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Capital Expansion, Rate of Growth, and Employment Author(s): Evsey D. Domar Source: Econometrica , Vol.

Capital Expansion, Rate of Growth, and Employment Author(s): Evsey D. Domar Source: Econometrica, Vol. 14, No. 2 (Apr., 1946), pp. 137-147 Published by: The Econometric Society

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CAPITAL EXPANSION,

RATE OF GROWTH,

AND EMPLOYMENT'

By EVSEY D. DOMAR

I. INTRODUCTION

Thispaperdealswitha problemthatis botholdandnew-the rela- tionbetweencapitalaccumulationandemployment.In economiclitera- tureithasbeendiscusseda numberoftimes,themostnotablecontribu- tionbelongingto Marx.Morerecently,itwasbroughtforthbyKeynes and hisfollowers. A thoroughanalysisofeconomicaspectsofcapitalaccumulationis

a tremendousjob. Theonlywayinwhichtheproblemcanbe examined

at all in a shortpaperlikethisis byisolatingit fromthegeneraleco- nomicstructureandintroducinga numberofsimplifyingassumptions. Some ofthemare not entirelynecessaryand, as theargumentpro- gresses,thereaderwillseehowtheycanbe modifiedorremoved. The followingassumptionsand definitionsshouldbe notedat the

outset:(a) thereis a constantgeneralpricelevel;(b) no lagsarepres- ent;(c) savingsandinvestmentrefertotheincomeofthesameperiod;

(d) botharenet,i.e.,overand abovedepreciation;(e) depreciationis

measurednotin respectto historicalcosts,butto thecostofreplace-

mentofthe depreciatedassetby anotherone ofthesameproductive

capacity;2(f) productivecapacityofan assetorofthewholeeconomy

is a measurableconcept.

Thelastassumption,onwhich(e) alsodepends,is notentirelysafe. Whethera certainpieceofcapitalequipmentorthewholeeconomyis considered,theirproductivecapacitiesdependnotonlyonphysicaland technicalfactors,buton thewholeinterplayofeconomicandinstitu- tionalforces,suchas distributionofincome,consumers'preferences,

1 This is a summaryofa paper presentedbeforea jointsessionofthe Econo- metricSocietyand theAmericanStatisticalAssociationin Clevelandon January 24, 1946. It containsthe logical essenceof the argumentwithrelativelylittle economicdetail.I hopeto developthelatterin a separatepaperto be published in one ofthe othereconomicjournals. Many thanksforhelp and criticismgo to my fellowmembersof the "Little Seminar":Paul Baran, SvendLaursen,Lloyd A. Metzler,RichardA. Musgrave, Mary S. Painter,MelvinW. Reder,Tiborde Scitovszky,AlfredSherrard,Mary WiseSmelker,MerlinSmelker,and mostofall to JamesS. Duesenberry.

2 If the originalmachineworth$1,000and producing100 unitsis replacedby anotherone worthalso $1,000, but producing120 units,only $833.33 will be regardedas replacement,and the remaining$166.67 as newinvestment.A simi- lar correctionis made whenthenewmachinecostsmoreorless thantheoriginal one. The treatmentof depreciation,particularlywhen accompaniedby sharp technologicaland price changes,presentsan extremelydifficultproblem.It is quite possiblethat our approach,whileconvenientforpresentpurposes,may giveriseto seriousdifficultiesin thefuture.

137

138

EVSEY D. DOMAR

wagerates,relativeprices,structureofindustry,and so on,manyof whichare in turnaffectedby thebehaviorofthevariablesanalyzed here.We shallneverthelessassumeall theseconditionsas givenand shallmeanbytheproductivecapacityofan economy(oran asset)its totaloutputwhenallproductivefactorsarefullyemployedunderthese

conditions.3

The economywillbe said to be in equilibriumwhenitsproductive capacityP equalsitsnationalincomeY. Ourfirsttaskis to discover theconditionsunderwhichthisequilibriumcanbemaintained,ormore precisely,therateofgrowthatwhichtheeconomymustexpandinorder to remainina continuousstateoffullemployment.

