We're Living In The Age Of Capital Consumption

Authored by Ronald-Peter Stöferle via The Mises Institute,

When capital is mentioned in the present-day political debate, the term is usually subject to a rather one-dimensional interpretation: Whether capital saved by citizens, the question of capital reserves held by pension funds, the start-up capital of young entrepreneurs or capital gains taxes on investments are discussed – in all these cases capital is equivalent to “money.” Yet capital is distinct from money, it is a largely irreversible, definite structure, composed of heterogeneous elements which can be (loosely) described as goods, knowledge, context, human beings, talents and experience. Money is “only” the simplifying aid that enables us to record the incredibly complex heterogeneous capital structure in a uniform manner. It serves as a basis for assessing the value of these diverse forms of capital.

Modern economics textbooks usually refer to capital with the letter “C”. This conceptual approach blurs the important fact that capital is not merely a single magnitude, an economic variable representing a magically self-replicating homogenous blob but a heterogeneous structure. Among the various economic schools of thought it is first and foremost the Austrian School of Economics, which stresses the heterogeneity of capital. Furthermore, Austrians have correctly recognized, that capital does not automatically grow or perpetuate itself. Capital must be actively created and maintained, through production, saving, and sensible investment.

Moreover, Austrians emphasize that one has to differentiate between two types of goods in the production process: consumer goods and capital goods. Consumer goods are used in immediate consumption – such as food. Consumer goods are a means to achieve an end directly. Thus, food helps to directly achieve the end of satisfying the basic need for nutrition. Capital goods differ from consumer goods in that they are way-stations toward the production of consumer goods which can be used to achieve ultimate ends. Capital goods therefore are means to achieve ends indirectly. A commercial oven (used for commercial purposes) is a capital good, which enables the baker to produce bread for consumers. 

Through capital formation, one creates the potential means to boost productivity. The logical precondition for this is that the production of consumer goods must be temporarily decreased or even stopped, as scarce resources are redeployed toward the production of capital goods. If current production processes generate only fewer or no consumer goods, it follows that consumption will have to be reduced by the quantity of consumer goods no longer produced. Every deepening of the production structure therefore involves taking detours.

Capital formation is therefore always an attempt to generate larger returns in the long term by adopting more roundabout methods of production. Such higher returns are by no means guaranteed though, as the roundabout methods chosen may turn out to be misguided. In the best case only those roundabout methods will ultimately be continued, which do result in greater productivity. It is therefore fair to assume that a more capital-intensive production structure will generate more output than a less capital-intensive one. The more prosperous an economic region, the more capital-intensive its production structure is. The fact that the generations currently living in our society are able to enjoy such a high standard of living is the result of decades or even centuries of both cultural and economic capital accumulation by our forebears.

Once a stock of capital has been accumulated, it is not destined to be eternal. Capital is thoroughly transitory, it wears out, it is used up in the production process, or becomes entirely obsolete. Existing capital requires regularly recurring reinvestment, which can usually be funded directly out of the return capital generates. If reinvestment is neglected because the entire output or more is consumed, the result is capital consumption.

It is not only the dwindling understanding of the nature of capital that leads us to consume it without being aware of it. It is also the framework of the real economy which unwittingly drives us to do so. In 1971 money was finally cut loose entirely from the gold anchor and we entered the “paper money era.” In retrospect, it has to be stated that cutting the last tie to gold was a fatal mistake. Among other things, it has triggered unprecedented instability in interest rates. While interest rates displayed relatively little volatility as long as money was still tied to gold, they surged dramatically after 1971, reaching a peak of approximately 16 percent in 1981 (10-year treasury yield), before beginning a nosedive that continues until today. This massive decline in interest rates over the past 35 years has gradually eroded the capital stock.

An immediately obvious effect is the decline in so-called “yield purchasing power”. The concept describes what the income from savings, or more precisely the interest return on savings, will purchase in terms of goods. The opportunity to generate interest income from savings has of course decreased quite drastically. Once zero or even negative interest rate territory is reached, the return on saved capital is obviously no longer large enough to enable one to live from it, let alone finance a reasonable standard of living. Consequently, saved capital has to be consumed in order to secure one's survival. Capital consumption is glaringly obvious in this case.

It is beyond question that massive capital consumption is taking place nowadays, yet not all people are affected by it to the same extent. On the one hand, the policy of artificially reducing the interest as orchestrated by the central banks does negatively influence the entrepreneurs’ tasks. Investments, especially capital-intensive investments seem to be more profitable as compared to a realistic, i. e. non-interventionist level, profits are thus higher and reserves lower. These and other inflation-induced errors promote capital consumption.

On the other hand, counteracting capital consumption are technological progress and the rapid expansion of our areas of economic activity into Eastern Europe and Asia in recent decades, due to the collapse of communism and the fact that many countries belatedly caught up with the monetary and industrial revolution in its wake. Without this catching-up process it would have been necessary to restrict consumption in Western countries a long time ago already.

