In popular phraseology, people save money and thus capital comes into existence. This does not mean that in order to increase the amount of productive capital in a country the amount of money must be increased. The capital may be increased without any change in the amount of money. What really happens is this: A who receives money, instead of spending it to gratify his wants, i.e. instead of spending it on consumption goods, puts it in the bank where possibly it draws interest. B who desires capital and has sufficient credit at the bank borrows this money, or its equivalent in purchasing power, and with it buys machinery or buildings which are already in existence or which are to be made. Because A did not buy consumption goods and B did buy machinery, productive effort has been diverted from the production of consumption goods to the production of machinery. In this way capital is produced. This production of capital involves abstaining from consumption and investing. Of course, in our illustration A himself might equally as well have invested the money in the machinery if he had been so inclined, and the result would be the same so far as the saving of capital was concerned.

Questions

1. Distinguish between acquisitive capital and productive capital.

2. What is meant by saying that capitalistic methods of production are roundabout methods of production? Illustrate.

3. Define capital. Is land capital? Why?

4. What distinction is sometimes made between capital and capital goods?

5. What is fixed capital? Circulating capital? Give examples of each.

6. What is free capital? Specialized? Give examples.

7. Show how productive capital comes into existence.

Supplementary Reading

Bohm-Bawerk, Positive Theory of Capital, Chaps. i. and ii.

Johnson, Introductory Economics, Chap. xi.

Marshall, Principles, Book IV., Chap. vii.

Seager, Principles, Chap. ix.

Seligman, Principles, Chap. xxi.

Taussig, Principles, Chap. v.