Capital macroeconomics: the limits of consumption and investment

In the second part of our series on capital macroeconomics, we encounter the first contradiction with Keynesian theory and explain the "Austrian" view of consumption and investment. We will also outline economic growth.

Ludwig von Mises
Ludwig von Mises

At the beginning of our journey into the depths of the capital soul, we must explain how consumption is understood in capital macroeconomics and investment. In theory, consumption and investment alternatives.

It can be clearly shown on the so-called. limit of production possibilities (HPP), which shows us what maximum combination of two goods a farm can produce. If instead of two different goods (for example wheat and barley) we give consumption a investment, we get this:

Figure 1: Limits of production possibilities
Figure 1: Limits of production possibilities


Under favorable conditions, therefore, a market economy with full employment distributes (allocates) economic resources and resources to both alternatives - both consumption and investment - "ideally", in harmony. From HPP we can see that consumption and investment they are substitutes.

As "investment“Are conceived in this construction thick investmentwhich contain i investment to the renewal of capital (repairs, etc.) Logically, these are renewal investment, when worn-out or obsolete capital is replaced, usually lower (but at most equal) than the total amount gross investment.

Figure 1: Breakdown of investments into net, gross and renewal

Difference between investments for recovery a gross investments they are then so-called. "Clean" investment into new capital. Clean investment, which creates new capital, are thus a decisive factor for economic growth.

New capital formation (thanks to net investments) allows that year after year, the limit of our production possibilities shifts "outwards", which means an increase in the limit of our consumption and investment.

Figure 3: Economic growth
Figure 3: Economic growth

This external shift then represents the HPP sustainable economic growth.

In the picture we see 4 periods of economic growth. Along with the economy, of course consumption is also growing, investment and savings Of course, the amount of renewed capital is also growing, but rising incomes are accompanied by growth in savings, and investment.

Thanks to the limit of production possibilities, we came across first contradiction with the Keynesian macroeconomic construction - while in capital macroeconomics they are investment and consumption by mutual alternatives, for Keynes they are conceived as complementary complementations in private sector spending, consumption effect a investment adds up.

For a better imagination, let's look at it this way:

Keynes: CONSUMPTION + investment

Capital macroeconomics: CONSUMPTION X investment

In this part of the series on capital macroeconomics, we have shown on the model of the boundary of production possibilities how savings are conceived in capital macroeconomics and investment and we have outlined economic growth in the conception of this theory.

But how fast will the boundaries of production possibilities shift? What factors influence economic growth? About that again next time.

0 comments

  1. Perhaps it will suggest when I say that the choice between investment and consumption is also a split time about the use of (not only) natural resources. More in other parts.

  2. Okay, but what's the point of sustainability? So does that mean it's sustainable from about 20 to, say, 60 years?

  3. That's the beautiful thing about it - of course it's individual. However, the HPP shift in one also allows the HPP shift in the other person… 🙂

    However, we are a little ahead of other articles.

  4. If consumption and investment on your charts are individual, then HPP (and economic growth in the sense of a shift in HPP) is also individual. In what sense can we claim that it is sustainable when each of us drives or later dies?

  5. Consumption, investment is always from the perspective of the individual. It is about the consumption of an individual, the investment of an individual… and so on.

    Economic growth in capital macroeconomics is then a very individual thing - but it is (as stated in the article) in the expansion of HPP, ie greater opportunities for both investment and consumption.

  6. What do you mean by "consumption", "investment", and "economic growth"? Since "capital macroeconomics lacks economic aggregates, it does not even count GDP" (to quote you), consumption is probably not aggregate consumption, investment is not aggregate investment, and economic growth cannot be traditionally defined as GDP growth.

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