Prague Conference on Political Economy 2020


  1. Introduction

An important view of the Austrian school of economics is represented by its theory of capital. The Austrian Capital Theory (henceforth ACT) is used to explain the economic growth/retrogression and the processes developing during the course of the business cycle. The aim of the present article is to critically evaluate the suitability of the traditional ACT to reflect and explain the development of an economy. In particular, it will be argued that:

  1. The ACT in its graphical form is not able to include the main bulk of capital present in an economy, in particular the fixed capital.In addition ACT is not able to account for the production of durable capital goods.
  2. The ACT is not able to account for the similarities and commonalities between fixed capital and consumer goods.
  3. The “roundabout” processes, on which growth in ACT is based, represent a questionable economic model. In fact the processes of production of fixed capital goods and consumer goods run in parallel to each other in time.
  4. The movement of resources due to saving is from lines of production leading towards consumer goods to lines of production leading towards durable capital goods
  5. Economic losses in ACT are not included in fact in the structure of the economy
  6. An economy can grow with zero net saving on the part of the economic agents

An alternative graphical representation of ACT, which does not suffer from the above-listed inadequacies will be suggested. Its better mapping to the underlying economic processes will be discussed.  The discussion  will be limited to the normal growth/retrogression conditions of an economy under invariable money only.


  1. Overview of the traditional Austrian Capital Theory

ACT is typically introduced with the help of the Hayekian triangle, which shows a sequence of stages that represent the movement of intermediate goods from the original means of production (land and labor) to the final goods sold to the consumer. A typical representation is shown in Figure 1.

A good begins being produced from the highest order stage, where it is created entirely from the original means of production. Then it passes down the structure to the next lower level as an intermediate product where additional value is added to it again from the original means of production. In this way the good gets improved in every subsequent stage until it becomes a completely finished one, ready for consumption in the last stage, where it gets sold to the consumer. When a good passes from one stage to the other it is being exchanged for money. The flow of money is naturally from the lowest order stage up to the original means of production. The monetary stream is started by the consumers when they buy a particular good and then this money goes up stage by stage. The stages themselves represent the different types of processing the particular good undergoes in time and each stage is supposed to embody a group of similar economic processes. Each stage takes a particular unit of time which is assumed to be the same for the sake of simplicity in the graph. At each stage a monetary profit (not shown) is generated which accrues to the particular producers. Since more and more original means of production are added when traversing the graph in downwards direction the monetary value of each stage grows.

A more detailed description can be found in the works of Hayek (1967),  Rothbard (2009) and De Soto(2012), which will be used as a base for the present discussion. The above given, general description however must be  sufficient for the purposes of what we intend to achieve.


  1. Structural problems embodied in the Austrian Capital Theory

 3.1. The inadequacy of ACT to represent the fixed capital goods used in production and to account for the production of durable capital goods.

When we inspect the given ACT graph we cannot avoid noticing that all the goods represented are intermediate (circulating) capital goods. The so called fixed (durable) capital goods are not visible anywhere on it. The latter fact has been acknowledged by Hayek (the main contributor to the theory) and never corrected by him (Repapis 2011). What this means is that fixed capital goods have not been considered at all originally, i.e. the theory in its graphical representation has disregarded their existence entirely. Later attempts were made to logically add the fixed capital goods to the existing graphical representation (e.g. Skousen (1990)).

The real problem is that ACT is a flow diagram. In other words it depicts only monetary transactions and their outcomes. Fixed capital however is not exchanged when used in production and thus it is not directly representable on it. From another point of view the ACT graph shows only the distribution of the amount of money present in an economy. Fixed capital goods used in production (i.e. plants, machinery, etc.) have market prices but these prices are not included in the monetary supply of the economy. In fact if we artificially add the current market prices of all the capital (fixed and intermediate) together we will get a number which surpasses the amount of money in the economy many times.

