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From the notion of capital goods one must clearly distinguish the concept of capital. The concept of capital is the fundamental concept of economic calculation, the foremost mental tool of the conduct of affairs in the market economy. Its correlative is the concept of income.

The idea of capital has no counterpart in the physical universe of tangible things. It is nowhere but in the minds of planning men. It is an element in economic calculation.

Capital goods are intermediary products which, in the further course of production, are transformed into consumers’ goods. All capital goods, including those not called perishable, perish either in wearing out their serviceableness in production or in losing their serviceableness, even before this happens, through a change in the market data. There is no question of keeping a stock of capital goods intact. They are transient. The notion of wealth constancy is an outgrowth of deliberate planning and acting. It refers to the concept of capital as applied in capital accounting, not to the capital goods as such.

The accumulation of new capital through saving initiates the chain of actions that results in an improvement of economic conditions. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way.

These additional funds make possible the execution of projects which, for the lack of capital goods, could not have been executed previously.

Embarking upon the realization of the new projects, entrepreneurs compete on the market for the factors of production. They push up the prices of materials and wage rates. Thus wage earners, at the start of the process, already reap a share of the benefits that the abstention from consumption on the part of savers has begotten.

In the capitalist society there prevails a tendency toward a steady increase in the per capita quota of capital invested. The accumulation of capital soars above the increase in population figures. Consequently the marginal productivity of labor, real wage rates, and the wage earners’ standard of living tend to rise continually. But this improvement in well-being is not the manifestation of the operation of an inevitable law of human evolution; it is a tendency resulting from the interplay of forces which can freely produce their effects only under capitalism.

That in capitalist countries the average wage earner consumes more goods and can afford more leisure than his ancestors is not an achievement of governments and labor unions. It is the outcome of the fact that profit-seeking business has accumulated and invested more capital and thus increased the marginal productivity of labor.

Capital as such does not bear interest; it must be well employed and invested not only in order to yield interest, but also lest it disappear entirely.

Ludwig von Mises
Ludwig von Mises

Ludwig von Mises (1881-1973) taught in Vienna and New York and served as a closes adviser to the Foundation for Economic Education. He is considered the leading theorist of the Austrian School of the 20th century.