Capital Consumption

Hans F. Sennholz’s Capital Consumption is a compact Austrian essay on the political economy of decline. Written against the background of the 1970s but framed as a general argument, it treats prosperity as the result of accumulated productive capital: tools, machinery, inventories, buildings, land improvements, and the savings that sustain them. Its central claim is that a society can appear to maintain or enlarge consumption while silently reducing the capital base that makes future wages and production possible.

And we speak of a contracting economy when the amount of capital per person is shrinking, which reduces incomes and standards of living.

The essay’s first concern is conceptual. Sennholz distinguishes genuine growth from policies that merely redistribute or consume existing wealth. Capital is not a static hoard but the structure of production itself, and it must be continually maintained, replaced, and enlarged. If savings are diverted from private investment into immediate consumption, the loss may not be visible at once; it appears later as lower productivity, fewer opportunities, and declining real incomes.

Sennholz’s critique of taxation follows from this intertemporal standard. Progressive income taxes, corporate taxes, and estate taxes do not merely transfer purchasing power; they reduce the funds from which replacement, expansion, and entrepreneurial experimentation would otherwise be financed. Especially when imposed on profits and estates, taxation may consume the very assets that support employment. The burden is therefore not only borne by present taxpayers but also by workers and consumers who inherit a thinner productive structure.

Labor productivity and living standards are debilitated as the taxing authorities consume this income.

The same reasoning governs his treatment of deficit spending. Borrowing does not abolish scarcity; it shifts command over savings from private investors to political authorities. Government programs may be defended as compassionate, stabilizing, or developmental, but Sennholz insists that they still absorb labor, materials, and capital that could have served other uses. Political allocation replaces market calculation, and projects are judged by popularity or administrative purpose rather than profit, loss, and consumer demand.

Government spending seems to be an all-purpose remedy for economic and social ills, the key to important political ends. The world of scarcity with which man always has struggled is finally giving way to a fabulous world of fulfillment and plenty.

Inflation, for Sennholz, is another form of capital consumption. By expanding money and credit, authorities distort interest rates, redistribute wealth, and make business calculation unreliable. Firms may mistake nominal profits for real gains, pay taxes out of capital, and discover too late that depreciation allowances cannot replace equipment at higher prices. Credit expansion also generates malinvestment: projects begun under artificially easy conditions become unsustainable when real scarcity reasserts itself.

Regulation and labor policy receive parallel treatment. Environmental and safety rules may pursue legitimate ends, but when imposed administratively they can force expenditures that do not increase output or replace capital efficiently. Sennholz favors property rights, liability, and contract over command regulation. Likewise, legally privileged unions may raise some wages in the short run while reducing profits, investment, and employment opportunities in the long run. The recurring theme is that present claims on production can undermine the capacity to produce.

When the public demand for government services and benefits grows beyond the ability of business and wealthy taxpayers to pay, budgetary deficits become unavoidable.

The essay ends as a warning about political incentives. Once citizens become accustomed to public benefits, subsidies, inflationary finance, or protected incomes, retrenchment becomes difficult. Declining productivity may lead not to reform but to louder demands on a shrinking base. Sennholz’s remedy is correspondingly austere: restore saving, sound money, lower taxation, market pricing, contractual responsibility, and legal equality. The importance of the essay lies less in its period detail than in its governing question: whether policy preserves the capital structure beneath living standards, or consumes it while calling the process prosperity.