of the data out there? >> Right. So, so there's a narrow a a narrow goal of the paper like takeaway and then a a broader one. The narrow one is yes, maybe we've missed that when thinking about capital and how it shapes specialization international specialization. We might not just want to stick to this actual lane physical capital idea and we want to envision a notion where capital matters in a way that interacts with the duration of production. And empirically um uh part of the contribution less of this paper because we we just borrow this measure from a different paper I wrote with a different grad student Italic Tubdinov. Uh we we suggest a way to measure this notion of duration which is which is I mean if you think about it it's it's hard, right? So, if you go back to the Vixcel uh timber examples of like the trees that are growing you gave us somewhat different example but same notion that if I wait longer for the tree to grow I'm going to get more more timber. I mean you you could imagine for particular sectors being very careful about how long they last how long time improves their productivity. Think about whiskey, right? Or or wines where we could get a sense of just how much productivity improves with time. Um instead we just sort of um uh take a different approach which is partly motivated by theory which is uh in the model variation in in the APB should correspond to variation in things we can observe. Okay? And in particular what we show uh and it sort of goes back to work that um um uh you may you may have seen Robert Dorfman who taught at Harvard for many years [clears throat] worked a little bit on on this sort of Austrian models. And and we kind of got the idea from there, which is use data inventory data. Okay, so if you are a firm that is producing things instantly very very quick production runs, you're going to produce and spit out of the factory like all the time, right? So there's you know, there's going to be very little stuff sitting as inventory. When you are producing wine, say, um and you have all these barrels that are have different maturities and so on. You've got a lot of inventory in house. Okay? So that it's sort of natural that inventory and in particular what we call work in process inventory, not like raw materials or finished products inventories, but this sort of work in process that's very much tied to this notion of there's a semi-finished product that is at the factory, okay, or whatever plant, and it's still there's still added value being added. So we have data for that. I mean, inventories data are are widely available. And what we show is that the APP is very close in the data under some stationary conditions it's very it should be captured by the ratio of inventories to the cost of goods sold. Okay? >> [snorts] >> And then those are two things that are always financial in financial data you can find for any publicly traded company. That's very easy to do. And with Vitali we we just went and measured this. We measured this for all the firms in Compustat, US, various countries. We explored variation that was you know, the extent to which firms in different sectors like all the wine makers are going to tend to have like larger duration than all the milk producers. Okay? And indeed we tend to see that that there's a big sectoral component to this measures. There's a lot of variation. If you look at the top longer production processes and the shorter ones, it kind of makes sense. You can kind of sense that there's a temporal, you know, this industry is different in a lot of ways, but it does look like that the temporal dimension of production matters. I think uh tobacco was one of the top five longest production processes. That had me a bit confused, and then at some point I gave a talk somewhere, and people said, "No, it makes a lot of sense. You need to like put them in the sun." I don't know anything about anything about tobacco, but uh they were telling me, "Yeah, no, that makes sense, actually. It actually takes a while uh to do these things." So, that's how we came to this measure, and then indeed it does look in the data that longer production processes uh if you look at exports of countries at the at the country and and sector level, mhm uh countries with lower interest rates tend to export disproportionately of this what we've measured being a longer production process. It's a statistical result. If you want to find counterexamples, I'm sure you'll find them. It's sort of on average, uh this has predictive power. Uh and and quite a bit of predictive power comparable to like other standard determinants of competitive advantage, like skill intensity, skill abundance interactions. That's kind of that's how what we do. >> Okay, fantastic. So, of course, folks, I'll I'll put a link um to Paul's paper. >> That'd be awesome. >> the version submitted. That'd be great. We have a few minutes here left, Paul. I have to ask you, and this is like we're we're chasing ratings here or whatever, but given you know, I was looking over your CV and how much in general you've done like on supply chains and things like even in the agricultural sector, do you mind just sharing your thoughts uh the Strait of Hormuz and you know, there's there's different things like a lot of the analysts, not just professional economists, but just guys who write like newsletters for financial people and whatnot, they're just going over the raw facts about like the interruption, not just of crude exports, but fertilizer and things like that. And yet, it seems like market prices are not nearly as worried about things as these analysts are. Do you have any comments on that? >> Um I have comments. I'm not sure I it's uh it's it's uh I'm perhaps a little bit less comfortable talking about these things than about semi-elasticities. Um let me just I'll I'll I'll answer the question. Let me just say one thing that I that that I left uh hanging and I don't want to leave it which is before in the previous question I you were asking me about what I draw conclusions, right? Or or or ways forward and I mentioned this one about here's a new measure of duration. Um The the the broader point I wanted to make is is um which I think should should be exciting uh for folks in in in in in your school uh thought is that I I do think that some of these ideas of of of the duration of production the links between time and productivity they have much broader applicability than just sort of figuring out the implications for trade flows. Um and and that's by the way um that is my sense. This is a paper that I've presented in many many places, many audiences, some international trade audiences. But talking to macroeconomists, they find this stuff very interesting. Okay, so um you might have the view that uh that sort of economists of this neoclassical tradition that they've they've sort of built on these ideas and they're immutable. No, I think people understand um that these ideas uh there was some power in some of these ideas that it's complicated may perhaps the work with models with uh heterogeneous capital. Uh but you know, there's a lot of I I I sense interest and and and so it leads me to believe that maybe there might be broader applicability and that people are going to start thinking harder and harder about um you know, time an explicit notion of time and how it shapes production, how it shapes interest rates which is sort of at some level one one one way that kind of like one of the key ideas in in Böhm-Bawerk's work. Anyway, that I wanted to leave that. Um >> Which is why guys like me should not be snarky on Twitter when you see someone >> Hey, it's Twitter. I mean, this is supposed to be you know, I can be I I've >> Do you ask a bird not to fly? Come >> I've been snarky there, too. That's that's the way that platform operates. Um So, and I didn't you know, I didn't take it badly at all. Um okay, um Or was Um It's a you know I think uh I've been surprised >> Mhm. >> as you have about uh us not having seen more of a direct impact of this right away. I mean, we just saw the inflation number. I don't know if you've seen it. We just got inflation numbers today. 