Live After Quit

Why Capital Goods Are the Key to Economic Progress

[This article is excerpted from chapter 18 of Human Action]

If one were to measure the length of the period of production spent in the fabrication of the various goods available now, one would have to trace back their history to the point at which the first expenditure of original factors of production took place. One would have to establish when natural resources and labor were first employed for processes that — besides contributing to the production of other goods — also contributed ultimately to the production of the good in question. The solution of this problem would require the solubility of the problem of physical imputation. It would be necessary to establish in quantitative terms to what extent tools, raw materials, and labor that directly or indirectly were used in the production of the good concerned contributed to the result. One would have to go back in these inquiries to the very origins of capital accumulation by saving on the part of people who previously lived from hand to mouth. It is not only practical difficulties that prevent such historical studies. The very insolubility of the problem of physical imputation stops us at the first step of such ventures.

Neither acting man himself nor economic theory needs a measurement of the time expended in the past for the production of goods available today. They would have no use for such data even if they knew them. Acting man is faced with the problem of how to take best advantage of the available supply of goods. He makes his choices in employing each part of this supply in such a way as to satisfy the most urgent of the not-yet-satisfied wants. For the achievement of this task, he must know the length of the waiting time that separates him from the attainment of the various goals among which he has to choose. As has been pointed out and must be emphasized again, there is no need for him to look backward to the history of the various capital goods available. Acting man counts waiting time and the period of production always from today on. In the same way in which there is no need to know whether more or less labor and material factors of production have been expended in the production of the products available now, there is no need to know whether their production has absorbed more or less time. Things are valued exclusively from the point of view of the services they can render for the satisfaction of future wants. The actual sacrifices made and the time absorbed in their production are beside the point. These things belong to the dead past.

It is necessary to realize that all economic categories are related to human action and have nothing at all to do directly with the physical properties of things. Economics is not about goods and services; it is about human choice and action. The praxeological concept of time is not the concept of physics or biology. It refers to the sooner or the later as operative in the actors’ judgments of value. The distinction between capital goods and consumers’ goods is not a rigid distinction based on the physical and physiological properties of the goods concerned. It depends on the position of the actors and the choices they have to make. The same goods can be looked upon as capital goods and as consumers’ goods. A supply of goods ready for immediate enjoyment is capital goods from the point of view of a man who looks upon it as a means for his own sustenance and that of hired workers during a waiting time.

An increase in the quantity of capital goods available is a necessary condition for the adoption of processes in which the period of production and therefore waiting time are longer. If one wants to attain ends that are temporally further away, one must resort to a longer period of production because it is impossible to attain the end sought in a shorter period of production. If one wants to resort to methods of production with which the quantity of output is higher per unit of input expended, one must lengthen the period of production. For the processes with which output is smaller per unit of input have been chosen only on account of the shorter period of production they require. But on the other hand, not every employment chosen for the utilization of capital goods accumulated by means of additional saving requires a process of production in which the period of production from today on to the maturing of the product is longer than with all processes already adopted previously. It may be that people, having satisfied their more urgent needs, now want goods that can be produced within a comparatively short period. The reason why these goods have not been produced previously was not that the period of production required for them alone was deemed too long, but that there was a more urgent employment open for the factors required.

If one chooses to assert that every increase in the supply of capital goods available results in a lengthening of the period of production and of waiting time, one reasons in the following way: If a are the goods already previously produced and b the goods produced in the new processes started with the aid of the increase in capital goods, it is obvious that people had to wait longer for a and b than they had to wait for a alone. In order to produce a and b, it was not only necessary to acquire the capital goods required for the production of a but also those required for the production of b. If one had expended for an increase of immediate consumption the means of sustenance saved to make workers available for the production of b, one would have attained the satisfaction of some wants sooner.

The treatment of the capital problem customary with those economists who are opposed to the so-called “Austrian” view assumes that the technique employed in production is unalterably determined by the given state of technological knowledge. The “Austrian” economists, on the other hand, show that it is the supply of capital goods available at each moment that determines which of the many known technological methods of production will be employed.1 The correctness of the “Austrian” point of view can easily be demonstrated by a scrutiny of the problem of scarcity of capital.