In view of the above, if we wish to represent fixed capital on a standard ACT graph we must make sure that it follows the rules the theory is based on. In particular this would mean that fixed capital can be resolved into factors of production, i.e. the intermediate capital goods and original factors of production used for the creation of the good. These factors of production could already be added to the ACT graph, i.e. they would be representable by it. This would be the only correct way to reuse and amend the existing graphical representation of ACT instead of creating an entirely new one.

The real problem with the above approach is that the operation of imputation (resolving fixed capital goods into circulating capital goods, original means of production and entrepreneural profit) must not be taken for granted. Here we intend to show that in the context used such an operation is not allowed and therefore that fixed capital goods cannot be represented graphically by ACT at all.

Durable capital goods can in fact be resolved into factors of production only during the process of their creation. After a durable capital good has been produced (i.e. its improvement is finished) this is not possible. But since the fixed capital goods supposedly represented by ACT are goods out of production (in use) they cannot be put on the standard ACT graph (Figure 1).

During the process of production businessmen use economic calculation in order to make sure that the product they create will be accepted by the market. From their target product price they impute appropriate factor prices so that production can be achieved at a profit. In other words businessmen use imputation during the whole process of creation of the particular good. In this way they take the available market information into consideration. As an example a businessman, when deciding to produce a new brand of cheese tries to guess first at what price the cheese could be sold, and then computes if this is possible by varying/playing with the factors necessary for its production, i.e. he calculates the expenses for labor, milk,etc. based on the current market prices. And if this calculation shows that profit can be achieved he may decide to undertake the risk of the new project.

Once a good stops being improved any more, the process of imputation also stops however. It is useless for the businessman to view a kilogram of cheese as seven liters of milk, other separate ingredients and a particular amount of labor. The reason is that the production of cheese is an irreversible process. The amount of labor used is gone forever, the depreciation of the tools used in production cannot be undone and there is no way to get the milk back from the cheese. What that means is that imputation (back to the original factors of production) is not used any more by the market once the production of the capital good has been completed. The market views the produced good as a separate, new, indivisible product, which can only be assessed as a whole.  In other words, after a good has been produced, the cost of production becomes irrelevant. The good in question detaches completely from the available market factors of production and its value gets determined by the constantly changing market preferences.  It is a given fact that the finished durable good is used later in time, i.e. the durable capital good must supposedly be resolved into factors of production that are not the original ones used during its production. In particular:  by the time a ready-made machine is used the price of labor has changed, the amount of labor necessary for its production has decreased due to technological innovation, other factors of production have changed, disappeared or new ones have been added. There is no known connection between the factors of production in a time period which succeeds the production of the capital good in question and the good itself. Thus the task to resolve a ready-made capital good into totally unrelated factors of production is an impossible one. In short: such type of calculation is not done by the market in general and what is more important, it is not possible for the market to do it. Note, that this argument is very similar to the one used  by Ludwig von Mises to demonstrate the impossibility of economic calculation under socialism. Let me give an example in order to elucidate the above: A picture of Picasso or Leonardo da Vinchi is used as a capital good, e.g. displayed in a private museum for profit. The picture derives its high price from the fact that it has been created by Picasso himself. But Picasso is not among the living any more and we cannot resolve the price of the picture into his labor. A proper substitute simply does not exist. The same applies to the canvas and paints used. Such ones are not produced any more (and will never be produced). In short, it is impossible to resolve Picasso’s picture into something meaningful. This is an impossible calculation.

The first direct consequence from the above is that, since fixed capital goods cannot be resolved into current (present) factors of production, then fixed/durable capital becomes an independent productive factor. The latter conclusion contradicts the standard view expressed in Rothbard (2009, pp. 334), quote:” It is clear that, conceptually, no one, in the last analysis, receives a return as the owner of a capital good. Since every capital good analytically resolves itself into original nature-given and labor factors, it is evident that no money could accrue to the owner of a capital good. “ Thus it becomes possible for the owners of fixed capital to receive income. The latter is actually obvious, since the owners of fixed capital such as car-renting companies (“Herz” for example) obtain income from their fixed capital.

