Free Capitalist Network - Community Archive
Mises Community Archive
An online community for fans of Austrian economics and libertarianism, featuring forums, user blogs, and more.

Accumulation of Capital and Knowledge

Accumulation of Capital and Knowledge

Accumulation of Capital and Knowledge
by Alex Merced

 While I've discussed capital accumulation a couple of times before I though I'd re-explain this concept and it's implications again since it's so pivotal in understanding many of todays fundamental political questions such as...

Why do the rich grow wealthier at a faster rate than the none rich, why do the smarter get smarter faster than the none-smart?

Capital Accumulation

 The basic premise is this, every input creates output, so the more inputs I have the more output I can create. While innovation and new technology will help magnify the effect of this process let's suspend disbelief and that technology is no longer progressing forward how can a society still become more prosperous?


Smith has $100 with which he can buy a machine that he can create enough goods that he'll generate $20 each week when bringing those goods to the market. So in 5 weeks he'll have recovered his cost and buy another of the same machine and begin to generate $40 and now it'll only 2 1/2 weeks before another machine can be bought.

So even though the machines weren't getting any better or efficient, accumulating the capital of this machinery allowed Smith to generate more wealth in a smaller period of time. It's this process that explains why people with more capital, or "rich" people may be able to accumulate more wealth at faster rates. Those who aren't rich are either earlier in this process of wealth accumulation if they are making these investments, or may be stuck in their circumstances due to lack of investment spending, because they chose to consume instead.

If smith instead bought $100 worth of apples and ate or consumed them, the end results is that smith has nothing left. So consumption in itself does not create more for smith, he must make an investment in order to ensure he can continue his consumption habits. In this case he could save $50 worth of the apples for later or sell them for $100 (assuming he can find a buyer) and consume the other $50.

Notice the difference...

In the first scenario Smith consumed $100 of apples and now has nothing

While in the second scenario Smith consumed $50 of apples and invested/saved the other $50 of Apples is still left with $100 in the end even after consuming $50 meaning a total of $150 of wealth existed for Smith throughout this scenario.

(NOTE: It's with this realization that one should look very suspect at statistics like Gross Domestic Product which assume the creation of value for Consumption spending is the same as Investment Spending, and that all Government spending is equally valuable whether it's on investment or consumption since it only measures the dollars committed not the dollars returned from expenditures. In either of the above examples the GDP of smith would be $100 yet it's obvious he was better off in one example over the other.)

(NOTE 2: The Reason GDP would only be $100 for Smith personally either way cause the only purchase he made was the $100 of apples, and GDP ignored the $100 returned from selling half his apples until he spends it. So GDP is always ignoring return of expenditures, which is this example are vastly different.)

Knowledge Accumulation

 Now if your reading this it's safe to assume your interested in accumulating knowledge, and knowledge accumulation works very similar to that of the example above.

For example, when you were a child in Kindergarten or First Grade you were learning the basics of communication such as the alphabet and how to read, and it takes long time develop those basic skills. Yet, as you get older and you master these fundamental pieces of knowledge your able to attain other pieces of knowledge at greater rates in smaller time frames, or else no child would be able to handle the difference in workload from 1st grade to college. The more you participate in this process the faster and great it becomes. The smart get smarter faster cause they've invested more in previous knowledge to attain future knowledge in the same way smith had invested more in previous capital to purchase future capital.


Many find this magnification of wealth growth to be a sign of inequity, although it's actually the result of the process that creates prosperity, knowledge and wisdom. To demonize capital accumulation and say capital must be taken from the rich and given to the poor is like saying we must take knowledge from a genius and give it to someone who may be referred to as "stupid". We should not fault those who are later in the process of capital accumulation for other being in the early stages of it, their participation in this process does not prevent other from participating in it.

Also, it's this process that separates developed countries from underdeveloped countries. It's not that technological innovations and practices are kept secret from these developing nations, but they are earlier in the stages of capital accumulation making growth seem slower relative to countries further along in the process. Yet if countries further along in this process take it for granted and consume all the fruits of these investments they may find themselves falling behind quite quick.

Posted Aug 28 2010, 01:40 PM by Alex Merced