The process of capital formation and its relation to inequality

A critique of Harold G. Moulton's The Formation of Capital. If Moulton's theories are correct, the price system is lacking in inner consistency; but there are errors in his analysis. His argument for the alleged dilemma of saving ignores current theories as to the function of interest in balancing the demand and supply of capital. In holding that increase of capital must be accompanied by increased expenditure for consumption, he confuses absolute with relative savings and consumption, and he overlooks the lowering of costs made possible by more capitalistic methods and by technological progress. The supposed escape afforded by bank credit expnsion is illusory. In asserting that inequality causes excess saving simultaneously with deficient consumption he overlooks the vast possibilities of extravagant consumption. It is more likely that the rich save for expected earnings than by necessity or habit. The theory that the stock market dissipates savings for which there is no profitable use involves the dubious assumption that people will bid up stock prices when expecting a decline in earnings.