Friday, February 15, 2013

Amount of Capital Dependent on Volume of Production?

We must sharply distinguish between the question: is the volume of production dependent upon capital accumulation; and the reverse question: is the amount of capital dependent on the volume of production? The latter question is, of course, to be answered in the affirmative. If more is produced, other things being equal, there is an increase in the amount of capital, i.e. in the amount of goods simultaneously present in the economy—or, better, of goods which reach the future from the present. Such an increase in capital is often spoken of as an increase in the width of the capital structure—just as a river bed becomes wider when the inflow of water increases.
The flow of goods over time has indeed often been compared with the flow of water in a river. It is a useful comparison, and we shall use it to explain many problems in connection with capital.

Common Sense Economics

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