#17 Productive Use of Capital

As we discussed in Issue #16, hoarding (saving) is a productive use of capital. Today we will cover how the Keynesians conflate saving with that of “unproductive capital”. Let’s start off with an illustration.

You have a shovel (capital good). Keynesians tell you that keeping that shovel in your tool shed is unproductive. By maximizing the productivity of that shovel (capital) you are increasing the net output of society. This is factually untrue because of how we understand the role of entrepreneurs in markets as written by Mises in Human Action.

Let’s say I come along and wish to borrow your shovel from you. You, being a good Keynesian who wants to maximize the productivity of your capital to the greater benefit of society, agree under the pretext that I share with you a small percentage of my labor with the shovel. I take your shovel and I use it to try and chop down a tree. In the process I break the shovel, consuming your capital and producing no lumber. Did giving me your shovel make it more productive?

This is a silly story, but the answer should be obvious. The role of an entrepreneur in society is to seek out profitable (the first and foremost important principle of productive action in a market) opportunity, which requires vast amounts of information regarding efficient deployment of capital in order to satisfy market demand. No entrepreneur is guaranteed an increased output with access to more capital. In this story, I produced just the same amount of lumber with the shovel and without the shovel. My lack of knowledge as an entrepreneur on how to most effectively use that capital to meet demand for lumber, resulted in my efforts being unprofitable.

Furthermore, not only does deployment of capital not guarantee increased output, but increased output does not guarantee increased profitability or increased satisfaction of the individual. Profitability in a market is the harmonious relationship between efficiency of supply and demand (aka in what quantity and at what price consumers are willing to trade).

Not only were my activities unproductive in the sense that I did not produce any lumber, I also consumed capital in the process. This is net unproductive for a society, where wealth is dependent on the accumulation of resources and finished goods. This can take many different forms, but it is the role of the entrepreneur to determine the ways in which this can be done profitably. If it yields net unproductive results (aka it is unprofitable) then no new value is created, value is instead consumed in the process.

Productive use of capital is prudence in investment. Through patience and careful due diligence you would make certain of my ability, as the borrower of your accumulated capital (shovel), to have a plan for successfully deploying that capital for profitable action. If you had asked me, for example, what my plans were before lending me that capital, you would immediately know that my activities were unproductive.

Such is the nature of lending agreements to maximize the “productivity” of capital under the Keynesian paradigm. We are lending our shovels to lumberjacks and confused as to why mal-investment (the liquidation of which is postponed by central banks) is the status quo. Hoarding capital is productive because it gives you time to gather information, which is an essential building block in profitable deployment of capital and profitable entrepreneurship.

Banks (lending institutions) are not incentivized to seek out profitable entrepreneurs because they are protected from the market forces of liquidation by the central banking system. Nor are you, the saver, incentivized to seek out profitable lending institutions for your capital because of the facade of risk free investment.

-Collin

Book of the Month: The Dao of Capital, By Mark Spitznagel

-“Although the future remains uncertain, the entrepreneur relies on “specific anticipative understanding,” which “can be neither taught nor learned”; he does not focus on what was or is, but acts upon what he expects the future to be.”