Capital Consumption

Dr. Sennholz heads the Department of Economics at Grove City College and is a noted writer and lecturer on monetary and economic affairs.

Government spending seems to be an all-purpose remedy for economic and social ills, the key to important political ends. The world of scarcity with which man always has struggled is finally giving way to a fabulous world of fulfillment and plenty.

In the world of reality, every economic good must be produced by man and his capital in cooperation with nature. In order to consume more, man must produce more unless he is prepared to eat into the capital substance that is helping to produce the goods. Capital refers to the monetary net amount of all the productive assets of an enterprise, which may consist of anything from cash to receivables, inventory, tools and equipment, or even land and buildings.

The amount of capital invested per head of the population basically determines the productivity of our labor, wage rates, and standards of living. We speak of a progressing economy when the per capita amount is increasing, which causes income to rise through an expansion of production. And we speak of a contracting economy when the amount of capital per person is shrinking, which reduces incomes and standards of living.

Every day we either accumulate capital through saving or reduce it through overconsumption. Businessmen either form capital through reinvestments of their earnings or dissipate it through losses or overconsumption. Every day total productive capital in the

U.S. either expands or contracts, which causes labor productivity to rise or fall, and incomes and living standards to move accordingly.

The growing popularity of many government programs rests on the inability of the public to understand the nature and importance of capital. The redistributive policies of the U.S. government have consumed productive capital on a massive scale. At first, these policies merely slowed down capital accumulation and improvement in the rates of production. But with the acceleration of government spending in recent years, it appears now that the U.S. has embarked upon net consumption of capital that was accumulated in the past. If this conclusion is correct, our redistributive policies have arrested further economic progress and now are reducing our wage rates and standards of living. Neither law nor regulation can prevent pernicious poverty if we choose to consume our capital substance.

We are today heirs and beneficiaries of the capital that was formed by our forebears. We are better off than earlier generations of Americans because we are working with capital goods that they created and accumulated for us. But if, for any reason, our generation chooses to consume more than we produce, we must prepare for reduced living conditions and all the social and political consequences thereof. And our children must learn to face further poverty and deprivation.

The Taxing of Progress

With the growing popularity of redistribution by political force, all levels of government have embarked upon specific policies of capital consumption. Their favorite tool at first was taxation of the income and wealth of rich capitalists and entrepreneurs.

From a modest beginning in 1913, the Federal income tax rose steadily from one per cent of personal incomes above $3,000, or $4,000 for married couples, plus surtaxes of 6 per cent on incomes of $500,000 or more, to a maximum personal income tax rate of 94 per cent in 1944. Corporate income taxes soared to 90 per cent of "excess profits." Simultaneously the Federal tax rates on larger estates rose to 77 per cent, on top of which the states may claim their shares. It is true that in recent years individual and corporate income tax rates have come down a little; but a variety of other taxes, from social security to state and local taxes, have taken even larger shares.

No matter what the motivation, this confiscation of the income and wealth of millionaires must have certain economic and social consequences. Corporate income may be distributed as dividends to owners or reinvested in business activity, that is, in capital goods that continue to render productive services. Expanding enterprises tend to reinvest most of their earnings in the business. Now, confiscatory taxation surely reduces the amount of revenue that can be reinvested in productive assets. And it curtails the dividends paid to stockholders and thereby reduces the savings that are reinvested.

Progressive income taxation has the same effects. Most successful businessmen with large incomes make large investments, that is, they convert income to productive capital which renders additional services. Confiscatory taxation obviously curtails this creation of capital and thus prevents production of goods and income. Labor productivity and living standards are debilitated as the taxing authorities consume this income.

Inheritance taxation to a large extent is an outright confiscation of productive capital. The wealth of a multimillionaire mainly consists of business assets that are producing goods for millions of customers and giving employment to thousands of workers. What the wealthy person holds to consume, such as his housing and clothing,usually constitutes a tiny fraction of his total wealth. Confiscatory estate taxation is bound to fall preponderantly on his productive assets, which means that the taxing authorities directly consume productive capital, and thus limit living standards and employment.

