In Progress
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In Progress

Capital

“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.”

–Ludwig von Mises

Among the properties that human can earn, economics makes a distinction between consumption goods, which are owned for the utility they offer their owners, and capital goods, owned not for their utility, but because they can be used to produce consumption goods that offer utility. Capital goods, or higher order goods, are any good which is not consumed, but used for the production of consumption goods, or lower order goods. What makes a good a consumption good or capital good is not inherent to the good itself, but is a function of how the good is utilized by the person who owns it. The same good can be used as a capital or consumption good depending on the context. A computer used for watching movies and browsing the web is a consumption good, but the same computer used by someone else to write a book is a capital good. A car can be a capital good if operated as a taxi, but a consumption good if used purely for entertainment. Grains of corn can be consumption goods if eaten, but a capital good if planted to grow more corn.

This chapter discusses capital conceptually in an abstract sense. After introducing money and the extended market order in the forthcoming chapters, Chapter XX will return to discuss capital in the context of a modern monetary economic order.

Lengthening the period of production

The introduction of capital into economic production necessitates the lengthening of the period of production. Without capital goods, man engages in the production of the final consumption good directly, but when a capital good is involved, man needs to first produce the capital good, and then use it to produce the consumer good. By adding an intermediate stage of capital production, the process of production, from start to finish, becomes longer. 

This might initially sound counter-intuitive. Why would humans engage in longer processes of production? Time preference is positive, as discussed in Chapter XX; humans prefer the same good sooner rather than later. Why spend hours building a fishing rod to catch a fish when you can just catch fish directly with your hands in the shorter period of time? The answer is in the productivity of the fishing rod. While producing the fishing rod takes time, once it is completed, its use should, hopefully, allow the fisherman to catch a larger amount of fish per unit of effort. There is no guarantee of the success of this investment, but the extra reward is the only motivation for engaging in capital accumulation.

The lengthening of the period of production cannot take place without first initially providing the consumer goods needed to sustain the producers during the production process. Provision for the future makes it possible to engage in production processes that are longer and more productive. Only if man is able to meet his current needs, can he save some of his resources to provide for the future. The farmer must produce enough grain to feed himself before he can plant any grains, and every grain he plants is a grain he cannot consume this year. If the fisherman is going to spend a day building a fishing rod, he needs to have provided for this day from the previous day’s production, thus delaying consumption that was possible the previous day. There is no possibility of engaging in building a fishing rod without forsaking time away from leisure, which has positive utility, or from labor producing consumer goods, which also have positive utility. 

The same is true even in the most sophisticated and long production process, such as the production of an airplane. There are today engineers working on designing the next line of airplanes, which will likely need another decade of design, production, and testing before it can be sold to generate any revenue to the company building it. The airplane maker requires capital investment in order to provide these workers with the resources necessary to sustain them before the completion of the production process and the generation of revenue, as well as to compensate the owners of the capital stock that will be used in the production process. Time preference is positive, and capital owners and laborers need to consume during the production process to survive and to part with their capital or labor. Even if Boeing were somehow able to procure all the capital equipment and labor it needs to produce the 787 by promising the workers and equipment sellers to pay them when the airplanes are completed, then the production was financed by the workers and equipment sellers, who had to delay gratification to produce.

In order to lengthen the production process, someone somewhere must forgo the consumption of resources in order to provide them to the producers. In the simple fisherman economy, that sacrifice was made by the fisherman himself when he saved some of the previous day’s food for the next day he will spend building a fishing rod. In a modern capitalist economy, the sacrifice is made by investors who forgo consumption to provide financing to the entrepreneur who will compensate the workers and the owners of capital, in the present, for providing their labor and capital for his production process, whose output will only materialize in the future. Not only does a longer production process require more delay of gratification, it also requires more cognitive skills to develop, and can incur more risks.Without an entrepreneur imagining a longer structure and an investor sacrificing present satisfaction for the chance of a larger future return, the capital and labor resources cannot be procured for the production process. Every process that lengthens production was only possible because of the sacrifice and delayed gratification made by capitalists. This seemingly obvious point is worth re-emphasizing because a sizable portion of the world’s economic fallacies have come from cranks laboring under the delusion that they have found an exception to this.

Higher productivity

Ludwig von Mises had described capital goods as “labor, nature, and time stored up” deployed in the service of production. Production with capital goods can be thought of as producing with the aid of the labor, nature, and time that went into making the capital good, resulting in an increase in productivity, allowing the production of one unit of final output to take less time than it would have taken without capital. Time is spent on longer processes of production to achieve higher outputs per unit of time, which is why capital is another way of economizing on human time, as Mises explains: “The difference between production without the aid of capital goods and that assisted by the employment of capital goods consists in time … 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.” 

