Is Capital Creation Beating Capital Consumption?

We have written numerous articles about capital consumption. Our monetary system has a falling interest rate, which causes both capital churn and conversion of one party’s wealth into another’s income. It also has too-low interest, which encourages borrowing to consume (which, as everyone knows, adds to Gross Domestic Product—GDP).

What Is Capital

At the same time, of course, entrepreneurs are creating new capital. Keith wrote an article for Forbes, showing the incredible drop in wages from 1965 to 2011. There was not a revolution, because prices of goods such as milk dropped at nearly the same rate. The real price of milk dropped as much as it did, because of increased efficiency in production. The word for that which enables an increase in efficiency is capital.

Or, to put it another way, capital provides leverage for productive human effort. We don’t work any harder today than they did in the ancient world (probably less hard). But we are much richer—we produce a lot more. The difference is capital. They had not accumulated much capital. So they were limited to brute labor, to a degree which we would find shocking today.

We have long had machine power to do most of the heavy lifting. For a few decades, we have had computers to perform much of the tedious number-crunching (you would be surprised how much number-crunching is involved in typing an article in a word processor). And computers also automate everything from manufacturing lines to business processes.

More recently, mobile computers and wireless networks have allowed us to efficiently organize markets, index a big fraction of everything ever published, and allocate resources such as cars to pick us up wherever we may be, and drop us off somewhere else.

Capital allows us to do more, with less. This principle applies to commodities as well as labor. A smartphone is a supercomputer, but it requires very little silicon and copper compared to the original generation. For example, the Cray-1 weighed over 5 tons and consumed 115kW. That’s over 30,000 times heavier than a Samsung Galaxy S9, and over 200,000 times as much power consumption. And for comparison, the S9 can perform over 4,500 times as many calculations per second.

Dairy production underwent a similar (if smaller) revolution. More cows could be supported on the same land, with more milk from each cow, and less labor per cow. This is all thanks to better breeding, computer tracking, customized individual feed control, and even automated rotating milk stations in the barn.

The Race

We have just described what computer software developers would call a race condition. Two processes—capital destruction and capital creation—are both running in the economy. The outcome of race conditions will either be great, or terrible, depending on which process is faster. There is a method to our madness, in formulating it this way. We will get to that below.

We want to first observe another problem with GDP. Who cares about the overall size of the economy? It’s not the gross size that matters to anyone. Of what benefit is it, to know that aggregate size is up 10%? What if the population is up 11%? It could mean that each person is slightly worse off than before—but there are more people. And folks, it is by such low-resolution pictures that central planners attempt to perform their magic.

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