4.2% Okay, so we we are we are certainly seeing um price action now. >> Mhm. >> Um why? Because, you know, we it's well understood in this uh modeling of production networks uh that even though um oil is a relatively small input into most production processes, um there's not a in the short run, there's not a lot of substitution. Okay, so you might end up with um price effects that uh are large. Maybe they're going to take a while. There's other work that shows that, you know, all all prices are going to take a while to kind of uh transmit to different parts of production, and you can have models of why that is in the sense of maybe the direct production cost is not very large, but it's affecting me when I drive around, and then I'm I'm I'm paying so much. I I need higher salaries. That's going to lead me to ask for a salary increase. That's going to you know, wherever I produce, that's going to So, there's all these rounds of uh adjustment that that um that might lead to prices not just going up immediately but slowly but more worryingly and that's why I think a lot of expectations about rate increases at the Fed might might come which is that it you know this is not something that's going to disappear the day after the war is over okay so that's very focused on oil and and prices but I know that's where a lot of the discussion is I think in terms of more global commerce I'm perhaps a little bit less surprised that that there has been less less of an effect because that's sort of I mean I think for oil that's a particularly important bottleneck for other commodities I think it is less so I've seen data though about like shipping prices going up a lot too so I'm I'm not I'm not saying I'm not sort of trivializing that this might lead to a a bigger shock that we've witnessed so far but it's uh uh but again I mean I would imagine with shipping costs something very similar than than with oil would have it's a very it's a small part of cost but it it might take a few rounds of sort of updating wages and this and that for it to end up showing up but uh yeah I mean and then there's I mean if you you need to have an oil expert to uh to speak about that but obviously there's been like adjustments on reserves and things like that that have attenuated have attenuated the response and in the case of the US I mean the US is a net exporter of oil right so in the country where we are I mean um economic theory might suggest that uh on on aggregate that's not necessarily a bad thing in the sense that the the of something we export on net is going up, that's a term of terms of trade gain. uh Uh, that obviously will not resonate with people that are paying close to 100 bucks to fill up their tanks these days. >> Right. But the people who own the oil fields, they'll they'll be happy. >> Right. Uh, and I don't know, I mean, an interesting there thing there is whether to what extent these oil companies that are probably their stock valuation is through the roof, um, to what extent are these US owned or cuz you guys you know, I mean, there's a lot of foreign ownership of of US stocks. So, I don't know that windfall, I don't know how much we're keeping of that. Um, but obviously the median individual in the US is probably not cheering the the higher gas prices right now. But you know, from a macro perspective, uh, it's less obvious that this should be something that is having a negative impact on on standard aggregates. >> Right. Okay, great stuff. So, thank you for that. So folks, my guest has been Paul Antras. Uh, Paul, thanks so much for your time here and explaining your insights on this fascinating paper. >> Thanks, Bob. I really appreciate the opportunity and uh, if your listeners have any feedback, any complaints, any uh, ideas for future work, um, you guys know where to reach me. Thanks again for your time. >> Okay, sure thing. And then so folks, like [music] I said, we'll we'll link to his paper and also some stuff I've done on like the re-switching debate if you want to see that spelled out, folks. We'll link to the show notes page. And thanks everybody for your attention. See you next time. >> [music] >> Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content [music] like this on mises.org. >> [music] [music]
A Harvard Economist Tests Austrian Capital Theory
Summary
Transcript
[music] >> This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's [music] your host, Dr. Bob Murphy. Well, Paul, welcome to the Human Action podcast. >> Thanks, Bob. It's a pleasure to be here. >> So, let's take care of this at the beginning. Um on Twitter/X a while ago at this point, I saw somebody announcing that oh, these two Harvard economists have a paper that involves Böhm-Bawerk and I went and looked at it in the abstract right away it jumped out it was talking about the average period of production and we'll come back to this folks in a minute and say why that's um you know, a controversial element in Böhm-Bawerkian thought. And I made some snarky remark about like, oh jeez, even when the mainstream's interested in us they focus on the one thing that modern Austrians no longer, you know, dwell on. And so, I want to formally apologize that I was just being snarky and >> [laughter] >> All good. >> So, thanks for coming here and yeah, that I mean this is amazing that we've got two Harvard economists and it have this like the draft I'm looking at is like 103 pages of a paper about Austrian capital theory embedded in, you know, international trade and it's under review at the AER which is arguably like top journal in the world. So, this is a very special event. So, of course, folks Paul was nice enough to come here and and talk about it. Uh before we get into the paper though or the the draft, Paul, can I just ask you just a little bit about your background cuz I'm just curious. So, you grew up in Spain and then went to MIT. Can you explain like over in Spain what's the what like what is that MIT known for? Like is it does it have like what's the reputation? Is it considered ideological? Cuz coming from the right-wing Austrian perspective, you know, what we have our views of MIT, but I'm just curious in general for a young person going into economics in Spain how they view MIT. >> Right. So, I mean I'm not too sure how things are now. I mean it's we're talking sadly we're talking about 20 more than 25 years ago. So, obviously things change. Uh the short answer to your question uh is that back in '99, '98, '99 when I was deciding MIT was simply not known. Okay, so um you know, I don't think that um most people pay as much attention to academic institutions uh in the US as people here in the US would. Now, obviously I was at a uh very good university in in Barcelona. And the folks that had taught me knew about it and had views about it. But um it uh there was no sense in which ideology mattered too much in that decision. I mean, there were views that uh Chicago um you know, it's sort of I I think the it was more about the freshwater macro versus new Keynesian macro. Less so about more like right or left type of stuff. >> Mhm. >> Um but um but the short answer is that uh I had a hard time convincing my parents that this was a good decision. Uh not because of ideology, but simply they could >> They didn't object to the Cambridge capital controversy? >> Yeah, exactly. [laughter] They could not understand why uh uh having been admitted to Harvard, for instance, >> Right. >> um I was deciding to go to a place uh with an acronym that they had never heard about. Um so, that's the short answer. >> Okay, well, then if you don't mind me asking, why did you So, you you could have gone to Harvard to get your degree instead you chose MIT? >> Yes. >> Uh absolutely. Um So, um so, the short answer is uh well, this I don't know how short, but um I um Harvard admitted me um I think in part because I had a Fulbright scholarship. >> Mhm. >> So, um I don't think we operate this way any anymore here at Harvard, but back in the day, if you had some financial aid from back home, that that gave you a little bit of an advantage. Um and I was elated, right? But then MIT admitted me and I started talking to some people back in my university that were telling me, you know, that's actually