It is important to not confuse the longer period of production for the entire production process with the shorter time of production of the final good. Accumulating capital leads to the increase of the total period of production of goods, when including the higher order goods that go into it, but a decrease of the period for the production of each marginal unit. When a fisherman moves from catching fish with his hands to building a fishing rod to catch the fish, he has increased the length of the period of production, since it now includes the manufacture of the fishing rod. But he will have reduced the length of the period of production of the final good; it takes one hour to catch a fish with the fishing rod, but it used to take him a day to catch it with his own hands. Beyond just increasing productivity, capital goods allow for the production of goods that were entirely impossible without capital. As the fisherman goes from catching fish with his hand to using a fishing rod or fishing boat, not only will he have a higher output, he will also be able to catch kinds of fish that were not within his reach before he had the capital. Without capital accumulation, most of the products we take for granted in the modern world would not be possible, as there is no way to produce them with the bare hands of man.

need a graphic illustration of productivity of labor with and without capital

Capital goods are built and acquired to increase the productivity of labor, and in the process, they inevitably make the entire production process longer. Capital is the difference between fishing with your bare hands, and fishing with a fishing rod, a fishing boat, or the Annelies Ilena, the world’s largest open sea trawler. A day spent fishing with your hands will produce a fish or two, if you’re lucky. With a fishing rod you could catch around a dozen fish a day, and with a fishing boat and net, a few hundred. If you were one of the approximately 70 crew members of the The Annelies Ilena, on the other hand, you would collectively produce approximately 350 tons of fish every day, or around 5 tons of fish per worker per day. The same individual could put in the same number of hours on the same day, and produce one fish, a dozen fish, a hundred fish, or five tons of fish, depending purely on the quantity of capital at their disposal.

This increase in productivity is what ultimately drives the disparity in living standards between people who can work with large amounts of capital and people who don’t; between people who fish with their bare hands and those who fish with the Annelies Ilena. This increased productivity is what makes our modern life possible. As a thought exercise, try to imagine securing your survival without resorting to the use of any capital goods. If all production processes were to be carried out with your bare hands, survival would be an uphill struggle. Securing enough food for survival, from foraging or hunting, would be uncertain daily. Shelter built only by hand would be flimsy and vulnerable to destruction by nature. Survival would be uncertain, but were you to survive, it is almost inconceivable that your reason would not recognize the enormous value from investing in the production of goods that increase the output of your time spent in production processes. Should these investments succeed in raising your productivity, securing a day’s food needs becomes less demanding and uncertain. Less time needs to be dedicated to securing basic survival, and more time can be directed toward investing in further capital production to increase productivity further. 

The surest and most important way of increasing human quality of life is through the accumulation of capital goods, because they serve to increase the productivity of work. There is no guarantee that investing in capital will result in increased productivity, and that is the risk inherent in the process of capital accumulation, but if investment yields capital that does not result in increased productivity, then the investment failed, its outcome is not capital, and it will not be deployed as such. It will be consumed if it can be, or discarded otherwise. There have, undoubtedly, been many attempts at producing capital goods that increase the productivity of fishing, but only the ones that succeeded remained, and all the others have long been forgotten, and the investment that went into them wasted. Capital is not just the product of any investment in lengthening the production process; capital consists of only the investments in the lengthening of the production process that yield a higher productivity. The risk of waste is but one facet of the high cost of capital.

The longer the production process, the higher the productivity of the production process, because all steps to lengthen the production process would only have been added onto it if they increase productivity. All innovation that did not increase productivity will be discarded so only increases in productivity lengthen the production process. The longer the production process, the more capital is deployed successfully, the higher the productivity of labor, the less of a day’s labor needs to be dedicated to securing basic survival, the larger the margin of safety separating man from starvation. It is primarily thanks to capital accumulation and longer production processes that food is secure for most of the world’s population, making it possible to buy nutritious food for a fraction of a day’s wages for the majority of the world’s population. Without modern capital, the output of a day’s work would be in the rough range of what an individual needs to survive for a day, making existence precarious and uncertain. Extreme poverty today exists only where capital is scarce, and people need to work daily to survive. With modern capital, on the other hand, the average worker can produce several multiples of their food needs every day, providing them a considerable margin of safety from economic hardship.

