Monetary expansion destroys capital
We often forget that capital wears out. It must be repaired, replenished. That takes real effort, real savings. Not paper. Not promises.
Written by: Econ Bro
We live in an age where printing money is seen as a solution. Politicians talk as if wealth can be conjured by decree, and central bankers flood economies with paper, pretending this paper is power. But those who understand capital – what it truly is and how it forms – know better. The Austrian economists, men like Mises, Rothbard, and Hoppe, understood that real wealth begins not with ink or digits but with saving, building, and producing.
Capital isn’t just money sitting in a bank account. It’s real stuff: machines, tools, raw materials, infrastructure, it’s things that make production possible, and none of it appears by magic. It must be earned.
To form capital, people must hold back on present consumption. They must save. They must invest their savings in productive activity. Without that, there can be no lasting progress.
Robinson Crusoe
To explain how capital is formed, I have employed the use of a popular thought experiment, known as “the Robinson Crusoe Economy”.
Picture Robinson Crusoe alone on his island. At first, he survives by catching fish with his hands. It’s inefficient and exhausting. He works all day for just enough to eat. But then he has an idea: if he builds a net, he can catch more fish with less effort. But building that net takes time. It means not fishing for a while most likely he may go hungry. He must make a sacrifice now for a benefit later. He defers consumption to build savings.
That’s saving. That’s investment. That’s capital formation.
Once he finishes the net, his productivity increases. He has surplus. He can eat more, rest more, build more tools. He’s now wealthier, not because he found more fish by luck, or because someone dropped more seashells (assuming he wasn’t the only one on the island, and they used seashells as a medium of exchange) into his lap, but because he made something. He saved. He built. He improved.
Now imagine the same Crusoe, but this time, someone comes along and doubles the number of seashells he uses as money. Does he suddenly become wealthier? No. The net doesn’t appear out of nowhere. The fish aren’t easier to catch. The extra shells just shift how he values things. If he believes he’s richer, he might consume more. But when he finds the goods haven't multiplied, he’s in trouble.
That’s inflation. That’s what central banks do when they flood economies with fiat currency. They don’t create capital. They just create confusion. The value of money drops. Prices rise. The savers – the ones who held back from consuming, who tried to build – watch their efforts eroded. And the new money? It goes first to governments, to banks, to the politically connected. The rest of us get what’s left, and by then, it buys less.
Rothbard called this what it is: theft. Inflation is a hidden tax. It transfers wealth from the prudent to the profligate. It punishes saving. And without savings, there can be no capital. Without capital, there’s no sustained production. Without production, there’s no real economy.
Even worse, easy money misleads entrepreneurs. When interest rates are artificially lowered, it sends the wrong signal. It says: “There are savings here, come and invest! Build!” But the savings aren’t there; it’s a lie. And so, resources are poured into projects that can’t be sustained. “Malinvestment”, the Austrians call it. Like Crusoe building a fishing factory with no one to run it and no fish to fill it. Eventually, the error is revealed. The boom crashes. The capital is gone.
Inflation doesn’t just misallocate, it erodes. When prices rise, maintenance becomes harder. That machine you planned to replace with your savings now costs 40% more. You delay. Productivity falls. Multiply that across an economy, and the decay spreads.
We often forget that capital wears out. It must be repaired, replenished. That takes real effort, real savings. Not paper. Not promises.
Say had it right. It’s production that creates demand. Real goods, not empty credit, make wealth. Money is just the middleman. Mistake it for the substance, and you poison the whole process.
So, here’s the truth, plain and simple: you cannot print your way to prosperity. You cannot consume what was never produced. You cannot inflate what has not been earned. Real capital – real wealth – comes from work, patience, and sacrifice. It comes from nets built in hunger and used in hope.
Everything else is illusion.
Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.