The Cyclical Growth Pattern
of Capital Accumulation
Our economy grows because individual agents invest money in income-creating projects. Motivated by the desire for profit that accrues to investors whenever new income revenues exceed original cost outlays, these investments add value and expand production capacity. In this way money accumulates as capital. That process of capital accumulation, which the classical economists analyzed so beautifully as one of "self-expanding value," gives the capitalist system its powerful dynamism. Competition forces producers to invest constantly in the development of new products and better production technologies. Otherwise they run the risk of falling behind in the race for profits and market share. On the sidelines are all kinds of financial investors who want to capture a share of those profits and who in the process make bets on the relative strengths and weaknesses of producers. Their choices reinforce the perceived qualitative differences in competitiveness. Firms, and in today's globalized economy even entire nations, must therefore shape up or decline. That pressure is sweetened by the prospect of enjoying the fruits of their effort. Investment and reorganization may eventually pay off.
But investors, whether industrial producers or financial assetholders, face a particularly stringent monetary constraint. They must spend now in order to earn more later. And they need to have their spending activities and choices validated ex post by others before they can earn any income. Neither the extent nor the timing of those future inflows can be predicted accurately. In this climate of uncertainty, investment activity fluctuates a great deal in response to changes in earnings performance and expectations. When investors cut back, their spending reductions filter through the circular flow and thereby feed on themselves. Eventually this shrinkage process will have destroyed enough of the excess build-up on the supply side to have run its course.