To understand the importance of capital, try to perform your job without any capital, and measure the change in your productivity. If you’re a taxi driver, try to drive people without having a car. Carrying them on your back is highly unlikely to be a sustainable business model. Try farming with only your bare hands and no tractor or shovel to help. Try hunting without a rifle, spear, or bow and arrow. Try to survive a winter without the capital equipment we use to build our modern homes. It is no exaggeration to think of poverty as capitallessness.

A good literary illustration of the value of capital becomes apparent when reading George Orwell’s Down and Out in Paris and London. Orwell spent a lot of time with the low income workers in both major European cities in the twenties and thirties of the twentieth century. One of his most astute and profound observations of the state of poverty in which he lived was how expensive everything was for poor people. A rich man who has a home with all the essentials of survival can take survival for granted on any given day, at least when compared to what a poor tramp has to persevere through in order to secure their basics needs. Without a kitchen, every meal is expensive. Without a car, walking is very time-consuming. Without a wardrobe to keep clothes, it is expensive to find decent clothes to look good for a job interview. Many things are made cheap by owning the capital, and capitallesness is a prime reason why poverty can appear impossible to surmount. Low stocks of capital make productivity low, and that in turn leaves very little income for saving and investing in capital to raise productivity. Breaking out of this cycle requires the deferring of consumption when consumption is very little and survival is precarious. Many of the world’s poor have struggled to break out of this poverty trap.

The high cost of capital

– Delayed gratification

The drawback of capital accumulation is that it is expensive and uncertain. It requires sacrificing present consumption in order to invest resources which will only bear fruit in the future, and may not bear fruit at all. Capital requires constant delaying gratification and deferring consumption. The opportunity cost of capital is always forgone consumption. Any person who owns any capital is at every point in time capable of selling the capital in exchange for present consumption goods. The moment his fishing rod is completed, the fisherman could find someone to pay them a significant sum of fish in exchange for the rod. In order to continue to produce at the higher productivity level of the fishing rod, its owner must every day reject the chance to accept a large sum of fish. The owners of the Annelies Ilena could live outrageously well over the next year if they sell it, but they continue to sacrifice that splendid year in favor of maintaining capital that will produce a stream of income for decades into the future. For any capital accumulation to occur, individuals must lower their time preference; they must reduce their discounting of the future enough to provide for it at the expense of the present. This point is worth bearing in mind when economic illiterates of the Marxist or Keynesian variety rail against capital owners for being parasitical on the workers. The sacrifice of present consumption by capital owners in exchange for future reward is economically no different from the sacrifice of leisure by workers in exchange for future reward. Had capital owners actually contributed nothing to the production process, then their consuming of the capital good instead of offering it to the workers would make no difference to the workers’ productivity. But ask any worker about what would happen to their productivity without capital, and the absurdity of the bitter Marxist confusions becomes apparent. The absurdity becomes understandable once one recognizes that neither of these schools of economic ill-thought has ever developed the intellectual capacity to deal with a concept like time preference, and what it implies for capital accumulation, nor have they ever demonstrated a grasp of the concept of opportunity cost, as is apparent from their policy proposals, which are made for a Garden of Eden that has no scarcity and forces no choices on governments. No appreciation of the difficulty and importance of capital accumulation can be obtained without understanding scarcity and opportunity cost, and that explains why every single government experimenting with Marxist ideas ended up with wholesale destruction of society’s capital.

-Risk

Capital accumulation is also inherently risky and uncertain. Any production process could fail to produce its desired output, for an endless variety of reasons. Capital can be lost or destroyed for many reasons, and the consumption that was deferred will be forever lost. Capital accumulation not only requires the sacrifice of the present for the future, it also requires the sacrifice of the certain for the uncertain.

-Destruction

Destroying capital, on the other hand, is very easy. Capital is similar to a living organism that needs to be continuously receiving inputs from, and producing outputs into, its environment to survive. It needs to operate in a market where prices dictate its most productive uses and mode of production. Prices are what inform capitalists where to allocate their capital, and they are what informs the entrepreneur how to manage the production process, as will be discussed in more detail in Chapter XX. Without being bought and sold in a free market, prices can give no signals to capitalists and entrepreneurs on where and how to allocate their resources, leading to misallocation, waste, and decline. Without being employed and properly maintained, machines malfunction and deteriorate. 

-Depreciation

It is also the nature of capital to depreciate in value over time as it gets used. Capital is not eternal, and the daily wear and tear will take its toll on a product. Producers who invest in capital cannot expect it to keep producing consumer goods indefinitely at the same level of productivity. The productivity of capital is constantly declining with use, and more capital expenditure is needed to maintain capital and its productivity.

