Economics in One Lesson

Economics in One Lesson
of capital expansion has already been reached. It is incredible that
such a view could prevail even among the ignorant, let alone that it
could be held by any trained economist. Almost the whole wealth of
the modern world, nearly everything that distinguishes it from the
preindustrial world of the seventeenth century, consists of its accu-
mulated capital.
This capital is made up in part of many things that might better be
called consumers’ durable goods—automobiles, refrigerators, furni-
ture, schools, colleges, churches, libraries, hospitals, and above all pri-
vate homes. Never in the history of the world has there been enough
of these. There is still, with the postponed building and outright
destruction of World War II, a desperate shortage of them. But even
if there were enough homes from a purely numerical point of view,
qualitative
improvements are possible and desirable without definite
limit in all but the very best houses.
The second part of capital is what we may call capital proper. It
consists of the tools of production, including everything from the
crudest axe, knife, or plow to the finest machine tool, the greatest
electric generator or cyclotron, or the most wonderfully equipped fac-
tory. Here, too, quantitatively and especially qualitatively, there is no
limit to the expansion that is possible and desirable. There will not be
a “surplus” of capital until the most backward country is as well-
equipped technologically as the most advanced, until the most ineffi-
cient factory in America is brought abreast of the factory with the lat-
est and most elaborate equipment, and until the most modern tools of
production have reached a point where human ingenuity is at a dead
end, and can improve them no further. As long as any of these con-
ditions remain unfulfilled, there will be indefinite room for more cap-
ital.
But how can the additional capital be “absorbed”? How can it be
“paid for”? If it is set aside and saved, it will absorb itself and pay for
itself. For producers invest in new capital goods—that is, they buy
new and better and more ingenious tools—because these tools 
reduce
cost of production
. They either bring into existence goods that completely
unaided hand labor could not bring into existence at all (and this now
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The Assault on Saving
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includes most of the goods around us—books, typewriters, automo-
biles, locomotives, suspension bridges); or they increase enormously
the quantities in which these can be produced; or (and this is merely
saying these things in a different way) they reduce 
unit
costs of pro-
duction. And as there is no assignable limit to the extent to which unit
costs of production can be reduced—until everything can be pro-
duced at no cost at all—there is no assignable limit to the amount of
new capital that can be absorbed. The steady reduction of unit costs
of production by the addition of new capital does either one of two
things, or both. It reduces the costs of goods to consumers, and it
increases the wages of the labor that uses the new machines because
it increases the productive power of that labor. Thus a new machine
benefits both the people who work on it directly and the great body
of consumers. In the case of consumers we may say either that it sup-
plies them with more and better goods for the same money, or, what
is the same thing, that it increases their real incomes. In the case of the
workers who use the new machines it increases their real wages in a
double way by increasing their money wages as well. A typical illustra-
tion is the automobile business. The American automobile industry
pays the highest wages in the world, and among the very highest even
in America. Yet American motor car makers can undersell the rest of
the world, because their unit cost is lower. And the secret is that the
capital used in making American automobiles is greater per worker
and per car than anywhere else in the world.
And yet there are people who think we have reached the end of
this process,
5
and still others who think that even if we haven’t, the
world is foolish to go on saving and adding to its stock of capital.
It should not be difficult to decide, after our analysis, with whom
the real folly lies.
5 
For a statistical refutation of this fallacy consult George Terborgh,
The Bogey of Economic
Maturity
(1945).
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