The second direct consequence from the above is that we cannot use the standard graphical structure of ACT by itself for deriving logical conclusions concerning economic processes. From the point of view of pure logic if a premise is not correct, then the conclusions derived from it can be correct only accidentally. Still, the latter approach (drawing conclusions directly from the Hayekian triangle) can be observed in many standard Austrian economics accounts, the prime example of which is Garrison (2002), who has developed his capital theory exclusively in a graphical way.

The above quoted excerpt from Rothbard is another example for drawing conclusions directly from the graphical representation. Note that the standard verbal accounts, for instance the one of Mises (2009,ch.5), presuppose (implicitly and explicitly) the existence of fixed capital goods at each stage of production. Thus, the third direct consequence from all the above is that if we wish to account for the existence of fixed capital goods used in production they must be shown explicitly on the graph.

We must also note that every economy produces durable capital goods, but they are neither shown in the graphical representation, nor are they verbally described as outputs of the economic processes ( like the consumer goods). The latter follows again from the premise that durable capital goods can be resolved into factors of production that exclude fixed capital. Thus the fourth direct consequence from the above discussion is that we have to show the production (output) of durable capital goods explicitly.


3.2. The inadequacy of ACT to account for the similarities and commonalities between durable capital goods and consumer goods.

 The standard view how an economy is structured (the Hayekian triangle) hides from view certain similarities and commonalities between consumer goods and durable capital goods.

The first similarity between consumer goods and durable capital goods is that they pass through similar production processes. Let us use the automotive production in order to clarify what we mean. Imagine an automotive producer who produces both cars (a typical consumer good) and trucks (a typical capital good). Both types require steel parts for their production. These parts are quite specific to the product that is produced, i.e. we need to produce separately parts for cars and trucks. Still the labor and even machines used for steel part production are very similar and sometimes even the same. Both types of parts however require steel in order to be produced. Thus steel production is a common technological process for both production lines. Note that, at this level of temporal remove from the final output, steel production is much more unspecific to automotive production, i.e. the same steel may be used alternatively for either car production or truck production. In fact one and same melting plant may produce steel for cars and trucks at the same time. When we move earlier in the technological process we find out that the production of iron ore is not only a common one for both production lines but also that it is entirely unspecific, i.e. a producer of iron ore is not concerned at all with what his output will be used for. With all of the above we wanted to stress the following: first, that both durable capital goods and consumer goods pass through similar production lines and have many processes and intermediate factors of production in common; and second, that the specificity of the production decreases when we move earlier in the production process with the result that we can not simply say that a particular intermediate product (such as iron ore) is used for durable capital goods or consumer goods production.

The second similarity between durable capital goods and consumer goods is that they are both improved upon until they reach the stage of final production and then they both begin depreciating (wearing out) with usage (private or industrial).

The third and actually the most important similarity between durable capital goods and consumer goods is that we cannot actually differentiate them. In order to for us to classify a produced good as a capital or a consumer one we must know how it is being used. Unless we know the latter we can not say if a particular producer produces capital or consumer goods. Let us take for example the car as such. A car can be a consumer good when used for leisure, i.e. when we transport our families and personal belongings around the country. At the same time however a car can be a capital good when a businessman uses it to transport his workers and equipment to the company’s working site. In the same way a truck is typically a capital good, i.e. it is typically used from businesses to transport their goods, but it can be a consumer good if one decides to use it as a recreational vehicle for his family (unlikely but entirely possible). What is more, one and the same product can be used alternatively at different times as a consumer or a capital good. Thus a businessman can use his company car to transport his workers and in his free time he may use it to go on a trip with his family. What follows from all of the above is that we can not distinguish both types of production. An automotive producer may be a capital goods producer, consumer goods producer or both. And even the producer itself can not say what type of goods he produces. The latter depends on his clients and the way they decide to use the products they have bought. From the just mentioned it follows that we must place consumer good producers and durable capital good producers at the same production stage. The alternative would be to place similar companies or even parts of the same company in different production stages. It could even come to the point that a company (or a part of it) must constantly jump between different stages because its product is used in a different manner (as a durable capital good or as a consumption good).