At the same time, the all-encompassing redistributive welfare state, which either directly through taxes or indirectly through the monetary system continually shifts and reallocates large amounts of capital, manages to paper over the effects of capital consumption to some extent. It remains to be seen how much longer this can continue. Once the stock of capital is depleted, the awakening will be rude. We are certain, that gold is an essential part of any portfolio in this stage of the economic cycle.



NoDebt SWRichmond Sat, 11/18/2017 - 21:25 Permalink

Destruction of monetary capital is relatively easily recouped.  Destruction of human/knowledge/experience capital is not so easily replaced.  Look at any country where the "natives" have taken over (Africa).  They then control the means of production and all the resources of the former owners but without the knowlege of how to actually produce anything (nor the experience to know why they even should).  Collapse takes only a single digit number or years at that point. 

In reply to by SWRichmond

translator zero bobcatz Sun, 11/19/2017 - 05:28 Permalink

In 1971 money was finally cut loose entirely from the gold anchor and we entered the “paper money era.” In retrospect, it has to be stated that cutting the last tie to gold was a fatal mistake.

LOL. It was not a fatal mistake. It was a free lunch by design for the money launderers and kleptocrats, for the empire to dominate half of the planet, and for the running dogs in finance to pay for their McMansions. The free-money era began in 1913 and has accelerated since then, punctuated by the default in 1933, the default in 1971, and the derivatives default in 2008, just to name a few.

In reply to by bobcatz

Escrava Isaura translator zero Sun, 11/19/2017 - 05:34 Permalink

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LOL. It was not a fatal mistake. It was a free lunch by design … to pay for their McMansions.  And the America middleclass with high paying jobs. Yes, you’re correct that it was a fatal mistake by capitalism, not because it’s unsustainable, but, because the population won’t be able to survive past its collapse. That will be the tragedy of industrialization and capitalism collapse. It will bring humanity with.  

In reply to by translator zero

Code Duello NoDebt Sat, 11/18/2017 - 23:49 Permalink

The author specifically states, "... Yet capital is distinct from money..." and you introduce a non-sequitur "monetary capital" into this thread.  At that point your argument/viewpoint goes down the drain.Regarding the actual ongoing capital destruction, I try to remind myself that Russia which was largely an agrarian economy, after the advent of the communists, took 78 years to deplete its capital base to the point at which the country suffered economic collapse.  Imagine the USA's capital base that is industrial rather than agrarian, which was gigantic relative to 1913 Russia's,  at the time of the abandonment of the gold standard - 1933; surely more than 78 years (i.e. AD 2049) will need to pass before the USA reaches a similar point of economic collapse -- perhaps hundreds of years.  The American economic apocalypse may be impending but it's probably further out in time than most of us think probable. 

In reply to by NoDebt

Booked Code Duello Sun, 11/19/2017 - 02:34 Permalink

One has to understand that "capital" is not a commodity that one can observe in the "real" world, but consists of ANY material or immaterial asset which in the mind of an acting man places him closer in time to the consumer good he wishes to bring to market.  "Capital", in its essential aspect, is an IDEA!  It would follow from this that a charlatan might claim as "capital" a lie or misrepresentation designed to bring him closer to consumer goods.  You know, like a degree from Harvard!  

In reply to by Code Duello

MrNoItAll Code Duello Sun, 11/19/2017 - 02:54 Permalink

So you're thinking another few hundred trillion or more in QE by 2049 before we finally consume all our capital? Not likely, IMO. Look for oil shortages to put an end to this bubble economy charade by 2020, if not before due to unforeseen geopolitical or natural events. Our modern civilization is skating on paper thin ice these days.

In reply to by Code Duello

Itinerant Code Duello Sun, 11/19/2017 - 07:57 Permalink

Economic collapse and capital depletion are not exactly the same. Economic, social, and political collapse have a lot of other variables than capital depletion alone. Countries like Korea and Russia achieved high rates of growth in the 20th century, but the kind of capital and infrastructure required in the current global economy is very different, and globalization means you are competing with other parties -- it's not just a question of building steel mills and churning out cement. The USA has fairly delapidated infrastructure in many regards, and few other OECD countries have the equivalent to Detroits or Buffalos. When this enormous pile of money (which is called capital) is repriced to actual income producing capital, the detonation in society and the global economy could be huge.There has never been a similarly orchestrated global house of cards!Current policy-makers believe that because low interest rates signal a healthy economy (plenty of capital), that you can fix the economy by "causing" low interest rates. This is the equivalent of using the water you have stored to wet the streets, because when the streets are wet, it rains and there is lots of water. But the water (debt) you are consumig is actually the hollowing out of the capital structure.