the best PhD program, technically, blah blah blah, that's where you want to go. Um and MIT uh I don't know how why exactly they they saw something in I mean, I felt like they did really see something in me and they offered me without even me asking for it a full ride, basically. And they said, "Look, we want you to come here. Um we think that when you finish your PhD, you will want to stay in the US and be an academic in the US and the Fulbright scholarship uh has some ties and we don't want you to take it because we want you to be able to choose and that was four years down the line." And that was very persuasive. I went to Harvard and I told them, "Look, uh that's what they're telling me there. Um I'd love to come to Harvard maybe, but you know, that's uh obviously there's no strings attached uh after I finish at MIT." And Harvard, obviously, because probably my ranking was not all that high, I had been admitted precisely because of the funding, they basically said, "Well, you know, you have a Fulbright. Um if you want to come here, use a Fulbright." So, that's one of I mean, there were many other things, right? I mean, an MIT is really a fantastic PhD program and I'm not sure what I would have decided under equal uh financial packages, but you know, it obviously, if you can make a decision without tying your future, um that that sort of uh and that's what I did and and and it was clearly the right decision exposed in terms of um I had a blast there, the great program and God only knows what would have happened if I had gone elsewhere, of course. >> Right. Okay, great. So, then my next uh sort of just warm up question here before we dive into the paper is how did you get interested in you know Böhm-Bawerk and I guess capital theory more generally but like specifically in the Austrian Böhm-Bawerkian tradition because I imagine that at MIT they weren't courting you saying yes we definitely want someone to come here because there's a hole in our department that no one's working on Böhm-Bawerk. >> No, this this came this came much later. It came much earlier and much later. And earlier in the sense that um I I would imagine that relative to the median uh academic economist uh in in in in US universities I'm I'm a bit perhaps a bit more versed in the history of economic thought. Um when I I did my undergrad in economics uh in Spain as you may know there's much more specialization there so I took like dozens uh literally like more than 40 courses on economics. Um and less on other things. Um and uh one of those courses was on the history of economic thought which was taught by a very uh entertaining individual who had been in politics. Um and you know he was uh he was obsessed with Schumpeter and the Austrian school. He was one of the introducers of Schumpeter's ideas uh into um into Spain in the '50s, '60s, etc. And uh so he did a very entertaining course on the history of economic thought and we talked about you know Menger and Böhm-Bawerk and uh but Schumpeter and uh Hayek, Mises, etc. Right? So I I had a familiarity of where the school um at least up to the 19 '50s, '60s >> Mhm. >> uh where it fit in the history of economic thought. Um uh and I knew that how important it had been for like neoclassical economics for instance. And I've I've regularly kept sort of reading history of economic thought. Now that's like way back, right? Now if then do you have like 20 years of my career that are focused on very different things. I mean, I've been working on models of global production, multinational firms, uh uh contract theory applied to general equilibrium models, uh very little capital theory, um and and certainly not uh a lot of sort of history of economic thought. But then, 19 I sorry, 2019, I think, uh so not that long ago, um I was in Vienna. And I go to Vienna regularly cuz my wife is from Bratislava, which you may know is uh maybe 50 like 40 miles from Vienna. Uh so, I spend chunks of the summer there and uh and I co-organize with a good friend of mine there a a conference every year where they we bring up a bunch of international trade economists and have a couple of uh days of seminars. And I was always amused how uh folks go there go I don't know if you've been to Vienna, uh but it's sort of uh uh for for young folks that maybe don't like fully appreciate the history of the city that they're shocked just how monumental the city is, right? It's like, wait, Austria is a small country. Why does it have this absolutely stunning capital? And then you explain a bit about the empire and this and that. And then you're like, well, but you know, we're having this at the University of Vienna. You know, this is the cradle of like modern economics. And so, we were having sort of these discussions and over dinner we're having the discussion of just the importance of the Austrian school for the development of of economics. And a local professor there um recommended a book uh which is cited in in the footnote of of of this paper that you mentioned, uh which is by I brought it cuz I always forget names. Uh Janek Wasserman, I don't know if you've read this book. Uh it's The Marginal Revolutionaries: How Austrian Economics Economists Fought the War of Ideas. Okay? So, I read that in 2000 during COVID, actually. Um and I found it, you know, some of the stuff I knew, but some of the stuff I hadn't fully appreciated. Uh it was a fascinating read and that sort of started reading the chapters on Bomba work and like remembering what he was working on and it just sort of made a lot of sense. Uh This notion of thinking hard about the temporal dimension of production. Uh, thinking about the role of sort of time and sort of not only as a sort of a cost of time in the traditional way, but sometimes something that is necessary that is productivity enhancing. And and having thought a lot about sequential production processes and how they become global. I felt there was something some concepts there. Uh, that seemed potentially important that I hadn't seen in the type of formal work. Uh, that I that I typically I'm involved with. So that sort of led me to think, you know, uh You know, I do this with this, but I many other topics I see what's happening in the world. Mhm. And as an academic, um Uh, then I pay to think well we think, right? So so what's happening? Uh How do I think about it? What is the framework in my toolkit? That I'm going to grab to understand this. Most of the time I have a framework. We can debate whether it's the right one or not, but I I have a way to understand this to make sense of this. Uh To to to criticize it or to praise it to be worried about it or to be to be excited about it. Uh, but in this particular ideas I I didn't know of about a formal model that would sort of capture that. >> And that let me down that path. >> Okay, that great. Yeah, and that answers your question. I I saw you cite that book and you were sort of giving the history in the paper of still like what led us down this path and I I haven't read that particular book so I'll have to check that out. That's interesting. I I have been to Vienna. I was there um one time I gave some kind of a presentation in in actually the I don't know if they call it Central Bank, but like a bank office in Vienna. It was kind of funny cuz I was basically giving a presentation saying why the Central Bank shouldn't exist or something. But anyway, [laughter] so it was it was interesting. All right, well, let me I think maybe Paul um for the benefit of the listeners here, maybe I'll just read the abstract of your paper and then we can start going through. Obviously, we're not going to get into like equation 16 says such and such, but maybe just to give them the >> [laughter] >> the big the big picture. So, the title is an Austrian and Austrian's in quotation marks model of international specialization. So, it's Paul and then you've got a co-author Adrian Colazza, also from Harvard. And here's the abstract. We develop a general equilibrium model of international trade in which the temporal structure of production is a key determinant of comparative advantage. Building on Böhm-Bawerk's theory of capital, the model formalizes the idea that production