And finally, the taxpayers are influenced by the fear of such tax rates. Instead of making more productive investments — the profits of which are destined to be seized, or worse yet, the substance of which will some day be claimed by estate tax collectors — the individual may prefer to consume and enjoy the wealth himself. Why strive and struggle if the fruits will be reaped by tax collectors? Why preserve his capital for the benefit of politicians and their beneficiaries?

Deficit Spending

When the public demand for government services and benefits grows beyond the ability of business and wealthy taxpayers to pay, budgetary deficits become unavoidable. After all, the popularity of redistribution by political force tends to grow with every dollar of "free" service rendered. The clamor finally becomes so intense that, in order to be heard, every new call is presented as an "emergency" that must be met immediately before all others. Redistributive government then rushes from one emergency to another trying to meet the most noisy and politically potent demands. As no one wants to pay for the new expenditures, least of all the beneficiaries, the transfer administration is bound to suffer budgetary deficits.

When a corporation suffers losses for long periods of time, it inevitably comes to the end of its capital substance and ceases to operate. Any remaining assets will be distributed to its creditors. While government deficits may not throw the government into bankruptcy, they nevertheless have economic consequences. They destroy productive capital. Indeed, the deficits of the U.S. government have consumed, and continue to consume, capital substance on a scale far greater than all losing enterprises combined. In the decade of the 1950′s total U.S. government deficits amounted to a mere $17.7 billion. During the 1960′s the total was $56.9 billion. Deficits during the first half of the 1970′s soared to $71.4 billion, and, as if they were following an exponential curve, in fiscal 1976 alone are expected to exceed $74 billion.

It is difficult to estimate the number of factories and stores that were not built, the tools and dies that were not cast, the jobsnot created, the wages not paid, the food, clothing and shelter not produced on account of this massive consumption of capital. This generation of Americans and countless others to come will be poorer by the productive capacity that could have been, but was not created.

Of course, the beneficiaries of the redistribution process may have enjoyed every moment of it. Among men lacking vision, today’s enjoyment is always more pleasurable than saving for tomorrow. They may applaud the very favors and handouts that are destroying their jobs and the wages they could have earned, and costly emergency programs may be hailed as progress though they yield the opposite. The bank or insurance company that is investing the people’s savings in Treasury bonds, notes, or bills may be enjoying "safety" for its investments. What is significant is the fact that it is channelling potentially productive savings into the maelstrom of government consumption. The returns it seeks from its investments will not come from new production but from taxes to be collected in the future.

In dim awareness of the importance of capital, some social spenders are quick to maintain that government spending is merely another form of investing. Therefore, they want government to "invest" in a greater society that is to be built by political force and redistribution of property. Their judgment of what is most urgent and important is to prevail over that of all others.

All such planners are would-be dictators. No matter what the objective, government expenditures always constitute economic costs that are borne by taxpayers, lenders, or inflation victims. Even when the government builds roads or canals, utility plants or airports, the expenditures invariably flunk the tests of the market. Demanded by voters, authorized by politicians, and administered by bureaucrats, public works constitute huge malinvestments that waste scarce resources and consume productive capital.

Inflation Destroys Capital

When the redistributive society has exhausted its favorite victims — wealthy taxpayers and lenders — it can be expected to resort to inflation as a desperate method of fund-raising. The inflation then taps the savings of the middle class whose material wealth mainly consists of monetary assets and claims. It destroys the capital markets that provide the necessary savings for the expansion and modernization of productive enterprises. And above all, it causes businessmen to overestimate their earnings, overpay their taxes, and consume their fictitious profits.

