CAPITAL GOODS AND BUSINESS SAVING
In 16C, the residents of Nolandia discovered that it was possible to increase the output of brothausen per man-hour through a device known as an augmentator. An augmentator is a machine with a useful life of several years, made of wood (a product that had hitherto been a useless growth on the face of Nolandia). The Nolandians established a new company, known as the Augmentator Corporation, which would hire labor to cut down trees and manufacture augmentators. This work was begun on January 1, 16C, but the first augmentator could not be ready until December 31, 16C.
Unfortunately, the only laborers available to the Augmentator Corporation were those already employed by the Brot, Hausen, and Distributing Corporations, which were remerged into the Brothausen Corporation in order to simplify the current discussion. The economy of Nolandia was "fully employed"; there was no one without a job. Diversion of labor to the Augmentator Corporation meant that the Brothausen Corporation would produce less consumer goods during 16C. There would be a lean year for households, but the Nolandians were eagerly looking forward to 16D, when the first augmentator would be ready and the output of brothausen would be greatly increased.
The engineers, who were called in to assess the situation, noted that in order to produce a single augmentator, it would be necessary to employ 30% of the factors of production, and only the remaining 70% would be left to produce brothausen. Hence, the output of brothausen would be reduced from $800 in 16B to $560 in 16C.* The scholars were greatly perturbed by this prospect, pointing out that income would be paid to all factors of production, whether they produced augmentators or brothausen. Hence households would receive $800, the same as before. What would happen when they had $800 of income but could buy only $560 worth of brothausen?____________________