In conclusion, we can say that if we wish to account graphically for the production of durable capital and consumer goods, then we must make sure that they both pass through similar intermediate production stages and that they are both products of the final production stage (because they both stop being improved there and because they cannot be differentiated).


3.3.  “Roundabout” processes and length of the Hayekian triangle

 Roundabout” processes according to the Austrian economics definition are processes in which we create a capital good first, which is later used for the production of consumer goods. The standard example is Robinson, who instead of picking up berries by hand, creates a stick (a capital good) and becomes much more productive by using it ( he is able to pick up more berries in the same time period). Such processes are considered to be more productive than the simple processes (when consumer goods are produced without creating capital first) and they are supposed to increase in number and get longer and longer with the development of the economy. The latter is represented graphically by the elongation of the Hayekian triangle in its vertical (time) dimension with the growth of the economy.

Let us discuss the consequences from this view. What it implies is that we produce durable capital goods first by combining original means of production (land and labor) with intermediate products and then use them down the graph, again combining them with original and intermediate factors of production until we reach the bottom of the graph where  consumer goods are produced. Thus we produce the capital good to be used immediately before (preceding) the production of consumer goods. The first problem is that, as discussed some time ago, we can not logically embed fixed durable(fixed) capital goods in the Hayekian triangle. The second and equally important problem is that such a “roundabout” method of production does not correspond to the objective reality. In other words real economic processes do not follow such a pattern. In particular the durable (final) capital goods that are used in production are not produced immediately before the consumer goods in question. These durable capital goods have already been available and present typically much longer than the whole process of consumer good production. What is more, the production of durable capital goods takes place concurrently (i.e. parallel) in time to the production of consumer goods. Let us re-use our previous example, in particular the simplified process of production of cars (consumer goods) and trucks (durable capital goods). We see that the ore produced is a common product (totally unspecific) and that part of it is being allocated for the production of metal for cars and metal for trucks respectively. But both types of ore are being produced at the same time. Later the metal is being melted again for both types of production at the same time (again a relatively unspecific process). Parts of the produced metal are being used for car parts production and another for truck parts production, but again both processes (already distinguishable) run parallel in time. And finally we assemble cars and trucks (possibly in the same factory) again parallel in time to one another. Thus we observe the factors of production working jointly and concurrently for the production of both consumer and capital goods at the same time. But once a truck has been produced it can be used back in the production process (but in a subsequent time period) to help an ore mining company carry its ore. And moreover this truck can typically be used much longer than the duration of the whole process of car/truck production from ore mining to the final product.

What we observe is that the production of more capital (i.e. roundaboutness) does not necessarily lead to longer times of production of consumer goods for the simple reason that it runs concurrently in time to the production of these consumer goods. Thus the elongation of the Hayekian triangle with the economic growth is a questionable economic model. In reality an economy produces in parallel both durable capital goods and consumer goods, not one after another as the standard view implies.


