Maintaining capital intact

Abstract

The purpose of economic activity is normally to produce a surplus which can be distributed (or appropriated) as income. But only that part of total output can be reckoned as surplus and distributed as income which is not needed to provide for the continuation of economic activity on the same level. Thus in an economy producing only corn (from abundant land and labour) an amount of total output equal to what was required to produce it has to be set aside as seed, and only the remainder can be distributed as income and is at the most available for consumption. If more is distributed, the economy cannot continue on the same level as before, that is, becomes less viable, and will ultimately become unviable so that economic activity comes to an end. To set aside as much output as is required to continue economic activity on the same level as before (or, to provide for simple reproduction) is thus a principle which may be violated in the short run, but which endangers the viability of economic activity if not adhered to in the long run. If economic activity involves stocks which are considered as ‘capital’, this principle requires that such capital be maintained intact. Capital is maintained intact if an amount of total output is set aside for its maintenance which ensures that the remaining output is on a level that can be kept up forever. The principle that the viability of economic activity be maintained which requires that capital be maintained intact, thus implies the Hicksian income concept (Hicks, 1939, ch. 14).