Pseudo-scientific cults like Keynesianism and Marxism do not teach the reality of economics as the study of human action, which results in their adherents being completely incapable of understanding the hard work, sacrifice, and risk needed for anyone to become a capital owner. This inability to understand cause and effect leads these dimwitted schools into imagining capital is some sort of heavenly privilege bestowed upon a particular race of people, and you either belong to that race or do not. There is absolutely no appreciation or understanding of all actions necessary to accumulate capital and hold on to it successfully.

In order to become a capitalist, a man needs to first produce something of value to others so they pay him. He then needs to abstain from using that payment to satisfy his own needs, and instead deploy it into a business whose goal is to serve others, by producing outputs which they subjectively value higher than the market price of the inputs into the production process. At any point in time, failure to provide customers with this value will result in a collapse in revenue and profitability, inevitably leading to bankruptcy and the loss of capital. The causes of such failure are endless: laziness, disinterest, bad luck, better competitors, but the outcome is always the same: the loss of capital. The extent that an individual owns capital in a free market economic system is the extent to which they are able to serve people and abstain from consumption. No privilege or inheritance is above this; and no wealth too large. The temptation of spending the money is always there, and only by resisting it is capital owned. Fail to serve customers, and your capital will depreciate until it becomes dysfunctional junk requiring disposal. 

As Ludwig von Mises put it: 

“Ownership of the means of production is not a privilege, but a social liability. Capitalists and landowners are compelled to employ their property for the best possible satisfaction of the consumers. If they are slow and inept in the performance of their duties, they are penalized by losses. If they do not learn the lesson and do not reform their conduct of affairs, they lose their wealth. No investment is safe forever.”

The denigration and vilification of capital ownership by the dominant intellectual death cults of the twentieth century, Keynesians and Marxists, has been reflected in the catastrophic economic consequences that have ensued whenever these fanatics have taken reins of a country’s economy. The childish inability to understand the costs needed for capital accumulation has meant that every single government advised by these imbeciles has attempted to finance investment without pre-existing savings. Whether it’s through printing physical money or credit expansion, the underlying dynamic is the same:
idiots who think generating more claims on capital results in an increase in capital stock. This dynamic is analyzed in greater detail in Chapter XX.

Capital and time preference

“Once it is low enough to allow for any savings and capital or durable consumer-goods formation at all, a tendency toward a fall in the rate of time preference is set in motion, accompanied by a “process of civilization.””

–Hans-Hermann Hoppe

The cost of capital accumulation lies in the sacrifices of present goods that must be undertaken in order to invest resources in the production of future goods. The more that people value the present compared the future, i.e. the higher their time preference, the less they will be inclined to defer consumption and invest in future production. As their time preference declines and their valuation of the future increases, they become more likely to forgo present consumption in search for future returns. As far as anyone knows, capital goods cannot be conjured out of thin air by visualizing or wishful thinking. The only way of making capital goods lies in the deferral of the consumption of present goods. Like all economic phenomena, capital can only be understood in terms of human action, and the action needed to make it happen. The constraint on capital accumulation is not natural or physical, it is human, and lies precisely in how much of their output humans want to invest in future production versus present production; in other words, the constraint on capital production is time preference. As Hoppe explained, “the lower the time-preference rate, the earlier the onset of the process of capital formation, and the faster the roundabout structure of production will be lengthened.” 

Seeing as time preference is the limit on the production of capital, it therefore follows that the price of capital is a reflection of time preference. The lower a person’s time preference, the less they discount the future compared to the present, and therefore the cheaper it is for them to sacrifice the present consumption for future reward. When a person’s time preference is high, on the other hand, the sacrifice of present consumption is going to appear very costly compared to future reward. The price of capital is thus a negative function of the time preference. This is the intuitive basis for the pure time preference theory of interest rates, which will be discussed in detail in Chapters XX, after introducing money, entrepreneurship, and the monetary market economic order in the forthcoming chapters. 

Since time preference is positive, only the expectation of a real return encourages saving. The value of capital goods is derived entirely from the goods they produce; capital has no value of its own because it offers no direct utility to humans as a consumer good; it has utility only to the extent that it can produce goods with utility. Only investment in activities which offer a positive return in terms of utility and final goods is undertaken. As Rothbard put it: “We may explain the entire act of deciding whether or not to perform an act of capital formation as the balancing of relative utilities, “discounted” by the actor’s rate of time preference and also by the uncertainty factor.”

