Sundry Observations on the Nature of Capital Icon

January 12, 2020

AN act of individual saving is a decision not to have dinner today. But it does lead to a spending of that saving to buy dinner at a later date.

Thus, it depresses the food service business or other consumption businesses. It is a net reduction of such demand.

The expectation of future consumption is based on present consumption. A reduction in present consumption will likely depress future consumption. This will result in the act of saving:

  • depressing the price of consumption-goods
  • leaving the marginal efficiency of existing capital unaffected.

It might depress the latter also by present investment-demand and present consumption-demand.

It will be different if the saving was meant for a future spending. In this case, the expectation of some future yield from investment would be improved. The resources saved could be used for preparing for that future consumption.

The expectation of consumption is the only raison d’être of employment. This means that a reduced propensity to consume has cet. par. a depressing effect on employment.

The trouble arises, therefore, because the act of saving implies, not a substitution for present consumption of some specific additional consumption which requires for its preparation just as much immediate economic activity as would have been required by present consumption equal in value to the sum saved, but a desire for “wealth” as such, that is for a potentiality of consuming an unspecified article at an unspecified time.

The idea that individual saving* is just as good for effective demand as an act of individual consumption is false.

*Superphysics Note= Here, Keynes confuses “saving” with “abstaining” or putting money under a pillow. Classical savings always implies saving money in a bank. Thus, the correct phrase is= ‘Individual saving IN A BANK is just as good for effective demand’

An increased desire to hold wealth is the same thing as an increased desire to hold investments. This desire increases the demand for investments and stimulates their production. In this way, current investment is promoted by individual saving just as present consumption is reduced.

These are fallacies coming from the idea that the owner of wealth wants a capital-asset for the sake of that asset* instead for its prospective yield.

*Superphysics Note= This desire is actually the desire for security which Keynes called “precautionary-motive” in Chapter 13. Adam Smith mentions this as kings hoarding treasure (massive treasure-saving) for the sake of security. How could Keynes forget his own principles? Here, he is strangely imposing the “transactions-motive” on capital-owners, like telling an apple to be an orange.

Prospective yield wholly depends on the expectation of future effective demand in relation to future conditions of supply. If an act of saving does nothing to improve prospective yield, it does not stimulate investment. Moreover, in order for an individual saver to attain his desired goal of owning wealth, a new capital-asset is not needed to be produced to satisfy him.

The creation of new wealth wholly depends on the prospective yield of the new wealth reaching the standard set by the current rate of interest.

The prospective yield of the marginal new investment is not increased by someone wanting to increase his wealth. This is because the prospective yield of the marginal new investment depends on the expectation of a demand.

I impose that the owner of wealth wants the best available prospective yield. In this way, an increased desire to own wealth reduces the prospective yield. Debt and money markets are also capital-assets, and so the prospective yield cannot fall below the current rate of interest.

Interest rate depends on the strengths of the desires to hold wealth in liquid and in illiquid forms relative to the supply of wealth .

If the reader still finds himself perplexed, let him ask himself why,

If the quantity of money is unchanged, a fresh act of saving reduces the liquid money.


Keynes Overturns the Classical Productive and Unproductive Capital in Favor of Money-Returns

Instead of calling capital as “productive” it would be better to say that capital has a yield over the course of its life in excess of its original cost.

An asset’s scarcity gives it a higher aggregate value greater than its initial supply price. It is kept scarce because of the competition of the interest rate on money.

If capital becomes less scarce, the excess yield will diminish. Yet it will stay as productive at least in the physical sense*.

*Superhysics Note= Here, Keynes applies sophistry. If everyone has access to a capital equipment, then the old capital equipment will not be used as much, rendering it less productive per equipment-unit. For example, 4G in mobile phones has made wifi routers unnecessary and therefore less productive to the eyes of society.

We should regard labour*, including, of course, the personal services of the entrepreneur and his assistants, as the sole factor of production, operating in a given environment of:

  • technique
  • natural resources
  • capital equipment
  • effective demand.