When the purchasing power of money depreciates, all claims depreciate at the inflation rate. Creditors lose and debtors gain. Now the creditors — for instance, physicians, dentists, attorneys, business executives, and all others holding savings bonds, life insurance, pension funds, and the like — may, in spite of their inflation losses, endeavor to maintain the levels of consumption to which they have grown accustomed. The physician whose Keough fund has lost half or more of its purchasing power, will not sell his home or automobile or postpone his vacation because of his inflation losses. On the contrary, in reaction to his losses, he may save less and consume more because of the apparent "futility" of saving. Or, he may want to hedge against further losses by investing in durable goods, which do not enhance the capital supply.

On the other hand, the debtors who are gaining from the debt depreciation may immediately raise their consumption. The government whose real debt, let us say, is cut in half will surely increase its spending. In fact, it may be tempted to add more debt until its old level of real debt is restored. Most individuals tend to react the same way. The house owner whose mortgage debt has diminished to insignificant monthly payments may buy new furniture or appliances. His consumption rises as his debt decreases.

Corporate Losses

Corporations, which as a class are the largest debtor, lose most of their inflation gains to tax collectors, labor unions, and their customers, all of whom are eager to boost their consumption. As prices rise taxes rise at progressive rates. When corporate income doubles on account of the inflation, the multiplicity of corporate taxes will surely more than double. Labor unions will make massive demands that are to compensate them for past losses and anticipated losses during the life of the contract.

And finally, customers may reap inflation gains as corporations tend to pass their gains from debt depreciation on to their customers. After all, when a bank loan falls in value or a corporate bond loses in purchasing power, a corporation usually does not raise the prices it charges its customers. On the contrary, facing the competition of many other enterprises reaping similar gains, the corporation may keep its own prices lower than it otherwise would. This means that customers pay prices that do not fully cover the rising costs of capital. Only gradually, when the inflation raises interest rates and corporations face higher interest charges on new loans, do business costs rise and ultimately the prices of goods. Thus, corporate customers are reaping gains at the expense of corporate creditors, gains that may find their way into additional consumption. Only a small fraction of the capital lost by creditors may be retained as productive capital by the, corporation.

Capital Markets Disappear

Inflation destroys the capital markets. Surely, there are always debtors eager to borrow money at "low" interest rates, that is, at rates that do not fully compensate the lender for the anticipated inflation losses. But the number of creditors willing to lend their funds at such rates tends to shrink with progressing inflation. Instead of suffering losses, the would-be lenders may prefer to consume their funds, or invest them in durable goods that may rise in price rather than depreciate in purchasing power.

Thus, the capital market tends to wane and economic expansion is checked for lack of capital. In fact, there may not even be enough capital to maintain the apparatus of production if business should fail to earn sufficient profits to rebuild and replace the capital goods that were used in the production process.

In countries that are plagued by chronic inflation, as in Asia and South America, long-term capital markets have long ceased to exist. Consequently, new plants and enterprises requiring large investments of capital cannot be built, labor productivity cannot rise and living conditions are destined to remain at misery levels.

Inflation makes economic calculation nearly impossible, which invariably causes businessmen to overestimate their earnings and overpay their taxes. Both accounting convention and tax legislation permit businessmen to treat as costs only those costs of capital that were expended in the past. But economic action always aims at future provision of goods and services; the past is significant only as it provides the means for future action. The fact that a certain item of capital equipment cost $1 million five years ago is irrelevant for business decisions if it costs $2 million today. If only $1 million were set aside for its replacement the production process cannot continue. But tax accounting only depreciates past capital costs and thus during inflation understates present costs and overstates business earnings.