processes with longer average periods of production or APPs entail higher financing costs due to the time lag between input payments and revenue realization. We embed this insight into a multi-sector Ricardian framework with endogenous interest rates. Under autarky, countries with more patient consumers or more developed financial markets exhibit lower equilibrium interest rates and higher wage rates. With international trade, these countries typically gain a comparative advantage in sectors with longer APPs. Though the model can also generate multiple equilibria and unconventional specialization patterns. We extend the framework to include trade costs, global value chain, and international capital market integration. And then finally, empirically, we present evidence showing that countries with more developed financial systems export disproportionately more in sectors with longer APPs even after controlling for standard neoclassical and institutional determinants of comparative advantage. All right, so there was You made me realize that I need to make it shorter. >> [laughter] >> Oh, was it yeah, there's probably some sort of period of period of round yeah, it was a roundabout exposition or summary of your paper. Um okay, so I I was going to be kind of snarky and say like, oh, so it's like Bambawale meets Krugman." Let me explain what I mean by that and then you can tell me like whether that Yeah, that's kind of right or if like no, that's totally wrong. But just for the cuz I think some of the listeners don't even know in terms of like modern >> Sure. >> trade like for example, Paul Krugman wins a Nobel Prize for his work on international trade and if you read some of his stuff where he's kind of like giving a a big picture summary of what has changed, I think part of it is something like this where for example, the case of the US, we can understand why if you're looking at Alaska versus Florida, Florida's going to send them oranges and Alaska's going to send them oil. That like just makes sense and that's you know, why is that? Well, it's obvious cuz of natural endowments. But more generally, you could have two identical regions with the workers are exactly identical whatever at time zero and if there are um economies of scale in the production technology, just through happenstance of one country goes down one path and another goes down a different path, you could see why 20 years later, they each have comparative advantages in different things and they specialize and export to each other not because the terrain or the resource endowments were different but just because, you know, path dependence and one thing specialized in one versus the other. So, you know, partly the models bec- you know, model things like that and you know, combine different types of literatures. So, is what you're doing just a particular example of that latter approach where you're saying one of the things that could make one country, you know, specialize in certain things is historically, they've invested in longer production processes? >> Yes and no, okay? So, uh everything you said is absolutely correct. It's a very nice description of uh of some of Paul Krugman's work. Um I would I would say um yes in the sense of we have the neo what we call neoclassical theories of specialization, Ricardian models, the Heckscher-Ohlin models. Uh and then the Krugman, what I'd like to call the the the Helpman-Krugman revolution, so-called new trade theory, was motivated by facts that we didn't see in the data that we that were visible in the data that were not rationalizable with neoclassical models. And you give a very good example of scale economies or sort of history matters and things like that. Um so in that vein, yes, what we're doing here is saying some of the traditional determinants of comparative advantage um you know a notion of capital abundance, of skill abundance, coupled with differences in say skill intensity across sectors are not sufficient in the sense that there's going to be residual variation in trade patterns that is explained by additional factors, right? And Krugman might be just accidents of nature or country size or something like that. Where I would say that I'm that I'm less we're less close to Krugman is in the sense that our model is actually um other than this Bomb Bather feature, it's absolutely neoclassical in the sense of having perfect competition, constant returns to scale. So there's no like every single assumption that Krugman built into models to kind of generate these new predictions, they're not there. Our model is actually in a lot of the papers in trying to um argue that despite being a model in which we're going to have labor and capital, okay, as in the Heckscher-Ohlin model, which is a one of the benchmark neoclassical models, the fact that we adopt this sort of Austrian notion of capital that is less tied to a homogeneous stock of physical capital, whatever that may be, and that would bring us to the famous capital controversies. If you think about capital as associated with working capital, with credit, Um, is necessary to kind of generate this sort of longer production uh line uh length, uh then you get predictions even in a otherwise neoclassical model that are quite distinct. Okay, so that is what I would sort of draw the distinction that yes, it's um it's a it's a twist on neoclassical theory, but it's within neoclassical theory. And then there's more subtle issues, which is maybe there's a connection in Krugman in that we also have multiple equilibria. You refer to multiple equilibria. There are multiple equilibria that have to do with uh with the nature of capital in this frameworks, which is very much an Austrian nature of capital, which is, you know, uh emphasizes the the dangers of over aggregate like aggregating capital into single things that may be convenient in some settings, but uh but may lead to uh rule out situations that may well arise as uh in equilibrium, uh which is what we illustrate in the paper. >> Okay, great. Um, let me ask you this then. Is your baseline result Are you starting with identical regions and just showing if except perhaps maybe for prep consumer preferences for the timing of consumption and saying the people that are more patient, this is how that's going to unfold or is that not your approach? Like do you >> You get You nailed it. That's that's I mean, we we do it more generally, but sort of that the baseline case would be this one where it's not like the two countries are completely identical. This There is a you know, which in a Krugman world you can generate trade in completely identical countries. We need some difference. We need some differ What's What's different here is that it's going to be coming from as you said exactly patience. Doesn't need to be only patience with our model allows for interest rate differences that are coming from variation in in in the efficiency of the financial system. >> Mhm. >> In some countries, uh funds are transferred from savers to investors in a more efficient way, right? There's less loss along the way. That would also generate interest rate differences. Uh but you need a little bit of a difference in that sense. Okay, and that's going to generate differences in availability of financial capital across countries. And that generates the interest rate differences and then the interest rate differences are going to affect the decisions of agents of just how long to kind of let production processes mature that are going to generate differences in production structure. >> Okay, so again I'm taking the readers along for the ride here Paul. Okay, so I realize yes, you cover a lot of stuff. I mean it's 103 pages with a lot of appendices and stuff. So it's a bit you cover a lot of material. But um but you Yes, one way of thinking of it is just to get a to the listeners and also like trained economists too who are just curious like what are these people what are these guys doing? Well, I want to check this paper out. So yeah, one baseline result is again two otherwise identical people or you know groups at time zero except that the consumers in one you know discount future utility less than the other ones do