CAPITAL

An advanced industrial economy like the United States uses an enormous number of buildings, machines, computers. software. and so on. These are’ the.factors of production called capital-a produced factor of production, a durable input which is itself an output of the economy.

Most of us do not realize how milch our daily activities depend upon capital, including our houses, the highways on which we drive, and the wires that bring electricity and cable ‘TI’ to our homes. The total net private capital stock in the U.S. economy is more than S19 trillion-including government-owned, business, and residential capital. On average,this is S70.000 per person.

As we have seen, capital is one of the ‘three major factors of production. The other two. land and labor, are often called primary factors of production. That means their supply is mostly determined by non-economic factors. such as the fertility rate and the country’s geography. Capital, by contrast. has to he produced before you can use it. For example,some companies build textile machinery, which is then used to make shirts: some companies build farm tractors. which are then used to help produce corn. Use of capital involves time-consuming. roundabout methods of production. People learned long ago that indirect and roundabout production techniques often are more efficient than direct methods of production. For example, the most direct method of catching fish is to wade into a stream and grab fish with your hands, but this yields mor t’ frustration than fish. By using a fishing rod (which is capital equipment), fishing time becomes more productive in terms of fish caught per day.By using even more capital, in the form of nets and fishing boats, fishing becomes productive enough to feed many people and provide a good living to those who operate the specialized nets and equipment.

Growth from the Sacrifice of Current Consumption.If people are willing to save-to abstain from present consumption and wait for future .consumption- society can devote .resources to new capital goods. A larger stock of capital helps the economy grow faster by pushing out the PPF. Look back at figure 1-5 to see how forgoing current consumption in favor of investment adds to future production possibilities, High rates of saving and investment help explain how Taiwan, China, and other Asian countries have grown so fast ‘over the last three decades. By comparison, many poor countries save arid invest little-they start the economic race at the back and fall further behind because they cannot accumulate productive capital.

Is there no limit to the:amount of useful capital?Should we continue to boost productivity by adding more capital, by replacing all direct processes with more productive, roundabout ones and all roundabout processes with still more roundabout processes? While .this seems sensible, it has a high cost because too much roundabout investment
would cause too great a reduction in today’s consumption.Investing resources to give every worker an advanced degree, to remove 99.9 percent of pollution, and to build a subway system ‘under every town and hamlet would certainly increase productivity. But the payoff would not be worth the enormous cost in reducing consumption.

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