Measuring the Average Period of Production

The importance of time in production was emphasized by Classical economists and was at the core of the Austrian capital theory proposed by Böhm-Bawerk and further elaborated by Wicksell, Hicks, Dorfman, and many others. A central concept in this literature is the existence of an ‘average period of production’ which governs the demand for circulating capital associated with a production process. Building on Böhm-Bawerk (1889), we propose a measure of the average period of production as a (weighted) average temporal distance between the time at which a firm employs its inputs and the time at which these inputs deliver finished goods that are sold to consumers. We show that, under stationarity conditions, this measure corresponds to the ratio of a firm’s stock of inventories to the cost of the goods it sells in a given period. Using data from publicly traded companies worldwide, we compute and validate this measure for various industries and countries, and show that, consistent with theory, this measure is lower, the higher the cost of capital faced by firms is.