Hayek’s essay examines how an advanced economy can impoverish itself by silently running down its capital structure. Though Austria supplies much of the immediate background, he treats the problem as general: depression policy may sustain present claims on income only by destroying the conditions of future production.
What we are confronting here, however, are economic problems towards whose explanation economics has as yet made little direct contribution, even if it offers us the necessary tools for doing so.
The core argument is that capital consumption occurs when current consumption absorbs more of the flow of productive resources than is compatible with maintaining existing capital. This is not merely a matter of visible physical decay. Capital can be consumed when circulating capital is not replaced, when goods in process are diverted to nearer uses, or when price relations make longer production processes uneconomic. A machine may still exist physically while losing its economic function if it cannot be profitably maintained, renewed, or integrated into production.
Hayek’s main mechanism is a cost structure inconsistent with the preservation of capital. Wages, taxes, social charges, or other burdens may rise above the level warranted by productivity and relative scarcity. Under such conditions, entrepreneurs curtail employment, shorten production, or abandon capital-intensive methods.
The former may occur for various reasons: trade unions may succeed in forcing wages above the existing equilibrium level, or additional taxation and social expenditure may increase the cost of employing workers or of using other factors of production.
Against underconsumptionist reasoning, Hayek denies that stronger demand for consumption goods necessarily stimulates investment. Higher receipts in final-goods markets may instead draw resources out of earlier, more remote stages of production. The economy can then display a deceptive revival in consumption industries while replacement funds are exhausted and capital-goods production contracts.
Current consumption will be able to claim a larger share of the product of the current flow of original factors of production than is compatible with the maintenance of the stock of real capital (or the conversion of new savings into real capital).
This explains why Hayek distinguishes unused capacity from surplus capital. Idle plant does not prove that an economy has more capital than it can use; it may show that capital has become immobilized by wages, costs, and prices that make its continued employment unprofitable. A shortage of free capital can therefore coexist with unemployment and idle machinery.
Hayek extends the analysis to fiscal and political measures that transform capital into current income. Property levies, estate duties, taxation of reserves, subsidies, and public works may all support immediate consumption or employment while impairing replacement and accumulation.
On the one hand, there are the direct interventions by the state which aim at converting capital into income, such as property levies and estate duties.
The political danger is that capital consumption is attractive because its benefits are immediate and its costs delayed. Wages, relief, public employment, and apparent purchasing power can be preserved for a time, while the erosion of capital appears only later as lower productivity and harder adjustment. Hayek’s lasting contribution is to join Austrian capital theory to depression analysis: capital is not a homogeneous fund, but an intertemporal structure whose maintenance depends on saving, replacement, relative prices, and restraint in converting future productive capacity into present income.
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