3.4. Movement of resources between different lines of production due to saving

   The standard view how resources are moved from one place to another when the process of saving occurs is described with the help of the Hayekian triangle as well. In particular, when saving is present, then resources from the lower stages (closer to the consumer) are freed up and transferred to the higher ones (closer to the original means of production). The problem with the above view is again that it does not correspond to the reality. Let us again take the automotive production as an example. We presume that consumers decide to save money and therefore stop buying as many cars as before. The first direct consequence is that many car producers will have to go bust or downsize, thus releasing capital in the form of labor, buildings, machinery and intermediate goods used in production. These car producers have suppliers however. They will have to cut down production also, since their products in the form of metal parts will simply not be needed and therefore release capital in the same form. The car part producers however have suppliers also, who will also have to release resources, since the metal they produce will not be needed. The same will apply for the ore mining companies. Basically, the decrease of the consumption of one particular good (cars) affected all branches which produced intermediate products leading towards the final consumer good. These released resources are the ones that can be used for investment later. Let us suppose that the freed resources will be used (invested) into capital goods production in the form of trucks. Thus a part of the released capital will flow into the truck production. People will be hired, machines will be bought, buildings will be rented/built. But the truck producers need to be supplied with truck parts, so another part of the capital will flow towards the truck part producers. And later to the metal producers as they are suppliers of the truck parts producers. And later again to the ore mining companies. Thus what we saw is that the released capital was redistributed from one chain (sequence) of production to another chain (sequence of production).

What is interesting is that in this particular set up a part of the capital will simply stay where it was but be used for different purposes. And the reason is that some processes are common ones for both lines of production.  In particular the ore mining producers will simply start selling ore to companies producing steel for the truck part producers. Since iron ore is a totally unspecific factor of production in this particular setup, then the redistribution of ore production will happen implicitly. Thus the same ore, produced before will be sold to different (or the same steel production companies) but this time it will be targeted towards truck production. In the same way, the steel mining companies need not change much their production ways, but they will start selling their steel to truck part producing companies. The truck part producing companies will have to change significantly (but not entirely) their production processes in order to fit the needs of the truck producers. As we see the less specific the production factor the less the need for adaptation/change. Thus most of the adaptation and physical movement of capital will happen in the lower stages.

We must note that this set-up (automotive production) is a very specific one however. It may be the case that the released capital from the line of production leading towards cars will be entirely transferred towards an entirely separate line of production, for instance towards the production of oil (oil distributors supplied by refineries, that get oil  from oil-drills, etc). Thus one line of production will grow at the expense of another one (the older one).

In conclusion, when we save we do not save consumer goods, but all resources which were used, i.e. which contributed towards the production of the particular consumer good.


3.5. Economic losses

 The standard treatments of the capital theory, i.e. Hayek (1967), Rothbard (2009), DeSoto (2012) do not include economic losses in the structure of the economy in fact. They are discussed as a separate issue, which is supposedly included in the graphical representation of ACT, but is not and cannot be included there in reality. As a typical example in DeSoto [ch.5, pp.302], when the structure of production is introduced (i.e. the Hayekian triangle) it is stated explicitly that net saving equals zero and that the economy is in a stationary state (i.e. it is not growing). Assuming for the purpose of the discussion that some net saving is necessary in order to compensate the depreciation (e.g. DeSoto[ch5,pp.280]), then the model developed cannot include the depreciation as such. If it did, then the described model of the economy must describe a retrogressing economy, not a stationary one as is stated.

In fact, depreciation has vanished due to the supposed imputation of fixed capital goods into original factors of production, intermediate/circular goods and entrepreneural profit. A depreciating type of good has been represented by /substituted through non-depreciating ones. Due to this (already discussed) erroneous approach depreciation as a net drain to the gross savings of the economy has simply disappeared from the model.

An additional problem is that, when economic losses are discussed, typically only the depreciation is taken into account. An economy however has other inherent losses, such as: losses due to environmental disasters (droughts, earthquakes, etc.), losses due to wars, losses due to economic waste (misused money from taxes for instance), loses due to unsuccessful entrepreneural projects (companies going bust), etc. Such losses must have been added on top of the depreciation and discussed along with it, but are not unfortunately.


3.6. Conditions for economic growth

 The standard requirement for economic growth to happen is the availability of net saving. Net saving is claimed to be needed in order to compensate depreciation and to move resources toward higher level production stages in the Hayekian triangle, thus enabling growth.

Here we will present a shortened version of an alternative view how growth can happen without net saving on the part of the economic agents. Such a process of growth is first described by George Reisman (1990).