As time goes by, people accumulate more capital, time preference begins to drop further, and the price of capital drops further. 

Drivers of capital accumulation

Factors that encourage low time preference and capital accumulation:

Security, property rights, peace, civilized behavior, ability to disagree nonviolently. 

Extensive literature on economic institutions that, at its heart, comes down to property rights.

There has been a strong lack of emphasis on the role of capital accumulation in modern economics. 

Largely because it runs against the best interest of government. There is no constituency for large-scale individual mass ownership of capital.

Arguably much more important than trade, conceptually and practically. Japan and South Korea show cases of growth with high savings without very large openness to global trade. Obviously far more tenable in the past than today, nonetheless quite telling. Global trade without capital accumulation would not be very useful, as there are not many primitive goods worth the cost of transportation.

There is very little discussion of savings in modern economic textbooks, particularly with regard to the essential role of savings in the genesis of the process of economic production. Saving financial instruments, instead of spending them, is no different from saving economic resources from present consumption in order to deploy them in economic production, or from delaying the enjoyment of leisure and engaging in labor. Rather than emphasize the commonality of delaying gratification in all of these acts, and their indispensable role in economic growth and progress, the Keynesian textbook portrays savings as an anti-social and borderline sociopathic personality trait. 

The starting point of Keynesian analysis is to assume that society’s income will be divided into consumption spending and saving according to a predetermined mathematical formulation. There is little discussion of the factors that determine the level of saving in a society. There is no recognition of the importance of the human agency in making this choice, and no discussion of its consequences. The Keynesian model uses a highly contrived definition of savings, whose explication and debunking is not worth including in this book.

This is how Mankiw’s Principles of Economics explains savings and investments. Identifying the many category errors necessary to make the Keynesian system of equations workable in this excerpt is left as an exercise to the reader. 

“The terms saving and investment can sometimes be confusing. Most people use these terms casually and sometimes interchangeably. By contrast, the macroeconomists who put together the national income accounts use these terms carefully and distinctly.

“Consider an example. Suppose that Larry earns more than he spends and deposits his unspent income in a bank or uses it to buy some stock or a bond from a corporation. Because Larry’s income exceeds his consumption, he adds to the nation’s saving. Larry might think of himself as “investing” his money, but a macroeconomist would call Larry’s act saving rather than investment. In the language of macroeconomics, investment refers to the purchase of new capital, such as equipment or buildings. When Moe borrows from the bank to build himself a new house, he adds to the nation’s investment. (Remember, the purchase of a new house is the one form of household spending that is investment rather than consumption.) Similarly, when the Curly Corporation sells some stock and uses the proceeds to build a new factory, it also adds to the nation’s investment.

“Although the accounting identity S = I shows that saving and investment are equal for the economy as a whole, this does not have to be true for every individual household or firm. Larry’s saving can be greater than his investment, and he can deposit the excess in a bank. Moe’s saving can be less than his investment, and he can borrow the shortfall from a bank. Banks and other financial institutions make these individual differences between saving and investment possible by allowing one person’s saving to finance another person’s investment.”

Suffice it to say that after extensive definitional and mathematical shenanigans, the Keynesian analysis concludes that equilibrium is reached only when the quantity of savings equals the quantity of investment, even though these are two completely distinct concepts and accounting entities, and there is no reason for them to be equal but coincidence. But, according to this model, when aggregate savings exceed aggregate investment, that must mean society is not consuming enough, or, in other words, saving too much. When people decide to stop spending a lot, and instead hold on to cash, the economy slows down, and causes widespread unemployment and bankruptcies. 

Through deferring to the authority of Keynes’ delusional certitude in his economically ignorant assertions, and through the application of more recent completely irrelevant mathematical equations and models, the Keynesian textbook implicates savings for destroying the economy and causing unemployment. He also concluded savings would prevent the market from recovering as the economy falls into a deflationary spiral, where less spending causes less employment, which in turn causes less spending in a never-ending downward spiral. Such an absurd scenario is understandable since Keynes had no understanding of how prices function and adjust in a market economy, where final products are discounted and sold off, while unprofitable factors of production are deployed in new more productive lines of production. But according to Keynes, markets would fail to adjust as people continue to selfishly look out for their own self-interest by saving, rather than doing the responsible thing and spending. 