Earnings Overestimated, Taxes Overpaid

The overestimation of American corporate earnings in recent years runs into tens of billions of dollars. Capital intensive industries, especially, are badly affected by this delusion, leading to massive capital consumption. To illustrate the point, let’s take a chemical company with capital facilities of one billion dollars earning 20 per cent before taxes, but after taxes only 10 per cent or $100 million per year. If the facilities need to be replaced on the average of every five years, our company will depreciate $200 million per year. Let us now assume that in a given year inflation raises the costs of the capital equipment by 25 per cent, which is a realistic assumption today. Our company needs $250 million for replacements this year and every year thereafter. If capital goods prices continue to rise at the 25 per cent rate, it will need $312 million in the following year, $391 million in the year thereafter, $488 million in the fourth year, and $610 million in the fifth year — altogether $2.051 billion in five years. But in order to accumulate this amount for mere capital replacement, in order to earn the extra billion dollars in five years, its profits after taxes would have to rise by $200 million per year, that is, from $100 million to $300 million, and its gross profits before taxes would have to soar from $200 million to $600 million. Only a 60 per cent gross return on capital could maintain its substance; anything less would lead to capital consumption.

Few companies are enjoying such profits today. Most businessmen are happy to earn their "normal profits" regardless of the rising costs of capital goods. They continue to calculate with capital costs of the distant past and thus arrive at earnings that are greatly overstated, and at overestimated tax liabilities that further reduce the meager returns. Only when specific replacements of capital goods are made, perhaps with the help of loan capital, do present costs appear on the company ledgers and depress the calculated earnings.

Few capital-intensive enterprises today are earning returns that fully cover the higher costs of capital. This is why capital spending by American business is declining year after year. Even a Commerce Department survey admits that projected spending in 1976 won’t keep pace with the rise in capital-goods costs. The spending projection suggests a decline in "real" spending of about 5 percent, which follows a decline of more than 10 per cent in 1975, the worst in 14 years. (Cf. The Wall Street Journal, Jan. 14, 1976, p. 3). The situation is even worse when we bear in mind that some of these capital expenditures are made by industries that cater to growing government consumption or are making mandated changes to meet the requirements of government regulations and controls. Such capital spending surely does not increase the stock of capital goods that are producing economic goods and services. They actually consume capital and thus lower the productivity of labor.

The businessman who, because of underdepreciation, overstates his earnings and overpays his taxes, may blithely consume his capital. After all, as goods prices rise he may allow himself to be impressed and deceived by his rising dollar profits and therefore indulge himself with higher outlays for consumption. While he is enjoying his "profits" he may actually be eating into his capital substance.

The Business Cycle

The boom and bust cycle, which is an inevitable consequence of inflation and credit expansion, is a powerful destroyer of capital. The administration that resorts to such policies must be charged with the responsibility for this capital destruction.

When the monetary authorities create new money and credit in order to stimulate economic activity they set in motion a causal chain of ominous events. Let us say they, as lenders of last resort, are financing a $75 billion Federal deficit. They either acquire Treasury obligations directly in exchange for newly created funds, or they extend new credits to banks who then purchase the Treasury obligations. No matter how it is done — directly or indirectly —the Treasury comes into possession of newly created purchasing power that enables it to buy more commodities and services. It thus withdraws real goods from other members of society, from consumers as well as businessmen. Everyone who is not a recipient of the newly created deficit funds must now tighten his belt as government is consuming a larger share of production.

When the monetary authorities engage in credit expansion in order to stimulate economic activity they destroy capital on a massive scale. The newly created funds, i.e. fiduciary credits, that are injected into the banking system tend to disarrange the whole production process. They lower interest rates and thereby misguide business in all its investment decisions. After all, the market rate of interest is an important guidepost for business, and an important item of cost that determines the profitability of activity. Whether a time-consuming project can be embarked upon largely depends on the rate of interest.

False Signals

When our monetary authorities inject fiduciary credits, interest rates tend to fall. That is, they falsely indicate the existence of savings that in reality were never made. Misguided by such low interest rates, businessmen may be led to embark upon investments that later will be disastrous. After all, the real savings are not available for a new round of expansion and modernization; the guidepost has been misplaced. It causes business to launch an economic boom amidst confusion and delusion. Many expensive projects are undertaken that later will prove to be costly malinvestments.

