Capital Investment. The two words that should be on the lips of all leaders of countries at the moment, so why arenât they? http://morganisteconomics.blogspot.com/2011/02/capital-investment-two-words-that.html Capital investment is the investment in goods and machinery used to produce other goods and services. For example factories, diggers, tractors, hand tools and even stationary (in an office environment) enable workers to create output. Without investment in these goods it is impossible for the economy to grow in any way that can be considered progressive and long term. Infrastructure improvements and new technological innovations are the most common forms of capital investment that are initiated to restart growth during downturn periods. It is a way of increasing aggregate demand which is not dependent on consumer spending habits or meeting individual peoplesâ wants. At least in the initial stages as most of the big efforts to increase capital investment improve national infrastructure or services, which in themselves enable greater prosperity through the efficiencies they create. It is important to point out to economists and governments in particular that capital investment is a crucial and in fact the most important component of aggregate demand during a recession. Remember aggregate demand is made up of C + I + G + E (consumer consumption, investment, government expenditure and exports). Consumer consumption and exports seem to be receiving all of the attention from western governments at the moment. This is indicated by the competitive price war for consumer goods that has been emerging over the last eighteen months, which is likely to accelerate over the next couple of years. In the countries that have expanded government expenditure, such as America, there have been efforts to increase capital investment but only in the public sector through centrally funded projects in the form of infrastructure improvements and innovations in environmentally friendly sciences. These efforts have only been mildly successful so far (although it is early days). The aspect of aggregate demand which I believe has been neglected is investment in the private sector. This is the form of investment that is required to get the free market functioning again to increase output and employment. This has partly been down to the limitations in the banking system due to the constraints on lending required by the higher reserves demanded on banks. It has also been created through fears in the future of the economy and risk of losing investments. However there are other ways to increase investment in the private sector. Canada, China, India, Brazil and Russia among other countries are all increasing their investment in other countries, which could be used increase demand. Currently foreign demand creation all ready exists in the form of lending to consumers to purchase foreign goods. However the borrowed money would be better invested in private sector funded infrastructure or capital goods. For example funds could be started to build new bridges which would then generate a profit when people pay to use them, like turnpike trusts. This is just one example of many methods of increasing capital investment in the private sector. The problem is that western governmentsâ are not taking any actions to make this investment possible due to the high cost of employment and high levels of taxation in their domestic economies. Unfortunately it is very hard if possible at all to grow if the means of production are not available to enable the creation of output. The question is why are western governments so slow to acknowledge this is where action needs to be taken and more importantly why have they made such poor attempts at relieving constraints on growth?