How Capitalists Improve Human Productivity
To quote the last paragraph of this 2008 article by Robert Murphy, when asked why Austrian school economics should be studied, the best answer is: “the Austrian theory of capital is the best one you can find if you really want to grasp how the economy actually works—beyond sterile mathematics and static timeless analysis.”
The Austrian school’s understanding of capital and production relies upon three main pillars. First: the factors of production comprise both nature-given factors—namely land and labor—and non-nature-given (i.e., produced by giving up production aimed at immediate consumption) ones—namely capital goods. Second: production in a capitalistic economy requires time and features several stages. Third: the ultimate source of wants satisfaction—and hence of subjective value—is consumption, which is the sole ultimate end of production; hence, the farther in time from consumption the output of production is, the less it’s valued—in other words, people have time preferences.
Understanding Production and Time
What is production? It’s human action blending commodities (land) and human energy (labor) in order to attain goods and services conducive to wants satisfaction. If production leads to direct want satisfaction, the outcome of production is consumption goods; otherwise—i.e., if the outcome is delayed want satisfaction, that is, goods and services conducive to satisfaction in future time—the outcome is capital goods.
As Rothbard very effectively describes it, capital is
a way station along the road to the enjoyment of consumers’ goods. He who possesses capital is that much further advanced in time on the road to the desired consumers’ good….Capital goods are “stored-up” labor, land, and time; they are intermediate way stations on the road to the eventual attainment of the consumers’ goods into which they are transformed. (Man, Economy, and State with Power and Market , pp. 52, 58)
Thus, capital is “‘stored-up’ labor, land, and time”—saved resources. The time element is particularly relevant in understanding capital; as a matter of fact, capital can be (also) conceived as previous human beings’ efforts whose outcome—i.e., advancement toward the enjoyment of final consumption—we can now benefit from. In this sense, Böhm-Bawerk’s metaphor is highly illuminating:
The boy who cuts a stick with his knife is, strictly speaking, only continuing the work of the miner who, centuries ago, thrust the first spade into the ground to sin
Article from Mises Wire