REFLECTIONS ON THE GROWTH OF CAPITAL AND INCOME

AuthorA. K. Cairncross
Date01 November 1960
Publication Date01 November 1960
DOIhttp://doi.org/10.1111/j.1467-9485.1960.tb00136.x
REFLECTIONS
ON
THE GROWTH
OF
CAPITAL
AND
INCOME
I
INVESTMENT
AND
GROWTH
IT
is an ancient heresy that you can buy anything for money. Nobody,
I
hope, believes it nowadays, but it seems to have popped up again
since the war in a more subtle form: money makes money.
If
only
you have capital, development is easy; the more capital you invest, the
faster
you
will develop. Conversely,
if
you are not developing very
fast, blame the rate of capital investment. Capital represents pur-
chasing power over all the other factors of production,
so
that there
can be no shortage of any of these factors that does not yield to an
adequate supply of capital.
There are a number of reasons why this convenient doctrine
is
so
widely accepted. First of all, there is the fact that capital is some-
thing that lends itself to government action.
If
you haven’t enough,
you can borrow; if investment is not taking the
right
direction,
you
can control it.
If
poor countries are a political danger and just have
to be developed
if
they are not to become a nuisance, they can be lent
or given the necessary capital.
If
the regional balance within a country
is unsatisfactory, measures to supplement investment in the laggard
areas will help them to catch
up
with the rest of the country.
Capital
is
equally ‘manageable’ from the point of view of the
theoretical economist
:
he can build it into satisfactory models and
watch how the growth of capital and income respond to one another,
without stopping to ask whether both may not respond to something
else, such as technical progress. For is it not self-evident that, without
investment, technical progress would be unavailing? And does it
really matter, therefore,
if
the word
investment
does double duty
for the two separate processes
of
capital accumulation and technical
advance?
Or,
if models of growth must be complicated by such in-
elegant variables, is it not at least legitimate to keep them well in the
background, like the electricity supply, with a definite potential and
frequency?
Then there are simple matters of fact.
If
the capital-output ratio
has been constant, as is alleged, over long periods
of
time, does this
not create
a
presumption that if only capital can be pushed up, out-
99
100
A.
K.
CAIRNCROSS
put will follow?
Is
it not obvious that the countries where investment
has been highest
in
recent years have
also
enjoyed the most rapid
advance in production and income?
How much
of
all this are
we
to accept?
In
a
matter of such enor-
mous importance, economists should not have to fall back on
(I
pn‘ori
assumptions, arguments by analogy, and fragmentary evidence, as
they
so
often do. There are some quite simple calculations that suggest
that, in a country like the United Kingdom, capital investment cannot
account by itself for more than
a
limited proportion of the growth in
productivity from year to year. The same line of argument suggests
that the acceleration to be expected as
a
result of additional invest-
ment, within reasonable limits, would also be relatively modest.’
Net investment in the United Kingdom has in recent years aver-
aged about
10
per cent. of national income while the increase in out-
put has averaged about
3
per cent. per annum.
If
the average social
return on the additional capital invested
was,
say,
10
per cent.-and
it is unlikely to have been much higher, for reasons given below-
the increase in output attributable to investment comes to
1
per cent., or
one-third of the total increase; and an increase in the rate of invest-
ment by one-half unaccompanied by other changes, would
at
must
bring about a change in the rate of growth of output from
3
to
33
per cent.
Calculations of this kind usually fail to impress economists who
are already believers in high investment. They take issue with the
suggestion that the average social return on capital is unlikely to be
higher than
10
per cent. (in real terms, of course) in an advanced in-
dustrial country like the United Kingdom; they point out that other
changes are bound to occur as investment rises; and they cite other
countries, particularly Germany, Russia and the United States, to show
that high investment pays handsomely.
The first of these points is difficult to submit to any conclusive
test.
If
one is thinking of manufacturing investment, one may postu-
late a financial return, after depreciation but gross
of
tax,
of
20
per
cent., or even more, as the average outcome of new investment; and
one may reasonably argue that the investment will be likely to have
some effect on the wages of those who use the capital, or the price
of
the final product.
so
that the financial return falls short
of
the social
return. There are difficulties
in
following this argument too far: the
financial return is, after all, uncertain, and
if
it is possible to
count
on
an average as high as
20
per cent., the capital market will haw
to
be
The same conclusion
is
reached
by
a different route in
0.
Aukrust,
‘In-
vestment
and
Economic
Growth,’
Productivity
Measurement Review,
Feb-
ruary
1959,
pp.
48-9.

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