The mistakes become visible as soon as the prices of the factors of production, which are business costs, soar on account of the boom while consumers’ goods prices fail to keep pace with the former. Profit margins are squeezed or turned into losses — powerful reminders of the mistakes that were made. Businessmen may then be forced to abandon their expansion projects for which there was no economic demand; many may fall into bankruptcy. Massive amounts of capital are written off — that is, are permanently lost. A society that indulges in such destructive policies must pay the price in the form of lower labor productivity, lower wage rates and a lower standard of living.

Government Regulations

It will never be possible to calculate the economic costs of government regulations. A few are visible, but most are hidden in the dimension of economic action that never took place on account of the government interference. The order that closes a factory may cost little in bureaucratic expense; even the capital losses to owners may be moderate. But the reduction in public well-being which the factory used to serve, the goods no longer produced, the wages no longer paid, the income no longer earned, the savings and investments that will never be made, these are incalculable real costs that may greatly surpass the visible losses.

Government intervention by law or decree may assume several forms: it may be directly prohibitive or restrictive as it forcibly prevents economic production. It may weaken competition through licenses and franchises, or even create cartels and monopolies. It may impose additional costs on the production process. The U.S. Environmental Agency, for instance, may want American industry to spend some $32 billion in order to reduce the occupational noise limit. And finally, the regulation may interfere with business management and efficient application of land, labor, and capital. All such controls and regulations tend to reduce economic productivity, depress wage rates, and lower our standard of living.

Capital is consumed when, for any reason, the capital goods expended in production are not replaced. If we consume more than we produce, we dissipate the productive wealth accumulated in the past. Or, even if our consumption should stay the same, but production falls below our consumption levels, we are eating into our substance.

In the United States we are attacking capital on both fronts: our political institutions are pressing continuously toward higher levels of consumption as most politicians are clamoring for ever greater government expenditures; and production is falling off because of costly government intervention.

The Environmental Decade

The 1970′s are supposed to be the "environmental decade" — ten years devoted to cleaning and mending our environment. The laws and regulatory actions of the 1970-1975 period alone are estimated to cost industry some $300 billion in addition to the major costs the taxpayers will be forced to bear. All such costs are "unproductive," meaning that the expenditures consume business capital without generating new production and income. Production costs per unit of output are not lowered, but raised, which causes real incomes to decline. F. C. Olds, senior editor of Power Engineering magazine, estimates that present environmental protection laws are costing every American family $2,000 a year. (Power Engineering, September 1975, p. 38 et seq.) If such costs merely were to reduce our incomes they would not destroy capital substance. But the $300 billion which industry must spend is business capital that will never be used to produce economic goods.

According to a recent report of the U.S. Council on Environmental Quality, pollution control is a growth industry that has created roughly one million jobs during 1975. (Chicago Tribune, January 6, 1976, Section 2, p. 4) If this should be true, we cannot escape the conclusion that this new industry with one million workers is busily consuming the capital substance of the productive industries rendering economic services to consumers. It cannot be surprising then that while the former is prosperous and growing, the latter industries are lingering in stagnation and recession.

This is not to imply that environmental pollution is preferable to clean air and water. On the contrary, let us favor full allocation of the total costs of property to its owners. As the undiminished benefits of an economic good should accrue to its owner, so should the costs be borne by him. But rather than rely on government regulation and an army of bureaucrats, let us rely on the safeguards of contract and the jurisdiction by courts of law. And let us seek to reduce the sphere of public property which is the principal source of environmental pollution.

Regulatory Agencies

Government regulation dissipates capital directly through imposition of capital outlays, and indirectly through restrictions of productivity that reduce income, saving, and investment. The American cartels are cogent examples of the latter. Through compulsory government licensing and rate making, government agents control the railroad industry, the motor carriers, water carriers, freight forwarders, air carriers, power generation, and broadcasting. Furthermore, government is manipulating labor and management in order to achieve its political and economic objectives. The National Labor Relations Act of 1935 and 1947, the Fair Labor Standards Act of 1938, the Employment Act of 1946, the Occupational Safety and Health Act of 1970, the Comprehensive Employment and Training Act of 1973, all are designed to prevent the application of labor according to the efficiency dictates of the market. Extensive government control over agriculture is preventing this important industry from working efficiently for its world-wide markets. And finally, the recent government take-over of energy production and distribution places all industries in serious jeopardy.

