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Part Four: Catallactics or Economics of the... > Chapter XVIII. Action in the Passing of Time

7. Accumulation, Maintenance and Consumption of Capital

Capital goods are intermediary products which in the further course of production activities are transformed into consumers' goods. All capital goods, including those not called perishable, perish either in wearing out their serviceableness in the performance of production processes or in losing their serviceableness, even before this happens, through a change in the market data. There is no question of keeping a stock of capital goods intact. They are transient.

The notion of wealth constancy is an outgrowth of deliberate planning and acting. It refers to the concept of capital as applied in capital accounting, not to the capital goods as such. The idea of capital has no counterpart in the physical universe of tangible things. It is nowhere but in the minds of planning men. It is an element in economic calculation. Capital accounting serves one purpose only. It is designed to make us know how our arrangement of production and consumption acts upon our power to satisfy future wants. The question it answers is whether a certain course of conduct increases or deceases the productivity of our future exertion.

The intention of preserving the available supply of capital goods in full power or of increasing it could also direct the actions of men who did not have the mental tool of economic calculation. Primitive fishermen and hunters were certainly aware of the difference between maintaining their tools and devices in good shape and serviceableness and wearing them out without providing for adequate replacements. An old-fashioned peasant, committed to traditional routine and ignorant of accountancy, knows very well the significance of maintaining intact his live and dead stock. Under the simple conditions of a stationary or slowly progressing economy it is feasible to operate successfully even in the absence of capital accounting. There the maintenance of a by and large unchanged supply of capital goods can be effected either by current production of pieces destined to replace those worn out or by the accumulation of a fund of consumers' [p. 515] goods which makes it possible to devote effort at a later time toward the replacement of such capital goods without being forced to restrict consumption temporarily. But a changing industrial economy cannot do without economic calculation and its fundamental concepts of capital and income.

Conceptual realism has muddled the comprehension of the concept of capital. It has brought about a mythology of capital.15 An existence has been attributed to "capital," independent of the capital goods in which it is embodied. Capital, it is said, reproduces itself and thus provides for its own maintenance. Capital, says the Marxian, hatches out profit. All this is nonsense.

Capital is a praxeological concept. It is a product of reasoning, and its place is in the human mind. It is a mode of looking at the problems of acting, a method of appraising them from the point of view of a definite plan. It determines the course of human action and is, in this sense only, a real factor. It is inescapably linked with capitalism, the market economy.

The capital concept is operative as far as men in their actions let themselves be guided by capital accounting. If the entrepreneur has employed factors of production in such a way that the money equivalent of the products at least equals the money equivalent of the factors expended, he is in a position to replace the capital goods expended by new capital goods the money equivalent of which equals the money equivalent of those expended. But the employment of the gross proceeds, their allotment to the maintenance of capital, consumption, and the accumulation of new capital is always the outcome of purposive action on the part of the entrepreneurs and capitalists. It is not "automatic"; it is by necessity the result of deliberate action. and it can be frustrated if the computation on which it is based was vitiated by negligence, error, or misjudgment of future conditions.

Additional capital can be accumulated only by saving, i.e., a surplus of production over consumption. Saving may consist in a restriction of consumption. But it can also be brought about, without a further restriction in consumption and without a change in the input of capital goods, by an increase in net production. Such an increase can appear in different ways:

1. Natural conditions have become more propitious. Harvests are more plentiful. People have access to more fertile soil and have discovered mines yielding higher returns per unit of input. Cataclysms and catastrophes which in repeated occurrence frustrated human [p. 516] effort have become less frequent. Epidemics and cattle plagues have subsided.

2. People have succeeded in rendering some production processes more fruitful without investing more capital goods and without a further lengthening of the period of production.

3. Institutional disturbances of production activities have become less frequent. The losses caused by war, revolutions, strikes, sabotage, and other crimes have been reduced.

If the surpluses thus brought about are employed as additional investments, they further increase future net proceeds. Then it becomes possible to expand consumption without prejudice to the supply of capital goods available and the productivity of labor.

Capital is always accumulated by individuals or groups of individuals acting in concert, never by the Volkswirtschaft or the society.16 It may happen that while some actors are accumulating additional capital, others are at the same time consuming capital previously accumulated. If these two processes are equal in amount, the sum of the capital funds available in the market system remains unaltered and it is as if no change in the total amount of capital goods available had occurred. The accumulation of additional capital on the part of some people merely removes the necessity of shortening the period of production of some processes. But no further adoption of processes with a longer period of production becomes feasible. If we look at affairs from this angle we may say that a transfer of capital took place. But one must guard oneself against confusing this notion of capital transfer with the conveyance of property from one individual or group of individuals to others.

The sale and purchase of capital goods and the loans granted to business are not as such capital transfer. They are transactions which are instrumental in conveying the concrete capital goods into the hands of those entrepreneurs who want to employ them for the performance of definite projects. They are only ancillary steps in the course of a long-range sequence of acts. Their composite effect decides the success or failure of the whole project. But neither profit nor loss directly brings about either capital accumulation or capital consumption. It is the way in which those in whose fortune profit or loss occurs arrange their consumption that alters the amount of capital available.

Capital transfer can be effected both without and with a conveyance in the ownership of capital goods. The former is the case when [p. 517] one man consumes capital while another man independently accumulates capital in the same amount. The latter is the case if the seller of capital goods consumes the proceeds while the buyer pays the price out of a nonconsumed--saved--surplus of net proceeds over consumption.

Capital consumption and the physical extinction of capital goods are two different things. All capital goods sooner or later enter into final products and cease to exist through use, consumption, wear and tear. What can be preserved by an appropriate arrangement of consumption is only the value of a capital fund, never the concrete capital goods. It may sometimes happen that acts of God or manmade destruction result in so great an extinction of capital goods that no possible restriction of consumption can bring about in a short time a replenishment of the capital funds to its previous level. But what brings about such a depletion is always the fact that the net proceeds of current production devoted to the maintenance of capital are not sufficiently large.

  • 15. Cf. Hayek, "The Mythology of Capital," The Quarterly Journal of Economics, L (1936), 223 ff.
  • 16. The state and the municipalities, in the market economy, are also merely actors representing concerted action on the part of definite groups of individuals.