Thursday, February 14, 2013

Expansion of Production Dependent on Capital Accumulation?

Capital is needed to keep the workers alive during the production period. We are therefore faced with the question: to what extent does any increase in employment actually depend upon an increase in capital? We shall deal with this question later in detail. Here we merely wish to make a brief remark on the so-called wage fund theory, which is the classics' answer to this question. This theory assumed that more workers could only be employed if a store of means of subsistence had been accumulated previously by production and abstinence.
This problem—like so many others in economics—is not a real one. The present does not live at all on a store of goods accumulated in the past. The present lives as a rule on goods that flow uninterruptedly from past production into present consumption; stores of goods are neither necessary nor would they be sufficient to enable new workers to be employed. Nor is an increase of production in the past a necessary condition for an increase of the labor force in the present.
What enables an increased labor force to be employed and production to expand is the fact that the entrepreneur obtains money with which to pay new workers. This money may be borrowed from other people who have not consumed all the goods which they were entitled to receive, but have saved some of their income. But even if there are no new savings, employment and production can increase. It is not at all necessary to think of such a thing as a fixed wage fund, as the wage fund theory in its monetary form supposes. The necessary capital can be supplied through savings in other capital needs, or money can simply be created by money-issuing banks, as we shall see in Part III when discussing inflation. Finally, increased employment may not require more capital at all if there is a proportionate fall in wages.
We shall discuss the supply of capital later in detail. Here it suffices to state that neither monetary nor real scarcities need prevent an increase in employment. In whatever way the money with which to pay new workers is made available, its expenditure for labor by the entrepreneurs enforces a redistribution of past products in such a way that the new workers can survive during the current production period.

Common Sense Economics

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