The golden rule of capital is the notion that there exists a certain level of steady-state capital
that maximises steady-state consumption in society. Although economic growth can be (for
example) measured through increased output in general, increased output does not benefit
the public if this doesn’t result in increased consumption at some point. One goal of
increased output and capital stock is that at some point our consumption can be raised as
well. Consumption level is the difference between the level of output and our level of
investment. Therefore, when we are looking for the golden rule level of capital (to maximise
consumption), we are looking for the level of capital that will result in the biggest difference
between our output and our investment or depreciation. For this, we have to choose the
optimal savings rate that will result in this maximised steady-state consumption. According to
the Solow model, a high savings rate will result in a large capital stock and a high level of
output in the steady-state, and if the savings rate is low, the economy will have a small
capital stock and a low level of output in the steady state instead. However, does this mean
that the higher the savings rate, around 100 percent, is more optimal for the economy? The
answer is no. Why is this? Because if the savings rate is 100 percent it means that all of our
income goes to investments which means that we are not consuming anything. And the
opposite, if the savings rate is extremely low, we are not creating new investments so the
current capital stock is then depreciated without replacement. Then the steady-state of
output will be lowered according to the Solow model, and this will again result in little
consumption. This implies that a savings rate should be somewhere in the middle between 0
and 100 percent, and this sgold rate depends and the economy will not automatically find the
sgold, but it has to be decided.