Human Action Study by Robert P. Murphy

Author:Robert P. Murphy [Murphy, Robert P.]
Language: eng
Format: epub
Publisher: Ludwig von Mises Institute

7. ACCUMULATION, MAINTENANCE AND CONSUMPTION OF CAPITAL

The concept of capital is a mental tool. The desire to maintain or increase the level of one’s capital really is the desire to maintain or increase the productivity of one’s future efforts at want satisfaction. At the same time, capital is always embodied in concrete capital goods, which necessarily wear out over time. Thus to maintain one’s capital in practice means to successfully anticipate future conditions, in order that the money equivalent of the products of the previous stock of capital goods can be used to purchase anew another stock of capital goods with the same (or higher) total monetary value.

The notion of capital and capital accounting is only meaningful in a market economy, with prices for all of the capital and consumption goods involved. Of course, even in primitive societies, fishermen understood the importance of maintaining their boats and nets in working order. But in a modern economy, with constant changes in technological recipes and consumer demand, reliance on tradition is not enough. Entrepreneurs need market prices in order to determine whether their efforts have increased or decreased their capital.

Additional capital can only be accumulated by saving, which is defined as a surplus of production over consumption. However, this saving need not entail an actual curtailment of consumption, because (for example) natural conditions could have improved, or a technological discovery could have rendered production processes more potent. Even in this case, if some of the additional output is to be devoted to the production of more capital goods, then necessarily consumption must fall short of what it could have been. In other words, in order to accumulate more capital goods, it is necessary that scarce resources be diverted away from potential consumption goods.

Capital consumption occurs when consumption takes such a large portion of current output that the remainder devoted to new capital goods is insufficient to replace the depreciation of the capital stock. Capital consumption may thus allow for a temporary increase in consumption, but future output is diminished as the stock of capital goods declines.

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