Let us look at the condition of a country suffering from scarcity of capital. Take, for instance, the state of affairs in Rumania about 1860. What was lacking was certainly not technological knowledge. There was no secrecy concerning the technological methods practiced by the advanced nations of the West. They were described in innumerable books and taught at many schools. The elite of Rumanian youth had received full information about them at the technological universities of Austria, Switzerland, and France. Hundreds of foreign experts were ready to apply their knowledge and skill in Rumania. What was wanting was the capital goods needed for a transformation of the backward Rumanian apparatus of production, transportation, and communication according to Western patterns. If the aid granted to the Rumanians on the part of the advanced foreign nations had consisted merely in providing them with technological knowledge, they would have had to realize that it would take a very long time until they caught up with the West. The first thing for them to have done would have been to save in order to make workers and material factors of production available for the performance of more time-consuming processes. Only then could they successively produce the tools required for the construction of those plants that in the further course were to produce the equipment needed for the construction and operation of modern plants, farms, mines, railroads, telegraph lines, and buildings. Scores of decades would have passed until they had made up for the time lost. There would not have been any means of accelerating this process than by restricting current consumption as far as physiologically possible for the intermediary period.

However, things developed in a different way. The capitalist West lent to the backward countries the capital goods needed for an instantaneous transformation of a great part of their methods of production. It saved them time and made it possible for them to multiply very soon the productivity of their labor. The effect for the Rumanians was that they could immediately enjoy the advantages derived from the modern technological procedures. It was as if they had started at a much earlier date to save and to accumulate capital goods.

Shortage of capital means that one is further away from the attainment of a goal sought than if one had started to aim at it at an earlier date. Because one neglected to do this in the past, the intermediary products are wanting, although the nature-given factors from which they are to be produced are available. Capital shortage is dearth of time. It is the effect of the fact that one was late in beginning the march toward the aim concerned. It is impossible to describe the advantages derived from capital goods available and the disadvantages resulting from the paucity of capital goods without resorting to the time element of sooner and later.2

To have capital goods at one’s disposal is tantamount to being nearer to a goal aimed at. An increment in capital goods available makes it possible to attain temporally remoter ends without being forced to restrict consumption. A loss in capital goods, on the other hand, makes it necessary either to abstain from striving after certain goals that one could aim at before or to restrict consumption. To have capital goods means, other things being equal, a temporal gain.3 As against those who lack capital goods, the capitalist, under the given state of technological knowledge, is in a position to reach a definite goal sooner without restricting consumption and without increasing the input of labor and nature-given material factors of production. His head start is in time. A rival endowed with a smaller supply of capital goods can catch up only by restricting his consumption.

The start that the peoples of the West have gained over the other peoples consists in the fact that they have long since created the political and institutional conditions required for a smooth and by and large uninterrupted progress of the process of larger-scale saving, capital accumulation, and investment. Thus, by the middle of the 19th century, they had already attained a state of well-being that far surpassed that of poorer races and nations less successful in substituting the ideas of acquisitive capitalism for those of predatory militarism. Left alone and unaided by foreign capital, these backward peoples would have needed much more time to improve their methods of production, transportation, and communication.

It is impossible to understand the course of world affairs and the development of the relations between West and East in the last centuries if one does not comprehend the importance of this large-scale transfer of capital. The West has given to the East not only technological and therapeutical knowledge, but also the capital goods needed for an immediate practical application of this knowledge. These nations of Eastern Europe, Asia, and Africa have been able, thanks to the foreign capital imported, to reap the fruits of modern industry at an earlier date. They were to some extent relieved from the necessity of restricting their consumption in order to accumulate a sufficient stock of capital goods. This was the true nature of the alleged exploitation of the backward nations on the part of Western capitalism about which their nationalists and the Marxians lament. It was a fecundation of the economically backward nations by the wealth of the more advanced nations.

The benefits derived were mutual. What impelled the capitalists of the West to embark upon foreign investment was the demand of the consumers. Consumers asked for goods that could not be produced at all at home and for a cheapening of goods that could be produced at home only with rising costs. If the consumers of the capitalist West had behaved in a different way, or if the institutional obstacles to capital export had proved insurmountable, no capital export would have occurred. There would have been more longitudinal expansion of domestic production instead of lateral expansion abroad.

[This article is excerpted from chapter 18 of Human Action: The Scholar’s Edition and is read by Jeff Riggenbach.]

• 1. Cf. F.A. Hayek, The Pure Theory of Capital (London, 1941), p. 48. It is awkward indeed to attach to certain lines of thought national labels. As Hayek remarks pertinently (p. 47, n. 1), the classical English economists since Ricardo, and particularly J.S. Mill (the latter probably partly under the influence of J. Rae) were in some regards more “Austrian” than their recent Anglo-Saxon successors.
• 2. Cf. W.S. Jevons, The Theory of Political Economy (4th ed. London, 1924), pp. 224–229.
• 3. This implies also equality in the quantity of nature-given factors available.