His ignorance of the the nature of capital gains and savings was forcefully brought home to me in September 1990 when, writing in the Australian Financial Review, he attacked the Liberal Party by claiming that the abolition of the capital gains tax could significantly reduce national savings. This statement revealed a stunning degree of economic ignorance. Let us first begin with the nature of savings. Saving is a process by which we transform present goods into future goods. Now I realise that this will probably strike most people as strange, but it really is very simple.
Future goods are capital goods, eg., machinery.
Hence, by consuming less today we can consume more tomorrow because our savings are invested in the means to produce more goods and services than we presently consume. We call capital goods future goods because they are gradually used up in the production of future consumer goods. Therefore, in order to get more future goods we have to divert resources from present consumption to the production of capital goods. This is what makes savings a fructifying agent. It therefore follows that if we want a healthier and more prosperous future we must significantly increase our volume of savings.