3.2.8 Investment in Infrastructure and Business Growth
The activity of wealth creation typically requires capital investment, which comprises expenditure on items that enable a business to operate and grow but which are not consumed in the products and services that it delivers:
- Most companies need land, buildings, tools, machines and office equipment – though some of these may be rented from other companies which had previously invested.
- Increases in capacity require further investment.
- Companies also need connections to suppliers and customers with some form of infrastructure: transportation, communications etc.
- A company might invest in research and development, to develop new products and business opportunities.
- It might invest in new technologies, such as computers and robots, to automate some jobs and improve productivity.
These investments all affect a company’s competitiveness, so they have to be maintained and updated. The supply, rental and maintenance of them are further wealth creation opportunities.
Private investors provide most of the finance to establish wealth-creation activities in a capitalist economy – but there is also a role for government, as acknowledged by Adam Smith in his book An Inquiry into the Nature and Causes of the Wealth of Nations:
“According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: [the first two were defence and law and order]… thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence[sic] to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.” (Book IV, chap. 9, para. 51)
A government can help in various ways:
- It can build infrastructure, making compulsory purchases of land where necessary.
- It can directly fund research to help the economy to develop – as described in an article by Robert Skidelsky for example: Now austerity is over, let’s commit to investment—and build a national bank to do it. Government research programmes have helped to set the direction of the economy in several countries, including America with its funded research in advanced technologies for its military and space exploration – which had later spin-off benefits that were the foundation for its dominance in computing.
- It can time its investments to counteract some of the effects of a recession, as a macroeconomic policy decision, as described later (220.127.116.11).
- It might want to assist less developed areas of a country – which is the purpose of the European Regional Development Fund (ERDF), for example.