In reply to by Code Duello

shovelhead Code Duello Sun, 11/19/2017 - 11:27 Permalink

Yet capital is distinct from money..." and you introduce a non-sequitur "monetary capital" into this thread.  At that point your argument/viewpoint goes down the drain.Nope. Monetary capital is savings and expertise and infrastructure are just different forms of capital previously invested when combined can create a business.A worker takes his truck and tools (previous investment) and combines it with saved capital (money) to start his own business to capture more capital for himself. Let's call him a roofer.If the new business owner starts taking earned capital and uses it to go to Vegas instead of reinvesting to grow his business or increase production effiency, then that is the equivalent to capital diffusion or destruction.Not hard to understand.

In reply to by Code Duello

A Sentinel NoDebt Sun, 11/19/2017 - 04:43 Permalink

CapM’s contribution to the devaluation of human capital as well as plant, brand and even “good will” (minimally customers trusting Goldman, Morgan and Fargo not to screw them) all have been marginalized compared to shortest term cash flow. The theory does that and it DOES maximize short-term NPV - what matters if you’re ready to sell when the right moment comes.

I was actually considering the finance PhD programs at Wharton and Chicago (the only programs worth a DAMN at that level — Harvard, just to name one, is a joke of 50 year old econometrics.

But that was my idea: Keynes’ C+I+G+X put WAY too much emphasis on C, and I was convinced that I was a multiplier (linear transform, what have you) operating on revenue mapping into future value.

But then I found the Austrian guys, And I realized that there wasn’t that much for me to do. So I didn’t.

In reply to by NoDebt

1 Alabama NoDebt Sun, 11/19/2017 - 07:55 Permalink

Dubious, do you think we are ever going to "recoup" that $20 trillion public debt? Or that $64 trillion personal debt? Or that $220 Trillion unfunded debt. There is less than a zero percent chance that this will be "relatively easy".Human knowledge/experience is what is destructive because of its inherit failure when examined through the lense of the laws of nature. Fixed it 4 ya.  

In reply to by NoDebt

JRobby NoDebt Sun, 11/19/2017 - 09:44 Permalink

That is why they purposely destroyed education. The fear of the educated boomer population bulge did it. They did not want that wave to continue.1. Flood the society with drugs (legal and illegal)2. Destroy education3. End the gold peg, 19714. Deregulate finance and pensions5. Wait until the boomer bulge ages enoughThen pull the rug out.

In reply to by NoDebt

Dincap SWRichmond Mon, 11/20/2017 - 00:11 Permalink

Actually the so self called Austrians besides not having any idea about capitalism as well invent a superstitious narrative about capital consumption.  It is like someone who cant understand mathematics and differential equations for instance nevertheless keeps on inventing an imaginative short cut to find a solution.

In reply to by SWRichmond

MozartIII Sat, 11/18/2017 - 20:39 Permalink

Faith and how it can be utilized ='s moneys value. History shows how this has changed over thousands of years. Look at Bit-Coin, and I'm not into it. Wish I had some from way back though.

Kefeer Sat, 11/18/2017 - 20:41 Permalink

I need two things and one I already have.  I need to be reconciled to the Lord for my rebellion against him and the penalty that bears to be paid and I need death to shed myself of this sinful nature.  Just a matter of time.  Reconciliation is true eternal capital.

WernerHeisenberg Kefeer Sat, 11/18/2017 - 22:50 Permalink

This truth transcends all human religious concepts.  The heart of the matter is our human lives and the observable universe are but three dimensional slices from something much bigger.  What we imagine to be our lives is better thought of as episodes in a reality show.  Our peers and seniors are watching (largely) undetected.  When our bodies die, we return to the existence we knew before our latest incarnations, and our amnesia of previous events is lifted.  Our actions we took when we believed ourselves to be mortals will be reviewed favorably or unfavorably.  This is the long game, and playing it well is all that matters in the end.

In reply to by Kefeer

GunnerySgtHartman litemine Sat, 11/18/2017 - 22:33 Permalink

We spent a trillion on shovel-ready infrastructure, and what did it get us?  A Brazilian steakhouse in Missouri, a martini bar, a fake beauty school in New Hampshire, and a program in California to photograph ants.  Oh, and we can't forget renovations to "Crazy Uncle" Joe Biden's favorite Amtrak station in Delaware (does it have a Dunkin Donuts staffed with people from India, Joe?).https://www.realclearpolitics.com/articles/2014/02/14/five_years_later_hows_that_wreckovery_working_out_121581.htmlThere should never have been a bailout of anyone.

In reply to by litemine

Utopia Planitia Sat, 11/18/2017 - 20:54 Permalink

Haven't the Fed and the wonks in DC been telling us to BORROW BORROW BORROW and SPEND SPEND SPEND???  So what's the problem now?  Did somebody actually pull their head out of their stinky ass and discover what they were selling?  Doubtful.