4.3 Review: Capital and technology

Lecture 4: Capital and technology
Human tools for increasing the amount and value of our time:
    Division of labor
    Indirect exchange, money


  • Capital goods are good that are not for consumption, but for the production of other goods. Higher order goods.
  • Nothing inherent to goods makes them capital goods. It's subjective, dependent on how a person uses it.The same good can be used as a capital or consumption good.
  • Human reason inevitably discovers capital and uses it to increase the quantity and value of its time.
  • If humans are able to meet their current needs, they can save some of their resources for the future. Postponing consumption makes it possible to provide for the future. Provision for the future makes it possible to engage in production processes that are longer and more productive.
  • Starting point of capital accumulation is the provision of consumption goods for the period of production. I.e. The starting point for building a fishing rod is the provision of fish for the time spent building the fishing rod rather than fishing.
  • The opportunity cost of capital is always consumption.
  • When producing using capital goods, you are producing at a higher productivity: higher output per unit of time.
  • Capital goods are created to increase productivity. Time is spent on longer processes of production to achieve higher outputs per unit of time. (1) they may provide a greater production of the same good per unit of time; or (2) they may allow the actor to consume goods that are not available at all with shorter processes of production.
  • Capital requires saving: the deferral of consumption. Delayed gratification. The opportunity cost of capital is in terms of consumption goods, ultimately. Productive goods can be sold for consumption goods. Sacrifice is necessarily involved, because resources can always be redirected to satisfy immediate needs. Not easy!
  • The constraint on capital accumulation is time preference.
  • The price of capital is determined by time preference.Time preference means there is a preference for present goods over future goods, it determines the originary interest.
  • Originary interest is the ratio of the value assigned to a present good and the value assigned to an identical future good.
  • The loan market adjusts the interest rate on loans to be equal the rate of originary interest, as manifested in the rate of discount future goods.
  • Interest rate and time preference is discussed in more detail in chapter XIX of Human Action, and Chapter 6 of Man, Economy, and State. It will also be discussed in more detail in the second Principles of Economics course offered on saifedean.com, ECO12).
  • Since time preference is positive, only the expectation of a real return encourages saving. Only investment in activities which offer a positive return is undertaken.
  • Capital is only accumulated in processes of production that are longer and more productive. Lenders will only lend if offered a return that compensates them for forgoing present goods.
  • Capital raises the marginal productivity of labor. If it didn't, it wouldn't be capital, it'd be a consumption good. Only capital that raises productivity can pay back the saver.
  • You build a fishing rod, then a net, then a boat. Any capital that doesn't increase productivity is discarded or repurposed. The process continues to get longer, but only with additions that increase productivity.
  • The loan market only provides capital to projects that make enough return to compensate lenders enough to overcome their originary interest.
  • Productivity rises as the process gets longer.
  • Accumulating capital leads to the increase of the total period of production of higher goods, but a decrease of the period for the production of each unit.
  • Catching a fish with your bare hands takes longer per fish than a fishing rod, but it is shorter as an overall process than manufacturing the fishing rod and using it.
  • The value of capital goods is derived purely from the value of the consumer goods they provide.
  • As capital is accumulated, newer technologies are developed for its application.
  • As time goes by, people accumulate more capital, time preference begins to drop further, and the price of capital drops further.


  • Reason allows us to develop concepts and ideas we use to achieve economic outcomes. Technology can be thought of as the plan of economic action, and the mechanism by which man achieves his ends. Similar to a recipe.
  • Technological advancement is the development and application of better ideas and methods of production, leading to an increase in output per unit of time.
  • You develop new ways of catching fish. A better fishing rod, a stronger boat. You catch fish you couldn't catch before.
  • Technology is a form of capital. It also serves to increase productivity of labor. It is distinct from physical capital in that it is non-rival. One person using a technology does not reduce its usefulness to others. One person invented the wheel, billions have used it.
  • Everything created by humans starts as an idea.
  • It has the enormous advantage of not being physical. It is much harder to stop and control by governments. Improvements in technology are more likely to improve economic outcomes today because capital accumulation is easier to control and restrict by governments.
  • Many Austrian Economists believe that patent laws, intellectual property, World Trade Organization are all actively preventing the spread of ideas and trying to minimize the number of people that benefit from them. But the internet is stronger than all of them!
  • See: Kinsella, Against Intellectual Property: https://nakamotoinstitute.org/literature/against-ip/
  • Kramer's paper shows that areas with higher population density grow faster than lower population density in the long run. Because the driver of growth is not rival resources, but non-rival ideas. More people means more non-rival ideas, more productivity.
  • Ideas are the one thing that cannot be controlled. Nobody can control what you think, no matter what they do. All the world's armies cannot kill a thought.

Lecture 5: Division of labor

Lecture 6: Indirect exchange, money

Last modified: Tuesday, July 27, 2021, 2:13 PM