Why Capital Accumulation is Key to Raising Wages

By Jacob C. Maichel

"There are no other means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population" -Ludwig von Mises

It is clear that arbitrary minimum wage laws are not only ineffective, but actually detrimental to real wage growth. So what type of action results in increasing wages in the United States, or any country for that matter? The only way to raise real wages is to increase the per head quota of capital invested by increasing capital accumulation. To accomplish this it is first important to understand what is meant by capital accumulation.

Capital accumulation, as explained by Austrian Economist Ludwig von Mises, is wealth that is created and owned by businesses and individuals. This wealth is both saved and reinvested to create further profit. The capital which is accumulated is encompassed in everything that businesses utilize from tools to finished goods, and everything in between. Both individuals and businesses create further profit by loaning out excess wealth (either through direct investment or holding money in traditional savings accounts). It is important to note this accumulation can only occur when more wealth is created and saved than that which is consumed.

With the understanding of how capital accumulation works we can now examine how it will increase real wages. It is critical in this discussion to break down the commonly held belief that wealth and the creation of wealth is zero-sum. It is fallacious to assume the wealthy getting richer makes the poor worse off. Instead this wealth creation makes everybody better off! The standard of living in the United Sates is higher than anywhere else in the world not because our politicians are superior to their foreign counterparts, but instead because of the high per head quota of capital that is invested. This high level of investment has allowed businesses to use the most efficient tools available through capital investments, and this is why United States workers are so productive. Other countries do not lack the intelligence to grow but suffer from inadequate capital needed to drive higher efficiencies which lead to increasing production yields. As the accumulation of capital becomes larger wages will raise as businesses compete for the most skilled workers. Only through the free market can wages increase for everyone, rather than the lucky few who benefit from minimum wage laws. 

The best way for government to encourage capital accumulation is to leave the market alone. Manipulating interest rates and the money supply through the federal funds rate or monetary policy sends the wrong signals to businesses. As the interest rate artificially drops and encourages borrowing individuals will save less and business will take on projects they would have not pursued otherwise. These malinvestments, as Mises calls them, are the direct cause of government intervention and detrimental to the accumulation of capital. Examples of malinvestment are present all over the world, from the United States housing bubble to unfinished sky scrapers such as the Nakheel Tower in Dubai. 

Another strong way to encourage capital accumulation is through lowering tax rates, particularly for corporations and wealthy individuals. Although this may be counter-intuitive for some who think that it is the governments role to redistribute excess wealth to help the common man, this is not the case. In Planning for Freedom: Let the Market System Work Mises states the following:

"United States were in the last decades directed toward confiscating ever-increasing portions of the wealth and income of the higher brackets. The greater part of the funds thus collected would have been employed by the tax-payers for saving and additional capital accumulation. Their investment would have increased productivity per man-hour and would in this way have provided more goods for consumption. It would have raised the average standard of living of common man. If the government spends them for current expenditure, they are dissipated and capital accumulation is concomitantly slowed down."  

The tax payers or businesses are able to save and invest more if they are taxed less, or not at all. Although this does make them more wealthy, it does not make the common man more poor. Instead from a material perspective everybody prospers. By allowing wealth accumulation resources are enabled to flow into their most efficient use, dictated by consumer demand, instead of bureaucrats deciding how money is transferred. The following graphic from Tax Foundation is a perfect illustration of Mises' argument, lower taxes results in increased production and wages.

 Anti-growth policy and propaganda has been incredibly strong in attempting to destroy Austrian Economic ideals, particularly in the recent years. We are continually told that wealth is a bad thing when clearly that is not the case. The most effective way to increase production and the standard of living to promote wealth creation and saving by leaving the free market to it's own devices, unfettered by interventionist policy. A laissez-faire approach does not strictly favor the wealthy capitalist, but rather the interests of the common man.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University