and so they're willing to save more. That can cause these things. But now am I right in thinking that like oh you could say okay, but where does the Böhm-Bawerkian capital theory come in? So the production technology in your framework the people input labor hours um and the the the gap like the duration like how long the labor hours are gestating in the production process before the finished good comes out that's like one of the choice variables, right? And >> Yes, I mean it's um the the Böhm-Bawerkian what do you call Böhm-Bawerkian? That's a big that's a big word. Um aspect yeah, comes from the the links the link between the the length of production. Okay, how many periods I mean we have continuous time but it doesn't matter just how the interval you know, how many seconds you spend in production and the productivity. Um and and that's a little bit of a history dependence of the paper because in the initial version of the paper which I started on my own and by the way Adrian my co-author is my student here and he joined the team at some point. He's making great contributions so it made sense to bring them along. >> [snorts] >> Um we we started with this link, right? Then if you read the the current version of the paper, a lot of the results uh really are more about the time-phased nature of production. That That some things for whatever reason they take longer than others, okay? And as long as there's interest rate differences across countries, obviously that's going to penalize but longer production processes more than shorter ones if it's if you're facing a higher interest rate. So, you know, obviously the time-phased nature of production is something that we associate with Böhm-Bawerk, uh but at some level goes back to Ricardo, uh and um and and Marx. Uh they wrote about that quite a bit. I mean, I think about Böhm-Bawerk as sort of really taking this idea and and running with it and arguing, well, um that happens, but it's also important for understanding productivity. You want to understand how interest rates are determined, this productivity effects uh might be relevant for that. Um so, you know, that's that's in there, but but a lot of it is more basic, linking to the capital controversy, which is the time-phased nature of production generates a lot of complications in thinking about what capital is and how do you how you can aggregate it. >> Okay. So, then my next question, just to clarify exactly how the Böhm-Bawerkian and I don't think I made that up, I think I seen other people use that. Uh element makes your your approach distinct. Um let me put it this way, couldn't a standard neoclassical growth theorist say, "What what do you mean? Like, if you had a like a Solo model or something and then you would posited that people had different uh intertemporal preferences and you you know, had them separated, I could see how the one people that they used to have a higher savings rate so they accumulate more of the homogeneous capital stock and that increases >> Yeah. >> you know, the the level of consumption, you know, anyway, could is there some reason that no if if capital is homogeneous even though saving more makes production higher 20 periods out that doesn't give rise to the specific things you're seeing? >> Right, great question. So, you sound a bit like my referee with my referees. >> [laughter] >> Hopefully not referee two. >> Yeah, you're referee two. I could tell. Um Um Yeah, no that's a good question. So, um the way I think it is as follows. Uh if you take a solo model, uh which is a dynamic version of a model with a like a homogeneous K, that maps to the actual model where also K is a homogeneous thing. And then you have predictions, let's say countries with lots of K relative to labor are going to uh produce and export capital intensive goods. And you you test the theory by trying to measure uh this big K at the country level, which is hard. Mhm. Um and then at the production level, at the industry level, you'd want to get a measure of capital spending, like spending on in on structures, on uh equipment, etc. relative to labor payments, right? We're saying uh yeah, maybe that might have some predictive power, but this story is different. It's like don't try to measure physical capital, maybe credit measures of credit over GDP, say, might be the or measures of financial development is how efficient financial systems are. This is the relevant country dimension. And and at the industry or product level, what you want is not a measure of uh the capital intensity in a physical sense, but a measure of the say working capital intensity, or more directly, uh a measure of of just how long uh on average, this average period of production, uh how long does it take to kind of collect revenue uh relative to when you're spending on inputs, right? And and and that variation, you could say, well, that's isn't that physical capital intensity? It need not be. Okay, that we show in the paper that that this connection might break. And in the data actually, surprisingly, we can talk more about empirically how we measure the APP, our measure of the APP turns out to be negatively correlated with standard measures of capital of physical capital intensity. So, that's why I see empirically, it is it is a distinct source of comparative advantage. It's not about machines, it's not about uh buildings and things like that enhancing productivity more in some sectors than others. It's really about the temporal dimension of production and the associated working capital needs and how it interacts with the financial system in in different countries. >> Okay. That is very interesting. And And yeah, just so you know, Paul and for the listeners, too, right, I wanted to kind of work through like the theory and then a big chunk at the end I want to give you time to explain empirically like why do you think this approach is is fruitful. But let let me read something from your paper that prompted me to ask you that so you make sure you understand where I'm coming from. You got [clears throat] this line, "These peculiarities arise because while financial capital is homogeneous and freely mobile across sectors, the physical capital goods it finances are heterogeneous within and across sectors due to variation in the temporal structure of production." And so, that that's why I was wondering like is it how how how much do your results depend on like why your results differ from a standard model that really you are not just assuming that oh yeah, you can summarize the capital stock at time T with you know, big K subscript T as opposed to there's cuz cuz that's a just so you know, Paul, that's a standard thing that Austrians a lot of times when they're trying to explain to people well, why is our why do people why should people care about the Austrian school? And most of us go, "Oh, cuz capital goods are heterogeneous." And some people are like, "Yeah, yeah, yeah, whatever. We we kind of know that." And so, anyway, that's partly why I'm wondering like how critical is that to what you're doing in this paper? >> Um it depends on what you uh uh want to take from the paper, right? So, if if you just if um, when we talk [clears throat] about the empirics and what we look into the data, what we find in the data, uh, it would be, um, um, you know, this idea that indeed in the data, uh, longer production processes tend to be carried out in, uh, in in in countries with lower interest rates. I don't think those differences are crucial, okay? It means that we could have, uh, this is a prediction that comes out very cleanly, precisely, when, even though measuring the aggregate K could be complicated, um, um, uh, the natural way to aggregate them uh, would deliver uh, roughly the right answer. In the paper, we also show that um, in situations in which that aggregation becomes trickier, >> Mhm. >> um, the model generates a series of more surprising results. For instance, uh, we show that it could be the case that uh, countries with lower interest rates, um, could actually, uh, um, end up, uh, producing goods, uh, that when you measure working capital intensity, uh, that working capital intensity is not higher, okay? So, that there's