It is the very objective of such controls to interfere with efficient economic production. After all, if we equate profitable production for the market with economic efficiency, then government interference with this production must necessarily be inefficient and costly. It is costly to consumers who pay more for fewer goods, and to producers who may suffer losses in income and capital. A small reduction in business income entails a large loss of capital. After all, it is the yield of capital that determines its market price; a $1 million reduction in income, for instance, may lower capital goods prices by $10 million. A regulation that completely idles a productive enterprise completely destroys its productive capital, or at least reduces it to the salvage value of its component parts.

Labor Unions

Capital can be formed only by saving, that is, a surplus of production over consumption. An enterprise that enjoys an excess of proceeds over costs earns a surplus, commonly called profit, some of which usually is plowed back into production. Profitable enterprises tend to grow; unprofitable ones must contract.

Labor unions owe their existence to the doctrines and notions of labor exploitation. They are pressure organizations of members who are afraid to stand alone in the economic world of competition. Through strikes and threats of strikes they aim to achieve one basic objective: to improve the lot of their members through higher pay and benefits, or through lower output and less work. In every instance, labor unions endeavor to raise the costs of production.

Productive business capital is consumed in nearly every phase of union activity. A strike may severely drain the working capital of an enterprise. After all, most business expenses continue although production is halted. Productive property may be damaged or even destroyed. And when the strike is finally settled, the costs of labor usually rise substantially. The hourly pay of union members as well as their fringe benefits, such as paid holidays, vacations, health and dental care, pension funds, and the like frequently double labor costs in just a few years. For the average General Motors hourly employee in the United States, the so-called fringes now come to $4,500 a year. (Remarks by Thomas A. Murphy, Chairman of General Motors Corporation before The Economic Club of New York, Nov. 12, 1975). But this is not all. The work rules to which the company must submit under the new contract may prove to be even more costly as management loses its ability to manage labor efficiently. The seniority rule may prevent a more efficient younger worker from performing a task. The "bumping right" of a senior worker may even cause the younger man’s dismissal. Management must helplessly watch the replacement of its best workers by senior union workers, the substitution of inefficient work rules for labor efficiency, or the application of unproductive methods and tools of production. And finally, the job discipline tends to suffer as union members may feel protected from managerial direction and supervision.

The demands and tactics of militant labor unions invariably reduce the expansion of profitable enterprises as business profits are turned into labor expenses rather than productive capital. Marginal enterprises that are burdened by new labor costs now suffer losses that dissipate business capital. And enterprises that were suffering losses even before the union extracted its coercive costs may be forced out of business. In each case, economic output is reduced and productive capital is consumed.

Capital Consumption Tends to Accelerate

Every day, one’s economic condition either improves or deteriorates. It is unlikely that anyone’s condition would remain unchanged, as income and consumption are independent continuous processes that rarely balance each other. Even if your savings and cash-holdings should stay the same day after day, you probably are suffering a decline in living conditions as your consumers’ goods, such as your car, refrigerator and shoes, are wearing out. The same is true with business. Every day a business enterprise either accumulates capital through saving, or reduces it through overconsumption. In a prosperous society with high rates of productivity and income, many people are in a position to save and invest. After the most important needs are met, a part of income is left for productive improvements. On the other hand, in a poor country it is more difficult to save and invest. In India, which reports a per capita income of $98 per year, it is more difficult to save $50 than in the U.S. where individual incomes average some $6,000. In fact, we can easily make more productive improvements, that is, spend more money on new factories, stores, machines and equipment, than the average Hindu is earning. This fact, together with the institutional handicaps that cause some countries to be so poor in the first place, explains why the difference in living standards between various countries continues to widen.

