Capital Formation is Needed for Economic Growth

What is capital formation?  Why is it needed to achieve economic growth?  Capital formation is the process of bringing together capital (money) from savers and investors for the purpose of investing in new businesses, products and services, in order to meet the needs of other businesses or individuals.

For example, if a couple wants to start a new restaurant, they might save up for years and add that money to the proceeds of a bank loan to have enough cash to rent a building, buy equipment, and pay for all the other things necessary for creating a new restaurant.  Without their savings and the savings and investments from others (obtained in this case through a bank loan), the restaurant might never come into existence.  Once open, assuming the couple has done their homework, a new profitable business will be established, creating new jobs and new tax receipts for the government.  With a good idea, hard work, and capital formation, this restaurant results in new economic growth for their town or city, for their state, and for America.

American Capitalism is an economic system based on faith, freedom and free markets.  These in turn lead to morality and economic freedom, both so vital to capital formation.  You can read more about economic freedom, capital formation and economic growth in my new book: “America’s Economic War”.  It’s important to realize that American Capitalism encourages new capital formation and leads to robust economic growth.

In stark contrast, socialism and socialist policies (including progressive socialist and welfare state socialist policies) usually inhibit and impede capital formation and thus, inhibit, limit, or even virtually eliminate economic growth altogether.  That’s one reason it’s true that “socialism always leads to moral and economic bankruptcy.”