The necessary and  sufficient condition for economic growth to take place is for an economy to be able to compensate and overcompensate its losses (typically only the depreciation is discussed). Taking the latter into consideration, we should note several well known facts. First, it is the fixed capital goods that depreciate, not the circular goods or the original means of production (land and labor). Second, we established that an economy produces not only consumer goods, but also fixed capital goods. Third, the depreciation itself does not depend (much) on what our economy produces, in particular on what mix of capital and consumer goods is produced. And forth and final, an economy can switch toward producing more capital goods (fixed capital goods in particular) at the expense of consumer goods, i.e. the economic agents can choose how much fixed capital goods an economy produces.

Taking all of the above into consideration, we could reach a condition of economic growth in a very simple way. Since depreciation (i.e. the loss of fixed capital) does not depend on what we produce, we may put the economy in such a productive state that it produces more fixed capital than is lost due to the depreciation. The increase of fixed capital production will happen at the expense of the production of consumer goods of course.  And if the amount of fixed capital produced surpasses the economic losses, then by definition our economy will grow.

The way to move an economy towards producing more capital goods is saving. But once the economy starts producing more fixed capital than it loses we need not save any more. In other words, net saving is not a precondition for economic growth. Thus an economy can exist and grow with zero net saving on the part of the economic agents. This idea in a simplified form has first been introduced by G. Reisman (1990). Note that this type of economic growth is not a part of the traditional ACT.


  1. An alternative capital structure theory

 4.1. Basic structure

 When taking into consideration and correcting the issues with ACT already discussed we are able to create a new structure of the capital of an economy. Figure 2 represents a simplified structure, stripped for the time being from many significant elements in order to simplify the explanation.


There are again four stages in it, but this time each stage represents not only the amount of circular goods passing through it but all the capital at that stage. In other words, each stage embodies the fixed capital and circular goods used in it along with the original means of production used (land and labor). The capital goods are measured according to their monetary value in the current market conditions. Note that we presume that the amount of money in the economy is fixed. Thus the top-most stage includes everything necessary for iron ore production, i.e. includes machinery, plants, labor, intermediate goods etc. The next lower stage includes all capital necessary for flotation and melting and so on. A small part of the overall capital in each stage flows from the upper stages to the lower-order ones,

which represents the already discussed intermediate/circular goods. The size of each stage is measured in monetary terms, i.e. it represents the monetary value of all resources employed in it. Note that the monetary value of all stages combined surpasses the amount of money available in the economy manifold, since it includes the current market prices of all capital goods employed. Each stage is assumed to be the same size, but this is just a simplifying assumption. In fact stages can be dissimilar in size, since they can differ in their capital efficiency. On each stage the rate of profit will be the same. Similarly to the original ACT structure the rate of profit will equalize, balance all the stages with respect to each other. The rate of profit will keep the capital in each stage in proper relation to the other stages so that production can go smoothly. Thus, as usually happens, if a capital saving invention appears in some stage, then in this stage the production will grow, selling prices will go down and profits will decrease. Therefore a part of the capital will switch to the other stages in a search of higher returns with the result that the rate of profit will again become the same in all stages.

In the opposite case, if for instance a flood or an earthquake destroys capital at some stage, then the selling prices at this stage will increase and profits will rise, which will create incentives for a capital influx from the other stages. Thus the rate of profit will again go down to the one representative for this structure.  We must note that the rate of profit would take care of the proper investment in capital as well. If a temporary over- or under-investment happens at a certain stage, relative to the other stages, then the profits in these stages will change and the corrective process described above will be set in motion. Thus the rate of profit will serve as a regulator of the investment in the economy.


4.2. Detailed structure

A more detailed structure of the capital in an economy is presented in Figure 3.  It represents the flow of capital.