there's some sort of, uh, what we call ranking reversals that can arise in the situation. Perhaps more interestingly, uh, whether a country, um, you know, whether the more patient country, say, uh, ends up with a lower interest rate or not, uh, it's it's a bit less obvious. There's multiple equilibria. Because if you happen to be, and I'll try to explain this, uh, in in in plain words. Suppose you're a country with, you know, patient uh, consumers, then you you tend to think that in that country interest rates are going to tend to be lower. But suppose that leads to according to the model that country to specialize in lots of sectors that have long production processes. >> Mhm. >> Well, that's going to entail a lot of demand for financial capital because we need to sustain these long production processes. With limited capital mobility across countries, that's going to generate a lot of local demand for capital which might bid up the interest rate. And it's not inconsistent that then you'd end up with a higher interest rate. >> Mhm. >> And then you no longer have competitive advantage in in this long production processes. Okay, so then you can get into this loops where you end up with with a patient country actually with a higher interest rate which which is not something you'd get in like a solo style looking neoclassical model. So, you know, what we haven't done in the paper yet is okay, how what's the evidence for this sort of new like completely new um predictions that are hard to generate in neoclassical models. We haven't done that. The predictions we have I'd say are distinct from available frameworks because they tell us we should be measuring K aggregate K and the variation across sectors in working capital intensity differently than we had been doing in the actual in model. Uh but we are not testing the sort of um uh funky results that we can get because of that thing. >> Okay, fair enough. >> What's the evidence? Yes, super quickly. I mean, you may know you know, there's this sort of related literature on reswitching effects. Samuelson had a very you know, the summing up paper, classical paper showing funky stuff can happen >> Mhm. >> uh when you think you can aggregate K and you can't, right? So, um we know that's true and and actually Samuelson was one of the few people going on record saying, you know, Joan Robinson was right. Um you know, similarly, I guess the Austrians were right in that it's typically not possible to to aggregate K. Um and here's proof of that. Now, the literature as you say that they moved on, and people say, "Whatever." Why? Well, because maybe we think these are funky situations that are not typically arising, and you know, we understand it's all approximations. We're just models are just an abstraction of reality. And yes, it's not exactly right, but maybe ballpark right. So, I I'm not sure I have a view on this whether these sort of funky things that can arise here are first-order importance or not. Uh um but uh but we thought that this is interesting. We might as well lay it out. Maybe people will pick it up and and test it in the future. >> Okay, great. So, you actually just segued right into one of the things I was going to ask you anyway, Paul. So, let me bring the the viewers along to make sure they're not getting lost. Okay, so partly why I was pleasantly surprised to see people, you know, nowadays working on stuff and and referring the average period of production was that a standard history of thought treatment says this is just dead. Like, Mark Blaug in his history of economic thought, um I think he This might not be an exact quote, but it's definitely close to it. When he's talking about Austrian capital theory, he says that this this reswitching controversy was the the nail in the coffin of Böhm-Bawerk's original conception. And so, just for the people at home here, the the big idea is um the idea is, okay, if you take labor and natural resource inputs, and if you're willing to invest them in physical processes that take longer, in general, you can always find a higher physical yield, right? That if you know, you want to get water out of the stream, if you just go with your bare hands and keep walking back and forth to your hut, you're not going to get many gallons per hour that way. But, if you first take the time to go fashion a shovel and you dig a ditch and you do this and that, you know, it might take you a year to get that whole thing up and running, but once you do, the amount of gallons per hour of your expenditure, all things measured, is is much higher, right? So, the longer you're willing to, you know, make the production process take, the the more yield you can get in physical terms for the amount of inputs you put in. Okay? And so, then and then Böhm-Bawerk, you know, tries to link that to, oh, so that's why a more capitalistic country that, you know, they save more, they invest more in the longer processes, they have a higher standard of living. And all of that kind of makes sense. But, the reswitching controversy, what they discovered in the famous, you know, Cambridge capital controversies in the uh mid-20th century, is that you can come up with very simple examples. And Samuelson came up with a simple one, and he was throwing in the towel, by the way. He was He had been on the wrong side of the debate originally and said, okay, yeah, yeah, these critics were right. Sh um saying that you can imagine a production thing where uh at high interest rates, one production process is favored over another, and then an intermediate range of interest rates, it flips that a different one is, you know, more cost-effective. But, then if you push interest rates down even more, it flips back to the other one. And so, he's saying there's no unambiguous way to rank production processes in terms of being more or less capitalistic in physical terms. Hence, this story to try to connect like, oh yeah, the capitalists save more and lowers interest rates, and that's good for the workers, and that kind of justifies ideologically the the interest payments to the capital No, that's all crazy because you can we can just show that doesn't work in general. So, I'll stop there, Paul. So, and then, you know, Block said, yep, see, nail in the coffin. Böhm-Bawerk was wrong. Do something else if you want to talk about capital and interest theory. And so, you guys are bringing that up again. So, what's what's going on? >> Yeah, no, I mean, I two answers. So, so the short one is sort of um you know, discarding a theory because of sort of some unconventional results that can happen in in in in particularly carefully chosen examples. I mean, I I don't think that's uh that's necessarily a conclusion that you can draw and you could do [clears throat] the same with uh solo style aggregate K theory and uh Heckscher-Ohlin models if you have things called factor intensity reversals, which can absolutely happen with well-behaved uh production functions that also generates all sorts of funky results. And we didn't discard the theory because of that. Okay, so that's answer number one. Answer [snorts] number two, perhaps more constructively. So, um part of what we do in the paper is is is formally derive an APP measure, which is not new actually. It's somewhat distinct from uh the Böhm-Bawerk one because of continuous discounting like the compounding of interest rates. But, this is something [clears throat] that actually you can trace it back at least uh to Hicks, his Value and Capital, 1939. Uh he has chapters on the average period of production and shows exactly how one should measure it with properly with uh discounting. And what we show, which we were very excited about, we thought we were the first ones to point this out and then I found a paper I'll tell you the story later in the 19 the 1970s paper that makes it very clear that this notion of the average period of production, despite all these things that you mentioned with Samuelson and stuff, there's always a very tight connection between this definition of the APP and how interest rates affect production costs. Okay? Technically, the I don't know if you want technical stuff, but what we call the semi-elasticity of