[Maybe more on Deflationary spiral]

Only the omnipotent, and omniscient hand of coercive government intervention could rescue the market from the catastrophe that low time preference savers had inflicted on it by providing for their future at the expense of the present. By devaluing the misers’ savings to finance credit expansion and fiscal spending, government would, at once, be able to increase the aggregate level of spending in society, increase the amount of investments, reduce the amount of savings, and, for good measure, teach savers a lesson and set a precedent that discourages them from saving in the future. This was, after all, the doctrine of a man whose time preference was so high he cared so little for the future he made his motto “in the long run, we are all dead.” Given that saving is meant to provide for the future, Keynes never failed to denigrate it, discourage it, and seek to undermine it.

The triumph of Keynesian economics in modern universities is reflected in the destruction of saving and the culture around it. The western societies that experienced the industrial revolution and the benefits of modern capitalism thanks to many decades of saving and capital accumulation currently have savings rates in the low single digit percentages, and have been at these levels for decades. 

[Chart on savings rates]

The value of capital goods is derived purely from the value of the consumer goods they provide.

As capital is accumulated, newer technologies are developed for its application.

Limits to Capital 

As quantities of capital are accumulated beyond a certain point while other factors remain constant, capital marginal productivity diminishes. A textile factory that gets machines for its workers will witness very fast productivity growth with the first machine it procures. With each worker that moves from using their hands to using a sewing machine, the productivity increases. But after all workers have had machines, adding another machine will have a smaller upside than the previous machines. The extra machine will be used as back-up in case any of the others breaks down, so its marginal contribution will be lower than the previous machine. As more machines are accumulated without corresponding increases in workers and other factors of production, and without technological improvement, the marginal productivity of each unit decreases.  Going from fishing by hand to using a fishing rod increases the productivity of the fisherman by more than what going from one fishing rod to two does. 

This relationship has driven some economists to hypothesize that there are limits to capital accumulation, or that capital accumulation cannot drive economic growth. While strictly true in a world in which capital grows while other factors of production remain stationary, a cursory look at the real world around us illustrates how far this is from reality. 

In the real world, the accumulation of capital does not run into diminishing returns because technological knowledge is constantly advancing, thus allowing us to accumulate better capital, and not just more capital. The technological advance is itself a function of increasing capital accumulation; the more capital available, the more technologies can be attempted, and the more will be found. It is the availability of capital that is the prerequesite for elongating the structure of production and introducing new technologies.

The fisherman does not continue to invest in accumulating an ever-growing number of fishing rods with declining marginal productivity. Instead, he will invest in other, more productive technologies, such as a fishing net, a fishing boat, and eventually, the Annelies Ilena. While in theory the concept of too much capital can be appealing, in practice, as long as any fisherman is less productive than the Annelies Ilena, there is still a lot of room for capital to be accumulated. Even the Annelies Ilena itself cannot be viewed as the pinnacle of capital productivity in the fishing industry. There is nothing about this boat that makes it the highest level of productivity open to us. A capitalist with more resources could commission the building of an even more productive boat, with an even longer production process to design and build it and operate it. Should the capital be made available to hire the world’s best and most experienced boat builders, and to give them plenty of time, it is extremely doubtful they would not be able to come up with a more productive boat than the Annelies Ilena. The reason we have no boat more productive than Annelies Ilena.

Are there limits to capital investment?

The limit on capital investment is the present opportunity cost in terms of present goods. 

We will never run out of the high opportunity cost of capital for us to have too much capital. In fact, the more capital we accumulate, the higher the value of leisure, the more expensive it is to sacrifice leisure for labor. 

The value of capital is subjective, but it is derived from the value of the final goods that capital produces. The marginal utility of the final goods produced from capital will also decline as their quantity rises.

The opportunity cost of capital is always in terms of consumption goods, because of the trade-off involved. More capital goods means fewer consumption goods, which results in a larger marginal utility forgone, i.e. a higher opportunity cost. 

The marginal productivity of capital also declines as its quantity increases, as long as the other factors are also constant. 

But in the real world, as technology continues to improve, the productivity of capital continues to rise. 

There is always scope for more capital accumulation because there is always room for higher productivity.

There is no such thing as too much capital. As long as there is a fisherman working with something less productive than the Annelies Ilena, there is room for more capital accumulation in the fishing industry. 

Capital does not replace labor, it just makes it more efficient. Machines will not displace people. Look at the transportation industry. From the wheel to modern tankers.

The mainstream economist understands the quantity of saving as a product of a societal marginal propensity to consume, a numerical parameter that determines the 

In Chapter XX, we return to the topic of the Keynesian explanation of the business cycle, and the role of saving and investment in them.