The Importance of Capital Accumulation for Economic Growth

I’m at FreedomFest with Mises Canada. Earlier today I watched a panel and one of the participants–George Gilder–in the Tom_Hanks_Cast_Awaymidst of a very impressive set of remarks made an offhand comment that is actually quite wrong. I am bringing this up not to pounce on Gilder, but because it underscores a key feature of the Austrian School.

Specifically, Gilder said (I’m paraphrasing), “The thing that drives the economy is knowledge. Neanderthal man had all of the same physical resources that we have today. The reason our standard of living is so much higher is that we have more KNOWLEDGE than Neanderthal man.”

But no, that’s not correct. If all of the world’s leading physicists, engineers, chemists, programmers, and entrepreneurs went back in time to the Stone Age, most of them would be dead within a week. Even though they would have all of the cutting-edge knowledge from today, they would lack the capital structure with which to implement their advanced ideas.

This is the sense in which Austrian writers like Bohm-Bawerk, Mises, and Rothbard would stress that the ultimate brake on economic growth was not “technology” or “inventions” but instead saving and investment. At any given time, there are always a bunch of projects “on the shelf” that are not put into operation because of a lack of sufficient savings.

Right now it would be technologically possible to build a colony on Mars, or a floating ocean city on Earth that could support 100,000 people. But it simply would be too expensive to implement such projects any time soon. It’s not that we “don’t know how to do it,” it’s that it would forfeit too many other potential goods and services to build a giant floating city on the Pacific by 2020.

My remarks are not intended to disparage technological innovation and the advances in physics and computer science. Obviously, if and when we have floating ocean cities and Martian colonies, such success will be due to breakthroughs that make it cheaper to build such projects than how we would do it today, if we had to.

However, at the same time we shouldn’t ignore the role of savings and investment, even holding technical know-how constant. A major reason we have a higher standard of living than our grandparents did, is that people have (on average) saved and invested over the last century. The average worker today has a larger stockpile of tools and equipment to augment his or her raw labor power, compared to the worker from 1914.

It is important to get the basics right about capital theory on the ground floor, because this is the framework on which Austrian business cycle theory rests.

2 Responses to “The Importance of Capital Accumulation for Economic Growth”

  1. Jake Witmer says:

    This is an excellent commentary, and it's implications reveal why the "pervasive regulatory atmosphere" is so destructive: all capital plans must anticipate the cost of defeating lawless and arbitrary government obstacles with an unknown percentage of that "working capital." Because government is now lawless (predatory on production, consumptive of resources and private property), instead of lawful (protective of clearly-defined private property), the cost imposed by government are highly unpredictable. Any unpredictable portion of a plan for innovation is the most costly portion of that plan. In a state of nature, highly intelligent predators are the costliest obstacle to innovation, because their capacity to destroy value is contextual: they can adapt to your countermeasures.

    In this way, government seeks to return us to a state of nature, where life is "nasty, brutish, and short." Government need not engage in public executions to accomplish this: it must simply raise the cost of finding, distributing, and administering a cure for the default death and destruction found in nature (cancer, aging, heart attack, stroke, poisoning, etcetera). Worse still, what now exists will persist under a "conservative" government -so the means of demanding IMPROVEMENT on a capital-starved economy (the sensing of unacceptable conditions) is concentrated in the highly intelligent or "irritable."

  2. jongunnarsson says:

    Perhaps an even better demonstration of the importance of capital accumulation is to look at the Third World. These countries have access to the same scientifc information that we in the West do. If knowledge were all that is required, then these countries, too, should be prosperous. But even though they don't lack far behind in knowledge, Third World countries have very little in the way of capital, which is why they are poor.

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