I rather answer this question as a blog post, because my answer is going to be somewhat longer than the 140 characters Twitter allows. Also, I want to make clear that this answer is premature; I have wanted to research the topic and provide a defense of Austrian theory, but I am really not yet ready to give it. Therefore, this answer should be interpreted as one made during a period of ‘intellectual transition.’ However, those who are more learned than I am on these topics have not really answered this topic consistently or comprehensively, as far as I know (that is, to the limited extent that I have read the relevant literature). For example, if I remember correctly, Roger Garrison, in Time and Money, writes that to a large extent Austrian capital theory has yet to integrate the lessons of the capital controversies. On the other hand, Ludwig Lachmann seemed to believe that the debates largely miss the contributions of “forward-looking” Austrian subjectivism (“Reflections on Hayekian Capital Theory,” in Expectations and the Meaning of Institutions [London: Routledge, 1994] — originally brought to my attention by Isaac Marmolejo).

Since the topic deserves more attention than I have afforded it, I will write my thoughts in a short couple of paragraphs. Hopefully, though, I will help shape a way of viewing Austrian capital theory; that is, viewing it as a theory of the distribution of capital in a time structure of production — a series of stages, or levels, farther and farther away from the final consumer good, based on the distribution of monetary income. It is within this context that I deem the problem of re-switching as unimportant with regards to its implications for Austrian capital theory (and, as a consequence, believe that re-switching does not “blow a massive hole” in it).

For the purpose of this blog post, I will base my understanding of re-switching mainly on Paul Samuelson’s “A Summing Up” (Quarterly Journal of Economics 80, 4 [1966], pp. 568–583). Re-switching basically mathematically proves that it is entirely possible that production can become less capital intensive at lower rates of interest. Starting on page 571 of Samuelson’s article, he uses a multistage production model of champagne to illustrate the argument. It could be, for example, that a production process at an interest rate of 100-percent could be capital non-intensive (call it ‘technique I’), and that at a rate of 50-percent it would become more capital intensive (technique II); however, at 25-percent it is possible that the same process would see a fall in capital-intensiveness (technique I). Based on this single final output model, we can see that greater future consumption does not necessarily need as much of a sacrifice of present consumption as the traditional model suggests.

But, the Austrian theory of capital is not about the capital intensity of any particular production technique, or about the multistage production process of a single good. Rather, as I said before, the Austrians describe the distribution of goods throughout the structure of production in accordance to time preference and market prices. It could be a logical possibility that the production of Champagne will require less inputs at a very low rate of interest, relative to the a relatively higher rate. But, the Austrian theory is not about capital intensity of a production technique or even a process. Instead of going to the production of champagne, other producers’ goods could go to the production of other goods. What greater capital accumulation basically allows for is a greater distribution of income and for the production of more complex products, since capital good production at very late stages suddenly becomes profitable (because there is a strengthening of entrepreneurial demand for them).

I realize that this is an incomplete answer. But, I hope it helps frame the discussion on the topic of re-switching and what it says about Austrian capital theory.