As economic improvements may accelerate through ever higher rates of saving and investing, so may we see an accelerating process of capital consumption and economic decline. No matter what our incomes may be, if we consume more than we produce we are eating into our productive substance. And once we consume capital while stubbornly clinging to old levels of consumption to which we have grown accustomed, we descend at ever faster rates. The stockholder who liquidates some stock in order to supplement his dividends for living expenses faces lower income in the future. If, nevertheless, he maintains his living standard he will have to liquidate his holdings faster and faster until the last share is sold. Obviously he could halt his impoverishment at any time, or even restore his fortune, through suitable curtailment of his living expenses.

Changing the Body Politic

For a future-oriented, determined individual, it may be relatively easy to readjust his consumption to falling income. But for a society consisting of millions of voters who are bent on redistribution and consumption through the political apparatus, this readjustment may be rather difficult. If the public is indifferent or uninformed about the significance of productive capital, the political pressures for government benefits and services may grow when incomes are falling. The very forces that are debilitating productive capital through overconsumption are likely to oppose any reduction in consumption. They may move heaven and earth to maintain their spending levels which, after all, come from "social benefits and services" to which they believe they are morally and politically entitled. Thus, the process of dissipation once begun feeds on the public pressures for simple preservation of the economic way of life to which we have grown accustomed.

If declining productivity and incomes should finally cut into those benefits and services, the beneficiaries may rise in anger about the sudden "violation of their rights." There could be social disturbance and disruption of the production process, which would reduce output and income even further, which in turn would again aggravate the social situation — a vicious circle of frustration and decline!

But even without this particular social force of acceleration, we may consume productive capital at accelerating rates. Many people react to declining real incomes from employment by producing less. They may even blame their employers, those "greedy" and "ruthless" merchants and industrialists, whom the demagogues will be quick to condemn for the decline. Absenteeism, slowdowns, work stoppages, featherbedding, and other restrictive work practices may grow worse. But lower output on account of lower labor efficiency raises labor costs and dissipates business capital. Only greater output through harder, more efficient work can arrest the decline.

In Spite of It All

Facing such powerful restraints on his creative energy, why does man not just surrender? Why does he struggle against all such odds to preserve his material well-being instead of consuming it in the pleasures of the moment? Why, in spite of this massive capital consumption by our political institutions, do we continue to enjoy a standard of living that is the envy of the world?

It cannot be the nature of man that continues to guide us to high incomes and relative prosperity. For the vast majority of human beings throughout history have lingered in abject poverty and suffering. It cannot be a racial characteristic of the white man, for he, too, has lived with hunger and misery throughout most of his history, and millions still do today. It cannot be the natural resources at our disposal, for countries that are poverty-stricken may be rich in such natural resources. The answer must be sought in the moral antecedents to economic freedom and prosperity. Honesty, integrity, independence, self-reliance, respect for the rights of one’s fellowmen and their property, the ethos of work and thrift, and genuine concern for tomorrow continue to live in the hearts and minds of millions of people. The moral values that gave birth to our political and economic order with its democratic institutions and the private property system in production are still alive and continue to guide many Americans. Attacked and wounded, shackled and mutilated, their individual enterprise system continues to deliver more goods, affords higher incomes and better living conditions than any other system now or ever before. And although many Americans no longer embrace its moral antecedents, they are naturally cautious in eradicating all remnants of such a system. While enjoying its rich fruits, they may question its various pillars, but are reluctant to bring them down all at once.

Thrift and Industry Bring Forth Economic Progress

To avoid gradual impoverishment, we must reverse this ominous trend toward the consumption of our substance. If we seek to improve our working and living conditions and to give a better economic life to our children and future generations, we must save and build now. We must curtail our appetites for present enjoyment and allocate a share of our earthly goods to production for the future.