Note first that this structure complies with the requirements for production discussed previously. In particular:

  • It includes fixed capital explicitly at each stage of production
  • It depicts explicitly the production of durable capital goods.
  • Both production lines (of durable capital goods and consumer goods production) run parallel in time.
  • The durable capital goods and the consumer goods are both product of the last stage with many intermediate stages in common.
  • Resources can easily move between both lines of production.
  • Losses (of all types) are explicitly shown

We can also draw the same structure in Figure 4 expressing the flow of money.

A unique feature of this structure is the  flow of durable capital goods stemming from the lowest stage up to the higher order stages. They represent capital substitution and investment. Again the example is an ore-mining company which buys a new truck to carry its mined ore. This company is situated at the highest order stage, but buys products (a truck) from the lowest one.

Another unique feature of the structure is that economic losses are shown explicitly. As already mentioned the economic losses do not include only the depreciation, but all other losses inherent to an economy. The economic losses represent a pure loss of capital and these losses can be compensated by the flow of fixed capital from the lowest stage towards the upper ones. As discussed, as long as the flow of fixed capital goods surpasses the losses the economy will grow.

For simplicity reasons the durable capital goods and consumer goods are separated only at the lowest stage, although, as discussed above, the product specificity gradually decreases up the graph. Both lines of production, i.e. car production and truck production have distinct rates of profit, which typically however have the same value. The rate of profit in one line of production can change for instance if net saving/dissaving is present.


4.3. Economic growth under invariable money

Let us now imagine that Figure 3 represents a stationary economy (no economic growth). At a certain point of time however the economic agents suddenly decide to consume less. The newly available savings would in the simplest possible case just flow into the banks. Banks in turn, faced with an abundance of money will lower the interest rates and extend more credit to the producers. This newly available money will be used for investment, which in fact means that capital goods (both fixed and intermediate) and original means of production will be bought. If we imagine for the sake of the explanation that before this change the same amount of durable capital goods and consumer goods was produced, i.e. that the division between the two in the lowest stage was exactly in the middle, then after the change the demand for durable capital goods will increase. The latter means that the border between capital and consumer goods will move to the left (see the graph). This will prove possible because the automotive companies will simply start producing more trucks at the expense of consumer autos. The newly-appeared demand for capital goods will be taken into account and the producers will adjust their production. After all it does not matter if the producers’ sales proceeds come from trucks or autos. Now, let us go up the depicted graph. The producers at the next level up will also adjust their production towards more capital goods-geared parts but they will have to adjust less, since some of the parts are not that specific. The same process will happen at the level of flotation and melting plants but to a much lesser extent. And at the level of ore production no adjustment whatsoever will be necessary. This will be a transitory process, which will last until the rates of profit within the structure (and in particular on the same stage) equalize. When saving starts, the rate of profit in the car-producing industry drops and capital starts flowing out of it and into the truck producing line or production, where the rate of profit has increased. When more and more capital moves from the left side of the graph to the right one the rate of profit in car production start growing and the one in truck production start declining, until they get equal. At this point of time the movement of capital will stop. The economy will move to a new state, where it will be producing more fixed capital goods than before.

What we observe in general is that the newly available saving does not affect only the level of consumer goods, it permeates the whole productive structure. If more is saved then more resources in the stages up the chain will be used for the production of durable capital goods. In other words, when we save money we save resources such as steel and iron ore at the same time. We do not save consumer (present) goods. Because of the complex temporal structure of the economy resources are released and redistributed not only from the last stage but also from the ones up the chain. These newly-available resources in turn will be used for the production of durable capital goods. The economy will become a more capital-goods oriented one. At the same time, since more savings are available the capital producing companies at each and every stage will be able to get more original means of production and durable capital goods and thus all stages will grow together. The rate of profit will make sure that the relative amount of investment among the different stages is kept in balance. Because of the synchronizing function of the rate of profit the whole economy will grow together, as a single entity.

