Capital accumulation

Demand-led growth models

In macroeconomics, following the Harrod–Domar model, the savings ratio (${\displaystyle s}$) and the capital coefficient (${\displaystyle k}$) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment. The rate of growth of the real stock of fixed capital (${\displaystyle K}$) is:

${\displaystyle \frac{\mathrm{\Delta }K}{K}=\frac{\frac{\mathrm{\Delta }K}{Y}}{\frac{K}{Y}}=\frac{s}{k}}$

where ${\displaystyle Y}$ is the real national income. If the capital-output ratio or capital coefficient (${\displaystyle k=\frac{K}{Y}}$) is constant, the rate of growth of ${\displaystyle Y}$ is equal to the rate of growth of ${\displaystyle K}$. This is determined by ${\displaystyle s}$ (the ratio of net fixed investment or saving to ${\displaystyle Y}$) and ${\displaystyle k}$.

A country might, for example, save and invest 12% of its national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually. However, as Keynesian economics points out, savings do not automatically mean investment (as liquid funds may be hoarded for example). Investment may also not be investment in fixed capital (see above).

Assuming that the turnover of total production capital invested remains constant, the proportion of total investment which just maintains the stock of total capital, rather than enlarging it, will typically increase as the total stock increases. The growth rate of incomes and net new investments must then also increase, in order to accelerate the growth of the capital stock. Simply put, the bigger capital grows, the more capital it takes to keep it growing and the more markets must expand.

The Harrodian model has a problem of unstable static equilibrium, since if the growth rate is not equal to the Harrodian warranted rate, the production will tend to extreme points (infinite or zero production). The Neo-Kaleckians models do not suffer from the Harrodian instability but fails to deliver a convergence dynamic of the effective capacity utilization to the planned capacity utilization. For its turn, the model of the Sraffian Supermultiplier grants a static stable equilibrium and a convergence to the planned capacity utilization. The Sraffian Supermultiplier model diverges from the Harrodian model since it takes the investment as induced and not as autonomous. The autonomous components in this model are the Autonomous Non-Capacity Creating Expenditures, such as exports, credit led consumption and public spending. The growth rate of these expenditures determines the long run rate of capital accumulation and product growth.

Marxist concept

Karl Marx borrowed the idea of capital accumulation or the concentration of capital from early socialist writers such as Charles Fourier, Louis Blanc, Victor Considerant, and Constantin Pecqueur. In Marx's critique of political economy, capital accumulation is the operation whereby profits are reinvested into the economy, increasing the total quantity of capital. Capital was understood by Marx to be expanding value; this is seen as a sum of capital, usually expressed in money, that is transformed through human labor into a larger value and extracted as profits. Here, capital is defined essentially as economic or commercial asset value that is used by capitalists to obtain additional value (surplus-value). This requires property relations which enable objects of value to be appropriated and owned, and trading rights to be established. Marx argued that capital has the tendency for concentration and centralization in the hands of richest capitalists.

According to Marxism during periods of stagnation in capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation, and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the level of permanent unemployment. Capital accumulation of the means of production in Marxist thought leads to the formation of the bourgeoisie.

"Accumulation of capital" sometimes also refers in Marxist writings to the reproduction of capitalist social relations (institutions) on a larger scale over time, i.e., the expansion of the size of the proletariat and of the wealth owned by the bourgeoisie. In the first volume of Das Kapital Marx had illustrated this idea with reference to Edward Gibbon Wakefield's theory of colonisation, and further refers to the "fetishism of capital" reaching its highest point with interest-bearing capital, because of how capital appeared to grow almost of its own accord.

The Marxist analysis of capital accumulation and the development of capitalism identifies systemic issues with the process that arise with expansion of the productive forces. A crisis of overaccumulation of capital occurs when the rate of profit is greater than the rate of new profitable investment outlets in the economy, arising from increasing productivity from a rising organic composition of capital (higher capital input to labor input ratio). This depresses the wage bill, leading to stagnant wages and high rates of unemployment for the working class while excess profits search for new profitable investment opportunities. Marx believed that this cyclical process would be the fundamental cause for the dissolution of capitalism and its replacement by socialism, which would operate according to a different economic dynamic. Anarchists hold that the state always maintains a form of capital accumulation to the elite, even in self proclaimed socialist states and that for true equality the state should be abolished.

Effects

The effects of wealth accumulation results in increased savings for the individual. If economic growth is shared unevenly between different groups of the population wealth inequality emerges. Extreme wealth inequality can result in oligarchy, in which super rich individuals hold most power and money in society.