*Superphysics Note= Here, Keynes makes land and stock subservient to labor, different from the Classical notion that puts all three as equal. Under Keynes’ reasoning, money can be eased as to employ humans to make Antartica or the Sahara productive. This is absurd.

This is why I used the unit of labour [common-labour] as the sole physical unit needed in my economic system, apart from units of money [money-wage] and time [hour].


Capital has to be kept scarce enough in the long term to have a marginal efficiency which is at least equal to the interest rate for a period equal to the life of the capital, as determined by psychological and institutional conditions.

A wealthy society with so much capital has its marginal efficiency at zero. It would be negative with any additional investment. Yet it will have a monetary system that has negligible costs of storage and safe custody. This will lead to interest rates not being negative. This will, at full employment, will make the people save.

Entrepreneurs will necessarily make losses if they continue to offer employment on a scale which will use the whole stock of capital. The stock of capital and employment will thus shrink until the society becomes so impoverished as to reduce the aggregate of saving to zero.

Thus equilibrium, under laissez-faire, will be one where employment is low enough and the standard of life sufficiently miserable to bring savings to zero.

The only alternative position of equilibrium is to have a stock of capital sufficiently great to have a marginal efficiency of zero. This means that wealth is available to satiate the aggregate desire to save and invest even with full employment, in times when no interest revenue is obtainable.

But it is unlikely that the propensity to save under full employment becomes satisfied just at the point where capital reaches the level where its marginal efficiency is zero. If this happens, it will probably take effect when the rate of interest is vanishing and during the gradual decline of interest rate*.

*Superphysics Note= The failure of QE from 2009 blows this argument out of existence. Keynes’ flaw is that he assumes that investments will just happen even at low interest rates because he forgets about profit maximization.

Thus, institutionally, the interest rate cannot be negative since money has negligible carrying costs.

In fact, however, institutional and psychological factors set a limit much above zero to the practicable decline in interest rates. In particular, the costs of bringing borrowers and lenders together and uncertainty as to the future interest rates will set a lower limit as high as 2% or 2.5% on long term.

If this proves correct, the awkward possibilities of an increasing stock of wealth, when the interest rate is at bottom, may soon become real. At this point, the aggregate desire to accumulate wealth will not likely be satiated before the interest rate has reached its minimum level.

The post-war UK and US experiences had an accumulation of wealth so large that its marginal efficiency fell more rapidly than the interest rate can fall under laissez faire. This accumulation interfered with employment and the standard of life.

It follows that the poorer society can enjoy a higher standard of life than a wealthier one. The poorer society will then have the same problem after it becomes rich, under laissez faire where the propensity to consume and the rate of investment are not deliberately controlled in the social interest.

Under full employment, the interest rate cannot fall as fast as the fall of the marginal efficiency of capital and the savings at that interest rate.

This means that even a diversion of the desire to hoard zero yield assets* will increase economic well-being.

*Superphysics Note= This is now the trend of real estate bubbles and ‘dry powder’ in money markets

Millionaires find their satisfaction in building mighty mansions. Digging holes in the ground* paid by savings will increase employment and the real national dividend of useful goods and services.

*Superphyscs Note= This is now seen as bullshit jobs which increase employment quantity but reduces quality, while the non-working capital-owners increase their pleasures. Keynes is to blame for it.


Let us assume that:

  • the interest rate is made consistent with the rate of investment of full employment
  • State action balances to provide growth of capital equipment is saturated without burdening the standard of life of the present generation

This should bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation. Progress would then result only from changes in technique, taste, population and institutions.

If I am right in imagining it to be easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this would be the most sensible way of gradually getting rid of many of the objectionable features of capitalism*.

*Superphysics Note= This is actually done by China as state capitalism which is able to flood the world with equipment and infrastructure.

For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth.

A man would still be free to accumulate his earned income for spending it later. But his accumulation would not grow.

The rentier would disappear. There would still be room for enterprise and skill*.

*Superphysics Note= This is also done by China which has a free market, but without the oligarch rent-seekers