Capital-Consumption Theory

Capital-Consumption Theory (CCT) offers a macroeconomic framework for understanding how productivity growth interacts with income distribution and aggregate demand. The theory models the economy as two functional sectors: worker-consumers, whose wages generate demand, and capitalists, whose investment determines productive capacity. Output arises from a combination of labor and technological capital, which are partially substitutable factors of production.

The central feedback loop is simple but powerful: wages drive aggregate demand, and aggregate demand drives wages. When productivity growth increases efficiency but its gains accrue mainly to capital, wage income stagnates, aggregate demand weakens, and investment opportunities contract—a self-limiting equilibrium. When productivity growth is instead transmitted through wages or broad income mechanisms such as universal basic income or citizen dividends, demand begins to catch up with capacity, sustaining output, employment, and innovation in a self-reinforcing path.

Because technological capital can substitute for labor, productivity growth can paradoxically reduce labor demand for a given level of consumption. The result is a capital–consumption imbalance—excess productive capacity alongside insufficient purchasing power. CCT interprets historical expansions and stagnations as alternating phases of this imbalance. In the emerging era of artificial intelligence, the theory predicts that rapid productivity acceleration will amplify these tensions unless new income-distribution institutions evolve to reconnect capital and consumption, ensuring demand synchronization in an age of abundance.