No matter what a man’s motives for saving may be, he not only serves himself but also benefits society. Even the miser who saves more than other people deem appropriate, clinging to his savings in growing cash holdings, renders a valuable social service. His act of saving allows a supply of goods that were produced to be available for further production activities. But most people who save part of their incomes either deposit their savings in banks and other thrift institutions, or directly purchase more factors of production. In each case, saving may directly be turned into capital accumulation. The farmer who builds a fence or barn or buys a tractor is creating capital that renders his labor more productive. The merchant who improves his store or enlarges his inventory is forming business capital. The oil company that builds a refinery or service station is creating capital goods that render human labor more productive. And the refinery worker who deposits his savings in his bank or credit union helps to create productive capital as some of their reserves are invested productively, yielding incomes on the investments.

A society that looks upon thrift and frugality as social virtues, that believes with Benjamin Franklin "if you know how to spend less than you get, you have the philosopher’s stone," such a society cannot escape the rich rewards that come from capital formation. On the other hand, a society whose habits are not thrifty will soon be poverty-stricken.

Our economic well-being depends on our ability to master the world of production which depends on our power of work. Man must work, which is as certain as life and death. In order to earn more, he must produce more. And he can always work more in order to produce more, which gives him the means to create the capital for ever higher productivity in the future. Work is not a curse; it is the only means to sustain and improve human life. Work, hard work, and long hours of work are the parents of prosperity.

The Blessings of Work

A society that looks upon labor as a blessing that brings happiness and ennobles all those who labor, reaps rich rewards in economic prosperity and progress. After all, the greatest economic asset of any people is the determination and courage to work. On the other hand, a society that frowns upon work as a curse or man’s device of exploitation is destined to be poor and wretched. As the man who lives in constant fear of exploitation and does not work for the love of work, but only for money, is likely to be poor and dejected, so is a society of such individuals likely to be plagued by poverty and torn by strife.

Man’s thrift and industry yield rich fruits, even though his body politic indulges in profuseness and encourages idleness. In fact, when the political institutions embark upon the consumption of economic substance, it becomes all the more important for the individual to preserve his productive capital through greater thrift and industry. And when the amount of capital invested per head of the population begins to decline, with ever lower real wages and standards of living, the individual may endeavor to offset the social decline through rising personal productivity. Indeed, he may successfully swim against the stream as long as the current of decline does not surpass his own forward movement.

When individual thrift and industry decline, man’s political institutions invariably reflect his changing aspirations. The government of profuse and idle men indulges in capital consumption and sanctions idleness. To reverse our ominous trend toward poverty and conflict, our political institutions must learn again to live within their present circumstances. For no society can be rich whose expenditures exceed its means.

All present policies that consume productive substance must be abandoned. Confiscatory taxes that prevent the formation of productive capital must be repealed. The deficit spending that consumes the peoples’ savings must be halted immediately. The inflation that is destroying the life’s savings of millions of thrifty Americans must be abhorred as a crime against economic well-being and social peace. The business cycle must be prevented through resort to sound and honest money. The countless government regulations that are impeding economic productivity and consuming business capital must be repealed and bureaucratic labor returned to productive employment. And finally, the legal immunities and privileges of labor unions must be abolished and labor disputes returned to the courts of law. In short, government must remove its numerous shackles on the creative energy of man.

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How to Attract Capital

There is no real shortage of capital in the world, and I do not know of any major project which has been held up solely because of the lack of money. Capital is plentiful wherever it is "wanted and well treated." The real bottleneck in the development of the world is the shortage of human capital: people with the skill, training, and education intelligently to employ the world’s resources.

The facts are that when political freedom and free enterprise spread, markets increase, and that the expansion of markets is only prevented through political motivation. The interest of American business in the expansion of a free enterprise system around the world as part of a free political system is based not only upon moral considerations, but on the hard fact that there is no market for consumer goods among slaves. The problem is not one of division whereby the static resources of a country will be reallocated by some planner’s program, but it is a problem of addition and multiplication whereby we must set our minds to increase the production forces and to broaden the areas of freedom and trade.

WALTER B. WRISTON, May 1963