the unit cost of production to the interest rate uh d log c over dr, that is exactly equal to this definition of the APP. Okay? Which tells you that if you want to measure how sensitive costs are to interest rates, formally, that is exactly what you want to be measuring. And it's a formal definition that is very much tied to Böhm-Bawerk, except for this sort of better treatment of compounding, uh which, you know, can you know, can trace it back uh to Hicks, okay? And that's very important because in neoclassical trade theory, um that derivative, I mean, how uh factor costs, in this case, interest rates affect uh costs is what determines comparative advantage. If a country uh has comparative advantage in capital-intensive goods, it's because changes in the rental rate of capital uh affect capital-intensive goods more than labor-intensive goods. That sensitivity is key. And And that's the sense in which, yes, the APP, we're aggregating all this complicated stuff into a number for a production process, right? It's an object. It's a real number. >> Mhm. >> Um but that's actually the key thing to to figure out where that thing should be produced, okay? If it's in a high or low interest rate country. So, that's the sense in which, even though funky stuff can happen, okay, and I alluded to Samuelson in terms of multiple equilibria, this and that, the link between interest rates and and and where high or low APP sectors should be produced, that is uh that is not subject to kind of funky counterexamples. So, that's the sense in which I'm And by the way, I mean, Hicks, but um I have it in front of me. Uh I'm sure you're familiar with Peter Lewin. Lewin, is that right? >> Yeah, and Nicolas Cachanosky, yeah. >> Yeah, they have a very nice paper, which I also discovered in this time, which we cited, which which makes a very similar type of point, like um actually, it's not that, okay? I don't think they make this uh semi-elasticity point that I'm mentioning, which is key in our paper. Uh but uh but but they but I I didn't get a sense reading that paper. These are pretty well-known Austrian economists. I didn't get a sense that the APP was dead. Okay, that there was at least a sub-community of the Austrian school that was still believing in in this concept. >> Oh, yeah, there I I may have over spoke there. Right. So, for folks so, Peter Lewin and Nicolas Cachanosky and I have I've had Nicolas on live interview Peter as well. And and right, that's one of the things they do. They do a lot on like the intersection of financial economics and Austrian capital theory. And yeah, one of their things was to say if you giving a way that you can correctly uh deal with the average period of production in a way that doesn't isn't subject to these reversals and it does what you want. Also, uh Paulo just as a fun anecdote, there's this Austrian um economist Roger Garrison, he recently passed. Um and his original training had been in engineering. And so, one of his complaints was he said that, you know, economists don't keep track of units and that used to annoy him in the you know, in the capital literature that they didn't keep the units track consistent. But he always thought that the capital reswitching thing was like a big nothing burger cuz he said, yeah, that's just showing that um a quadratic, you know, the quadratic formula has two solutions. Like big deal, you know. So, he he never thought that that was uh a big deal one way or the other. Okay, so I I thank you for going I'm glad I I asked you that to go through that. So, maybe can you and you kind of already said it a little bit but just for completeness, can you summarize to say if someone's like, okay, what's the what's the payoff? Why do I want to wade through this paper? Empirically, what kind of things do you think that your approach can shed light on where is again that the standard explanations from the neoclassical or even the new trade theory people don't quite fit the patterns that we see in some of the data out there? >> Right. So, so there's a narrow a a narrow goal of the paper like takeaway and then a a broader one. The narrow one is yes, maybe we've missed that when thinking about capital and how it shapes specialization international specialization. We might not just want to stick to this actual lane physical capital idea and we want to envision a notion where capital matters in a way that interacts with the duration of production. And empirically um uh part of the contribution less of this paper because we we just borrow this measure from a different paper I wrote with a different grad student Italic Tubdinov. Uh we we suggest a way to measure this notion of duration which is which is I mean if you think about it it's it's hard, right? So, if you go back to the Vixcel uh timber examples of like the trees that are growing you gave us somewhat different example but same notion that if I wait longer for the tree to grow I'm going to get more more timber. I mean you you could imagine for particular sectors being very careful about how long they last how long time improves their productivity. Think about whiskey, right? Or or wines where we could get a sense of just how much productivity improves with time. Um instead we just sort of um uh take a different approach which is partly motivated by theory which is uh in the model variation in in the APB should correspond to variation in things we can observe. Okay? And in particular what we show uh and it sort of goes back to work that um um uh you may you may have seen Robert Dorfman who taught at Harvard for many years [clears throat] worked a little bit on on this sort of Austrian models. And and we kind of got the idea from there, which is use data inventory data. Okay, so if you are a firm that is producing things instantly very very quick production runs, you're going to produce and spit out of the factory like all the time, right? So there's you know, there's going to be very little stuff sitting as inventory. When you are producing wine, say, um and you have all these barrels that are have different maturities and so on. You've got a lot of inventory in house. Okay? So that it's sort of natural that inventory and in particular what we call work in process inventory, not like raw materials or finished products inventories, but this sort of work in process that's very much tied to this notion of there's a semi-finished product that is at the factory, okay, or whatever plant, and it's still there's still added value being added. So we have data for that. I mean, inventories data are are widely available. And what we show is that the APP is very close in the data under some stationary conditions it's very it should be captured by the ratio of inventories to the cost of goods sold. Okay? >> [snorts] >> And then those are two things that are always financial in financial data you can find for any publicly traded company. That's very easy to do. And with Vitali we we just went and measured this. We measured this for all the firms in Compustat, US, various countries. We explored variation that was you know, the extent to which firms in different sectors like all the wine makers are going to tend to have like larger duration than all the milk producers. Okay? And indeed we tend to see that that there's a big sectoral component to this measures. There's a lot of variation. If you look at the top longer production processes and the shorter ones, it kind of makes sense. You can kind of sense that there's a temporal, you know, this industry is different in a lot of ways, but it does look like that the temporal dimension of production matters. I think uh tobacco was one of the top five longest production processes. That had me a bit confused, and then at some point I gave a talk somewhere, and people said, "No, it makes a lot of sense. You need to like put them in the sun." I don't know anything about anything about tobacco, but uh they were telling me, "Yeah, no, that makes sense, actually. It actually takes a while uh to do these things." So, that's how we came to this measure, and then indeed it does look in the data that longer production processes uh if you look at exports of countries at the at the country