We presumed at the beginning that an increase of savings was needed to bring the economy out of the stationary (i.e. no growth) state. However from now on no net saving will be necessary. The resulting structure of gross saving will  guarantee the future growth of the economy. The economy will be in a state, where it produces more fixed capital goods than it loses due to the depreciation (and losses in general). Thus  new saving is not required. Only an initial “push” of saving was required to bring the economy out of the stationary condition, but once this state was reached, then economic growth could go on by itself.

It is instructive to discuss in more detail what the specific processes in the economy before and after the initial push have been. In the stationary state of the economy a specific amount of consumer and durable capital goods have been produced. The durable capital goods produced have been just enough to substitute the capital which was worn out, i.e. to compensate the depreciation. Thus no net growth of the capital in the economy was possible. At a certain point however the economic agents suddenly decide to save more. Let us presume that these are just the final consumers. Thus consumers will buy less cars and will put their surplus money in the banks, invest in stocks, etc. Many car-producing companies at the last stage will have to either go bust or downsize. Workers will be laid off and plants will stop operating. In general: physical capital and labor resources will be freed. The plants mentioned however have suppliers from the upper stage (car parts producers). Since car parts will not be required as much as before then the car-parts suppliers will also have to go-bust or downsize, thus releasing labor and physical resources too. This process will go up the chain until it reaches the level of the ore-mining companies. At the same time however an opposite process will be present. Banks will lend the newly available savings to producers so that they can expand their production. For instance a new ore-mining operation will be started at the top-most stage. A part of the freed labor force will take part in it. A new operation however needs capital equipment to be built and operated later (trucks, machinery, etc.). Thus an expansion of the truck producing companies at the last stage will be necessary and a part of the newly available savings will go there. Capital and labor will follow. The suppliers of truck parts will also expand their operations in order to match the needs of the truck producers, thus employing more labor, machinery, etc. The same process will happen with their suppliers from the next level up. The overall result will be that resources at all stages which were previously geared towards the production of consumer goods will be moved towards the production of capital goods (fixed and intermediate). As we can see, a restructuring of the entire economy is set in motion. As discussed, the rate of profit will make sure that the new investment and restructuring will happen synchronously at all stages. And once the savings-push caused restructuring has been completed the economy will continue growing with the same amount of gross saving. The reason will be that after the restructuring it will produce more capital goods than are necessary to cover the capital substitution needs of the economy.

From a general point of view, what we observe is the following: A part of the economic product in the particular economy has been reserved to serve the process of capital substitution and new investment. Due to this reason the economy needed no external support in the form of new saving on the part of the economic agents, since it was possible for it to compensate and overcompensate its looses on its own.

The capital used for this purpose consists of original means of production, circular goods and fixed goods. We could call the just mentioned capital an “investment fund” in analogy to the “subsistence fund”. However, whereas the subsistence fund consisted only of consumer goods (or possibly of intermediate products of these consumer goods) the investment fund includes all types of capital.


4.4. Economic retrogression under invariable money

Let us now imagine the opposite, namely that the time preference of the consumers changes suddenly and they decide to consume more. Then the opposite process will occur. Resources will be withdrawn from the industries geared toward production of finished capital goods and transferred towards ones producing consumer goods. Thus automotive companies will decrease its truck production and increase the amount of cars coming out of its plants. Its suppliers will also start producing more  car parts than truck parts and so on. The economy will switch towards less capitalistic production, i.e. towards producing more consumer goods. And the latter will affect the whole productive structure.


  1. Conclusions

It was shown that the Austrian Capital Theory by itself has serious inconsistencies. ACT cannot include fixed capital goods in the process of production in fact, despite claims to the contrary. ACT does not account for the production of durable capital goods too. ACT neglect the similarities and commonalities between durable capital goods and consumer good and misrepresents the way capital gets redistributed during the processes of saving/dissaving. It does not include economic losses in itself (depreciation in particular). ACT presupposes that net saving is necessary in order for economic growth to take place. It was shown however that an economy can grow with no net saving. An alternative economic theory, which corrects the mentioned deficiencies was developed. The processes of economic growth and retrogression were described with its help.