Roundaboutness

Roundaboutness, or roundabout methods of production, is the term used to describe the process whereby capital goods are produced first and then, with the help of the capital goods, the desired consumer goods are produced.

The term was devised by the Austrian School economist Eugen von Böhm-Bawerk, who maintained that it was consumer demand, and not necessarily the supply of savings, that would determine the capital investment in any industry.

The Austrian economist Eugen von Böhm-Bawerk argued against both the Ricardian labor theory of price and Marx's theory of exploitation. On the former, he contended that return on capital arises from the roundabout nature of production. A steel ladder, for example, will be produced and brought to market only if the demand supports the digging of iron ore, the smelting of steel, the machines that press that steel into ladder shape, the machines that make and help maintain those machines, etc. Advocates of the labour theory of value point out that every step in that process, however roundabout, involves labor. But Böhm-Bawerk said that what they missed was the process itself, the roundaboutness, which necessarily involves the passage of time.

Roundabout processes, Böhm-Bawerk maintained, lead to a price that pays for more than labor value. This makes it unnecessary to postulate exploitation in order to understand the return on capital, although how the length of the production process in and of itself produces value remains unclear, as if Böhm-Bawerk's idea were correct, the more inefficient a capitalist manufacturer, the longer their production process and the more profit they would accrue. When in fact the additional costs they incur through their inefficient production process would prevent them from selling their output at the market price. Rather than accruing higher profits therefore, they would accrue none at all.

The concept has similarities to the later Keynesian theory developed in the 1930s. A disproof of roundaboutness in economies with compound interest was presented by Paul Samuelson during the Cambridge capital controversy.