CAPITAL GOODS
AND CAPITAL ACCUMULATION

History suggests that the long-term economic growth rates of the major countries correspond roughly to the proportion of their total outputs they save and invest. When we recognize that most technical advance also requires investment (in research and development, in human beings, and as a vehicle for introducing technical changes), the need to save and invest for economic growth becomes doubly obvious.

Throughout the nineteenth century, the United States was a high-saving and high-investment economy. It paced the world in economic growth. During the present century, though we have become ever richer, the proportion of our national product devoted to investment has dropped substantially—especially during the Great Depression of the 1930’s and again after the. Korean War.

FIG. 16-4 Gross capital formation has risen ten-fold over the past century, but recently both gross and net capital formation hove been much smaller percentages of g.n.p. than in earlier decodes. (Sources: S. Kuznets, Capitol in the AmericanEconomy, Princeton Univ. Press,1961; and Council of Economic Adrisers.)

Figure 16-4 tells the story. Gross and net capital formation were high percentages of g.n.p. during the last century, but both have clearly trended downward during the last half century, though with an upward surge again in recent years .

Despite this downward trend, year after year American businesses have invested huge sums. Private homes and apartment houses have been built on an unprecedented scale. U.S. private investment in capital goods and housing (excluding investment in consumers’ durables like automobiles) reached the staggering total of $125 billion in 1967. Government investment in highways, public buildings, and other civilian-type goods accounted for perhaps $1 5—$25 billion more. This huge total was more than the entire g.n.p. of any other country in the world, except the U.S.S.R.

The result of this saving-investment process over the centuries is that America has an enormous stock of capital. Our capital goods are estimated at over $1.7 trillion (excluding stocks of goods held by consumers, such as furniture and clothing); this amounts to around $30,000 per family. Consumer durables raise the total to over $2 trillion. A century ago, the figure was only $7 billion. If we look at manufacturing plant and equipment alone, the type of capital goods that comes most readily to mind, capital per wage earner in manufacturing averaged over $22,000 in 1966, far above the figure for any other nation; and it exceeded $100,000 per worker in petroleum. Capital has deepened steadily, except in the great depression of the 1930’s. Remember that our capital stock has grown sixfold since 1900, while population has only tripled.

One more word on the process of saving and capital investment in the American economy. Private saving and investment decisions have produced most of this growth. But governments and the political process have played a big role too. When we levy taxes on ourselves and use the funds to build public capital goods like highways, we accumulate capital through diverting current output from use in current consumption, much as with private saving and investment.

TECHNICAL CHANGE

Since 1900, national output has risen twice as fast as the input of labor and capital combined. Technical advance must account for a good share of the difference. Table 16-2 breaks down technical advance between improvement in the quality of capital and the quality of labor. Unfortunately, we have little direct quantitative information on technological advance, Indeed, just how to measure such advance quantitatively is a very difficult question. But whatever the precise figures, American technology over the past century speaks for itself. Look at a modern oil refinery. Or walk through an automobile assembly plant. Visit a midwestern farm, complete with automatic farm machinery and fertilizers. This is modern technology, the trademark of America, and a source of never-ending amazement to visitors from abroad.

FIG. 16-5 Research is the newest major industry in the
United States. It has developed largely since World War
II, and is about two-thirds government financed. Mast is
applied and developmental, only a little basic, research.
(Source: National Science Foundation.)

Increased investment in research and development is one major explanation for the rate of technological advance. Figure 16-5 shows the spectacular growth of spending on research and development in the United States since World War II. R and D spending by the government and private industry has grown by more than 10 per cent annually. Since 1960, we have spent two-thirds as much on research and development as on total investment in fixed plant—perhaps a harbinger of a speeded growth rate in the future.

Certainly, U.S. growth has been substantially faster since World War II than over the preceding century.

The National Science Foundation suggests that research has a lagged effect on real output. Some observers argue that we are now seeing its accelerated impact, in computers and electronic devices, atomic and solar energy, satellites circling the earth, and modern chemistry and machinery on the farm where productivity has increased even faster than in industry.

Interestingly, most of the basic research in America has been financed by government, often through military funds. The most spectacular growth in output per man-hour—in agriculture— has come about through research financed almost entirely by the government, through universities and agricultural experiment stations which have taken the new knowledge to the farmers. Private industry has concentrated largely on developing the basic research of others into commercially profitable applications. Large digital computers, many drugs, atomic energy, missiles, and modern aircraft are notable examples of major innovations originally stimulated and financed by government research funds.

Perhaps Denison is wrong in giving so much credit to technological advance (20 per cent of our total growth since 1929), more than to capital accumulation itself. Or perhaps he has given 214 technical advance too little credit. But as best we can tell, technological advance appears to have been roughly as important as capital accumulation, and to have become increasingly important in recent decades.