Human Action

As soon as those present wants are sated the satisfaction of which is considered more urgent than any provision for the morrow, people begin to save a part of the available supply of consumers’ goods for later use. This postponement of consumption makes it possible to direct action toward temporally remoter ends. It is now feasible to aim at goals which could not be thought of before on account of the length of the period of production required. It is furthermore feasible to choose methods of production in which the output of products is greater per unit of input than in other methods requiring a shorter period of production. The sine qua non of any lengthening of the process of production adopted is saving, i.e., an excess of current production over current consumption. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way.

The postponement of consumption and the accumulation of stocks of consumers’ goods destined for later consumption would be practiced even in the absence of the stimulus offered by the technological superiority of processes with a longer period of production. The higher productivity of such processes consuming more time strengthens considerably the propensity to save. The sacrifice made by restricting consumption in nearer periods of the future is henceforth not only counterbalanced by the expectation of consuming the saved goods in remoter periods; it also opens the way to a more ample supply in the remoter future and to the attainment of goods which could not be procured at all without this provisional sacrifice. If acting man, other conditions being equal, were not to prefer, without exception, consumption in the nearer future to that in the remoter future, he would always save, never consume. What restricts the amount of saving and investment is time preference.

People eager to embark upon processes with a longer period of production must first accumulate, by means of saving, that quantity of consumers’ goods which is needed to satisfy, during the waiting time, all those wants the satisfaction of which they consider more urgent than the increment in well-being expected from the more time-consuming process. Accumulation of capital begins with the formation of stocks of consumers’ goods the consumption of which is postponed for later days. If these surpluses are merely stored and kept for later consumption, they are simply wealth or, more precisely, a reserve for rainy days and emergencies. They remain outside the orbit of production. They become integrated--economically, not physically--into production activities only when employed as means of subsistence of workers engaged in more time-consuming processes. If expended in this way, they are physically consumed. But economically they do not disappear. They are replaced first by the intermediary products of a process with a longer period of production and then later by the consumers’ goods which are the final product of these processes.

All these ventures and processes are intellectually controlled by capital accounting, the acme of economic calculation in monetary terms. Without the aid of monetary calculation men could not even learn whether--apart from the length of the period of production--a definite process promises a higher productivity than another. The expenditures required by various processes cannot be weighed against one another without the aid of monetary terms. Capital accounting starts with the market prices of the capital goods available for further production, the sum of which it calls capital. It records every expenditure from this fund and the price of all incoming items induced by such expenditures. It establishes finally the ultimate outcome of all these transformations in the composition of the capital and thereby the success or the failure of the whole process. It shows not only the final result; it mirrors also every one of its intermediary stages. It produces interim balances for every day such a balance may be required and statements of profit and loss for every part or stage of the process. It is the indispensable compass of production in the market economy.

In the market economy production is a continuous, never-ending pursuit split up into an immense variety of partial processes. Innumerable processes of production with different periods of production are in progress simultaneously. They complement one another and at [p. 492] the same time are in rivalry with one another in competing for scarce factors of production. Continuously either new capital is accumulated by saving or previously accumulated capital is eaten up by overconsumption. Production is distributed among numerous individual plants, farms, workshops, and enterprises each of which serves only limited purposes. The intermediary products or capital goods, the produced factors of further production, change hands in the course of events; they pass from one plant to another until finally the consumers’ goods reach those who use and enjoy them. The social process of production never stops. At each instant numberless processes are in progress some of which are nearer to, some remoter from, the achievement of their special tasks.

Every single performance in this ceaseless pursuit of wealth production is based upon the saving and the preparatory work of earlier generations. We are the lucky heirs of our fathers and forefathers whose saving has accumulated the capital goods with the aid of which we are working today. We favorite children of the age of electricity still derive advantage from the original saving of the primitive fishermen who, in producing the first nets and canoes, devoted a part of their working time to provision for a remoter future. If the sons of these legendary fishermen had worn out these intermediary products--nets and canoes--without replacing them by new ones, they would have consumed capital and the process of saving and capital accumulation would have had to start afresh. We are better off than earlier generations because we are equipped with the capital goods they have accumulated for us.7

The businessman, the acting man, is entirely absorbed in one task only: to take best advantage of all the means available for the improvement of future conditions. He does not look at the present state of affairs with the aim of analyzing and comprehending it. In classifying the means for further production and appraising their importance he adopts superficial rules of thumb. He distinguishes three classes of factors of production: the nature-given material factors, the human factor--labor, and capital goods--the intermediary factors produced in the past. He does not analyze the nature of the capital goods. They are in his eyes means of increasing the productivity of labor. Quite naively he ascribes to them productive power of their own. He does not trace their instrumentality back to nature and labor. He does not ask how they came into existence. They [p. 493] count only as far as they may contribute to the success of his efforts.

This mode of reasoning is all right for the businessman. But it was a serious mistake for the economists to agree with the businessman’s superficial view. They erred in classifying “capital” as an independent factor of production along with the nature-given material resources and labor. The capital goods--the factors of further production produced in the past--are not an independent factor. They are the joint products of the cooperation of the two original factors--nature and labor--expended in the past. They have no productive power of their own.

Neither is it correct to call the capital goods labor and nature stored up. They are rather labor, nature, and time stored up. The difference between production without the aid of capital goods and that assisted by the employment of capital goods consists in time. Capital goods are intermediary stations on the way leading from the very beginning of production to its final goal, the turning out of consumers’ goods. He who produces with the aid of capital goods enjoys one great advantage over the man who starts without capital goods; he is nearer in time to the ultimate goal of his endeavors.

There is no question of an alleged productivity of capital goods. The difference between the price of a capital good, e.g., a machine, and the sum of the prices of the complementary original factors of production required for its reproduction is entirely due to the time difference. He who employs the machine is nearer the goal of production. The period of production is shorter for him than for a competitor who must start from the beginning. In buying a machine he buys the original factors of production that were expended in producing it plus time, i.e., the time by which his period of production is shortened.

The value of time, i.e., time preference or the higher valuation of want-satisfaction in nearer periods of the future as against that in remoter periods, is an essential element in human action. It determines every choice and every action. There is no man for whom the difference between sooner and later does not count. The time element is instrumental in the formation of all prices of all commodities and services. 

• 7These considerations explode the objections raised against the time-preference theory by Frank H. Knight in his article, “Capital, Time and the Interest Rate,” Economica, n.s., I, 257-286.