Thomas Taylor points out in an Introduction to Austrian Economics:
- "What is important to understand is that the capital in a society is not a vague notion to be calculated as a total amount, rather capital goods are parts in an interlocking structure of individual plans."
- "The essential difference between rich societies and poor societies does not stem from any greater effort the former devote to work, nor even from any greater technological knowledge the former hold. Instead it arises mainly from the fact that rich nations possess a more extensive network of capital goods wisely invested from an entrepreneurial standpoint. These goods consist of machines, tools, computers, buildings, semi-manufactured goods, software, etc., and they exist due to prior savings of the nation’s citizens. In other words, comparatively rich societies possess more wealth because they have more time accumulated in the form of capital goods, which places them closer in time to the achievement of much more valuable goals."
Capital is not homogeneous and capital exists only as part of an individual's plan. Another important concept to understand is the time structure of production. The capital structure broadens and lengthens in an economy similar to a formation of a coral reef. It is a process that requires time, and it requires saved capital.
If you haven't done so already, readI, Pencilby Leonard E. Read before you go on. Read's I, Pencil was referenced above in the section about Specialization and Knowledge, but this short essay is also a great illustration about how lengthening the structure of production benefits an economy.
For an easy to understand illustration of capital formation and the structure of production,
please see Robert Murphy's article from mises.org titled the Importance of Capital Theory. Robert Murphy situates the lesson humorously on an island where sushi production is the sole function of the economy. Paul Krugman lands on the island and tries to 'help' fuel the economy by introducing interventionist policy to increase demand. What results is an excellent lesson on capital theory.
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