From time to time I have read articles that refer to capital consumption, but I don’t really understand what it means. Can someone explain it to me?
Say you own a machine. It produces goods that you sell for a profit.
This machine requires regular maintenance in order to keep functioning. You now have two choices:
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Reinvest some of your profits into machine maintenance.
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Let the machine work until it falls apart and use all the profit money for yourself.
The latter would be capital consumption. You could say that it is the deliberate exploitation of productive assets for the greatest possible personal use in the present.
What, you’ve never seen people eat their tools and machines before?
Capital consumption occurs when consumption exceeds the income available. It is the opposite effect of capital accumulation that results from savings.
This is achieved by not reinvesting the part of the income previously allocated to capital goods (future goods) and reallocating it to spendings for consumers goods (present goods). In practice, tools, machines, and natural resources etc.. are either outright abandoned or used up and fully depleted.
It seems to me that this is related to the ‘wealth effect’, i.e. people start consuming more as their wealth (but not necessarily their income) increases, by converting equity into cash.
the capital term in capital consumption…would you define that as some type of non-money business asset???
ie, squre foorage in a building, miles of railroad track, etc???
george -
Yeah that’s how I look at it.
The word “Capital” in the term Capital Consumption refers to the “capital goods” one owns and uses.
So when you consume your Capital, you’re consuming the actually machine, since you failed to save your money to reinvest in that machine.
“The whole complex of goods destined for acquisition is evaluated in money terms, and this sum–the capital–is the starting point of economic calculation. The immediate end of acquisitive action is to increase or, at least, to preserve the capital. That amount which can be consumed within a definite period without lowering the capital is called income. If consumption exceeds the income available, the difference is called capital consumption. If the income available is greater than the amount consumed, the difference is called saving. Among the main tasks of economic calculation are those of establishing the magnitudes of income, saving, and capital consumption.” (Human Action)
Here Mises, in referring to capital consumption, is clearly talking about capital (defined as “the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit.”), not capital goods.
So it’s not as specific as failure to maintain capital goods?
More general? As in any increase in consumption pased the point in which income is available to pay for the consumption?
“So it’s not as specific as failure to maintain capital goods?”
The concept does not include “failure to maintain capital goods” at all (although a failure to maintain capital goods can RESULT in capital consumption, because the decline in income that is concomitant with not maintaining capital goods can contribute toward total income dropping below total consumption).
more Mises:
Capital consumption and the physical extinction of capital goods are two different things. All capital goods sooner or later enter into final products and cease to exist through use, consumption, wear and tear. What can be preserved by an appropriate arrangement of consumption is only the value of a capital fund, never the concrete capital goods. It may sometimes happen that acts of God or manmade destruction result in so great an extinction of capital goods that no possible restriction of consumption can bring about in a short time a replenishment of the capital funds to its previous level. But what brings about such a depletion is always the fact that the net proceeds of current production devoted to the maintenance of capital are not sufficiently large.
Yet more Mises:
If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption. The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction.
Great quotes, Nir.
Unfortunately, Rothbard confused the matter in Man, Economy, and State:
“If Crusoe decides not to replace the first or the second stick, and accepts a later drop in output to avoid undergoing present saving, he is consuming capital.”
This passage led me to make the same mistake in my Human Action Comics.
Capital consumption in the sense Hans Hoppe might use it is the using up of some of the complementary factors of production, which in turn reduces the integratedness and net goods that a structure of production can generate. It is important not to think of capital as an ‘amount’ that is ‘consumed’, like one would consume a loaf of bread. Instead it is the destruction and use of certain complementary factors, which disrupts the previous production structure’s overall integration, which is ‘capital consumption’.
Liberte,
I’m surprised you’re adopting the Rothbard/Hoppe conception over the Misesian one. One can easily just call what Rothbard and Hoppe are talking about “capital goods consumption” and reserve “capital consumption” for what Mises is talking about. Market actors engaging in economic calculation really do seek to maintain and increase “the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit.” There is no better word for this quantity than “capital”. And there is no better term for a net decrease in this quantity than “capital consumption”.
Hold on a minute. I’m not sure your clarifications here (Nir, Liburne) are making things more clear or more confusing. Let’s just be clear so there is no misunderstanding: Capital consumption is certainly always related to the real physical structure of production, which always result in a shortening, less productive structure.
Example from Rothbard:
If Crusoe decides not to replace the first or the second stick,
and accepts a later drop in output to avoid undergoing present
saving, he is consuming capital. In other words, he is electing to
consume instead of to save and maintain his capital structure
and future rate of output. Consuming his capital enables Crusoe
to increase his consumption now from 450 to 500 berries per
day, but at some point in the future (here in 10 days), he will be
forced to cut his consumption back to 200 berries. It is clear
that what has led Crusoe to consume capital is his time preference,
which in this case has led him to prefer more present consumption
to greater losses in future consumption.
If Crusoe decides not to replace the first or the second stick,
and accepts a later drop in output to avoid undergoing present
saving, he is consuming capital. In other words, he is electing to
consume instead of to save and maintain his capital structure
and future rate of output. Consuming his capital enables Crusoe
to increase his consumption now from 450 to 500 berries per
day, but at some point in the future (here in 10 days), he will be
forced to cut his consumption back to 200 berries. It is clear
that what has led Crusoe to consume capital is his time preference,
which in this case has led him to prefer more present consumption
to greater losses in future consumption.
imagine that Mises would stick to his guns and say that as there is no money equivalent for crusue assetts, no market price, in money, of his stick-asset, he never had any ‘capital’, and so could hardly consume it. He would of course agree that the capital good which he used to have was consumed, that was stipulated !
Its just terminology at the end of the day.
It doesn’t follow from that passage that Rothbard is confusing anything. Rothbard is being more concise and elaborative on the concept of capital consumption.
In Nir’s passage, Mises is basically saying: Don’t conflate the natural extinction of physical factors with my use of the term capital consumption. So the fact that I will die one day from old age is not the result of capital consumption.
No, this is an important distinction Nir and DD5. Capital is a catallactic category. It has no meaning outside of the realm of calculative action. Since only an actor operating within the monetary nexus can engage in economic calculation, only an actor operating within the monetary nexus can judge, in a calculative manner, whether he has consumed capital.
I understand that capital as a money equivalent of capital goods is important and distinct. I’m just saying that the term that describes it, in this case ‘capital’ is just a term chosen, maybe its valid for purely historical reasons, but whatever…