and and sector level, mhm uh countries with lower interest rates tend to export disproportionately of this what we've measured being a longer production process. It's a statistical result. If you want to find counterexamples, I'm sure you'll find them. It's sort of on average, uh this has predictive power. Uh and and quite a bit of predictive power comparable to like other standard determinants of competitive advantage, like skill intensity, skill abundance interactions. That's kind of that's how what we do. >> Okay, fantastic. So, of course, folks, I'll I'll put a link um to Paul's paper. >> That'd be awesome. >> the version submitted. That'd be great. We have a few minutes here left, Paul. I have to ask you, and this is like we're we're chasing ratings here or whatever, but given you know, I was looking over your CV and how much in general you've done like on supply chains and things like even in the agricultural sector, do you mind just sharing your thoughts uh the Strait of Hormuz and you know, there's there's different things like a lot of the analysts, not just professional economists, but just guys who write like newsletters for financial people and whatnot, they're just going over the raw facts about like the interruption, not just of crude exports, but fertilizer and things like that. And yet, it seems like market prices are not nearly as worried about things as these analysts are. Do you have any comments on that? >> Um I have comments. I'm not sure I it's uh it's it's uh I'm perhaps a little bit less comfortable talking about these things than about semi-elasticities. Um let me just I'll I'll I'll answer the question. Let me just say one thing that I that that I left uh hanging and I don't want to leave it which is before in the previous question I you were asking me about what I draw conclusions, right? Or or or ways forward and I mentioned this one about here's a new measure of duration. Um The the the broader point I wanted to make is is um which I think should should be exciting uh for folks in in in in in your school uh thought is that I I do think that some of these ideas of of of the duration of production the links between time and productivity they have much broader applicability than just sort of figuring out the implications for trade flows. Um and and that's by the way um that is my sense. This is a paper that I've presented in many many places, many audiences, some international trade audiences. But talking to macroeconomists, they find this stuff very interesting. Okay, so um you might have the view that uh that sort of economists of this neoclassical tradition that they've they've sort of built on these ideas and they're immutable. No, I think people understand um that these ideas uh there was some power in some of these ideas that it's complicated may perhaps the work with models with uh heterogeneous capital. Uh but you know, there's a lot of I I I sense interest and and and so it leads me to believe that maybe there might be broader applicability and that people are going to start thinking harder and harder about um you know, time an explicit notion of time and how it shapes production, how it shapes interest rates which is sort of at some level one one one way that kind of like one of the key ideas in in Böhm-Bawerk's work. Anyway, that I wanted to leave that. Um >> Which is why guys like me should not be snarky on Twitter when you see someone >> Hey, it's Twitter. I mean, this is supposed to be you know, I can be I I've >> Do you ask a bird not to fly? Come >> I've been snarky there, too. That's that's the way that platform operates. Um So, and I didn't you know, I didn't take it badly at all. Um okay, um Or was Um It's a you know I think uh I've been surprised >> Mhm. >> as you have about uh us not having seen more of a direct impact of this right away. I mean, we just saw the inflation number. I don't know if you've seen it. We just got inflation numbers today. 4.2% Okay, so we we are we are certainly seeing um price action now. >> Mhm. >> Um why? Because, you know, we it's well understood in this uh modeling of production networks uh that even though um oil is a relatively small input into most production processes, um there's not a in the short run, there's not a lot of substitution. Okay, so you might end up with um price effects that uh are large. Maybe they're going to take a while. There's other work that shows that, you know, all all prices are going to take a while to kind of uh transmit to different parts of production, and you can have models of why that is in the sense of maybe the direct production cost is not very large, but it's affecting me when I drive around, and then I'm I'm I'm paying so much. I I need higher salaries. That's going to lead me to ask for a salary increase. That's going to you know, wherever I produce, that's going to So, there's all these rounds of uh adjustment that that um that might lead to prices not just going up immediately but slowly but more worryingly and that's why I think a lot of expectations about rate increases at the Fed might might come which is that it you know this is not something that's going to disappear the day after the war is over okay so that's very focused on oil and and prices but I know that's where a lot of the discussion is I think in terms of more global commerce I'm perhaps a little bit less surprised that that there has been less less of an effect because that's sort of I mean I think for oil that's a particularly important bottleneck for other commodities I think it is less so I've seen data though about like shipping prices going up a lot too so I'm I'm not I'm not saying I'm not sort of trivializing that this might lead to a a bigger shock that we've witnessed so far but it's uh uh but again I mean I would imagine with shipping costs something very similar than than with oil would have it's a very it's a small part of cost but it it might take a few rounds of sort of updating wages and this and that for it to end up showing up but uh yeah I mean and then there's I mean if you you need to have an oil expert to uh to speak about that but obviously there's been like adjustments on reserves and things like that that have attenuated have attenuated the response and in the case of the US I mean the US is a net exporter of oil right so in the country where we are I mean um economic theory might suggest that uh on on aggregate that's not necessarily a bad thing in the sense that the the of something we export on net is going up, that's a term of terms of trade gain. uh Uh, that obviously will not resonate with people that are paying close to 100 bucks to fill up their tanks these days. >> Right. But the people who own the oil fields, they'll they'll be happy. >> Right. Uh, and I don't know, I mean, an interesting there thing there is whether to what extent these oil companies that are probably their stock valuation is through the roof, um, to what extent are these US owned or cuz you guys you know, I mean, there's a lot of foreign ownership of of US stocks. So, I don't know that windfall, I don't know how much we're keeping of that. Um, but obviously the median individual in the US is probably not cheering the the higher gas prices right now. But you know, from a macro perspective, uh, it's less obvious that this should be something that is having a negative impact on on standard aggregates. >> Right. Okay, great stuff. So, thank you for that. So folks, my guest has been Paul Antras. Uh, Paul, thanks so much for your time here and explaining your insights on this fascinating paper. >> Thanks, Bob. I really appreciate the opportunity and uh, if your listeners have any feedback, any complaints, any uh, ideas for future work, um, you guys know where to reach me. Thanks again for your time. >> Okay, sure thing. And then so folks, like [music] I said, we'll we'll link to his paper and also some stuff I've done on like the re-switching debate if you want to see that spelled out, folks. We'll link to the show notes page. And thanks everybody for your attention. See you next time. >> [music] >> Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content [music] like this on mises.org. >> [music] [music]