Positive Theory of Capital

Eugen von Böhm-Bawerk's Positive Theory of Capital (1889) is a foundational work in the Austrian school of economics. Böhm-Bawerk's theory posits that capital goods are created through an indirect, or "roundabout," process involving land and labor.12

The Austrian view describes an economic process where original factors of production are embodied in capital goods of varying lifespans. These goods, as they are consumed, yield value and utility. The time between the initial investment of factors and the final consumption is termed the "period of production". A longer period of production implies a larger capital stock per unit of income. This theory, however, is primarily focused on equilibrium states and offers limited insight into the dynamic nature of capital theory. Böhm-Bawerk also developed a theory of interest rates, which influenced modern economic thought by highlighting the interplay between the preference for present goods and the productivity of longer production periods.12