Canonical Austrian business cycle theory holds that a lower rate of interest lengthens the structure of production. Fillieule (2007) derives the opposite conclusion: the average period of production rises with the rate of interest. I argue in this article that the apparent conflict dissolves once two distinct meanings of lengthening are differentiated. Lengthening in the technical sense is an increase in the temporal duration of production. Lengthening in the economic sense is an increase in capital intensity. The two definitions are often treated as one. Once they are separated, Fillieule’s positive result describes a technical co-movement among economic aggregates rather than a revision of the time-preference theory of interest. This article generalizes the comparative statics of the average period, supplying a complete set of partial derivatives and a cross-partial result: the sensitivity of length to the rate of interest is itself increasing with investment. This provides the amplification mechanism of the business cycle that canonical accounts of the bust presuppose but do not derive. This model relates and resolves four active debates in capital theory: the reswitching controversy, the duration-based rehabilitation of the average period, the interest-dependence critique of Rapka (2024), and the Lachmannian heterogeneity critique.
Key findings:
- The paper distinguishes between two different meanings of a “lengthened” production structure: technical length (longer production time) and economic length (greater capital intensity).
- Once these two concepts are separated, an apparent contradiction in Austrian business cycle theory disappears: a longer production period does not necessarily imply greater capital intensity, and vice versa.
- The average period of production is best understood as a technical measure of production processes rather than an economic measure of roundaboutness or capital accumulation.
- The paper derives a new amplification mechanism showing that economies with more capital-intensive production structures become increasingly sensitive to interest-rate changes, helping explain why credit booms can lead to particularly severe busts.
- The analysis reconciles several long-standing debates in capital theory—including discussions of reswitching, production duration, and capital heterogeneity—within a unified analytical framework.
- The paper argues that understanding business cycles requires distinguishing between the technical organization of production and the economic forces that drive investment decisions and capital accumulation.
Link to Working Paper: 2026_07_WP03_Howden