II. THE PROBLEM OF GROWTH

The idea thatthepreservationoffullemploymentin a capitalist economyrequiresa growingincomegoesback(inoneformoranother) at least to Marx. It has beenfullyrecognizedin numerousstudies (recentlymade in Washingtonand elsewhere)of the magnitudeof grossnationalproductneeded to maintainfull employment.But thoughthevariousauthorscometo differentnumericalresults,they all approachtheirproblemfromthepointofviewofthesize ofthe laborforce.The laborforce(man-hoursworked)and itsproductivity are supposedto increaseaccordingto oneformulaor another,and if fullemploymentis to be maintained,nationalincomemustgrowat thecombinedrate.Forpracticalrelativelyshort-runpurposesthisis a goodmethod,butitsanalyticalmeritsarenothigh,becauseitpresents

a theoreticallyincompletesystem:sincean increasein laborforceor in its productivityonlyraisesproductivecapacityand does not by itselfgenerateincome(similarto thatproducedby investment),the demandsideoftheequationis missing.Noris thedifficultydisposed ofbyMr.Kalecki'smethodaccordingtowhichcapitalshouldincrease proportionallyto theincreasein laborforceand itsproductivity.4As Mrs.Robinsonwellremarked,"The rateofincreaseinproductivityof laboris notsomethinggivenbyNature."6Laborproductivityis nota functionoftechnologicalprogressin the abstract,but technological progressembodiedincapitalgoods,andtheamountofcapitalgoodsin

3 It shouldundoubtedlybe possibleto workout a moreprecisedefinitionof productivecapacity,but I preferto leave the matteropen,because a morepre- cise definitionis not entirelynecessaryin thispaper and can be workedout as and whenneeded. 4 See his essay,"Three Ways to Full Employment"in The EconomicsofFull Employment,Oxford,1944,p. 47, and also his"Full Employmentby Stimulating Private Investment?"in OxfordEconomicPapers, March,1945,pp. 83-92. 5 See herreviewof TheEconomicsofFull Employment,EconomicJournal,Vol. 55, April,1945,p. 79.

CAPITAL

EXPANSION,

RATE OF GROWTH,

AND EMPLOYMENT

139

general.Evenwithouttechnologicalprogress,capitalaccumulationin-

creaseslaborproductivity,at least to a certainpoint,bothbecause morecapitalis usedperworkmanin eachindustryand becausethere is a shiftoflaborto industriesthatusemorecapitaland canaffordto paya higherwage.So iflaborproductivityisaffectedbycapitalaccum-

ulation,theformulathatthelattershouldproceedat thesamerateas theformer(andas theincreaseinlaborforce)isnotas helpfulas itap- pears. The standardKeynesiansystemdoesnotprovideus withanytools forderivingtheequilibriumrateofgrowth.The problemofgrowthis

entirelyabsentfromitbecauseoftheexplicitassumptionthatemploy-

mentis a functionofnationalincome.Thisassumptioncanbejustified onlyovershortperiodsoftime;it willresultin seriouserrorsovera periodofa fewyears.Clearly,a full-employmentlevelofincomeof fiveyearsagowouldcreateconsiderableunemploymenttoday.Weshall assumeinsteadthatemploymentis a functionoftheratioofnationalin- cometo productivecapacity.Whilethisapproachseemsto me to be superiorto thatofKeynes,it shouldbe lookeduponas a secondap- proximationratherthana finalsolution:itdoesnotallowustoseparate

unusedcapacityintoidle machinesand idle men; dependingupon variouscircumstances,thesameratioofincometo capacitymayyield differentfractionsoflaborforceemployed. Becauseinvestmentin the Keynesiansystemis merelyan instru- mentforgeneratingincome,the systemdoes not takeintoaccount theextremelyessential,elementary,and well-knownfactthatinvest- mentalso increasesproductivecapacity.6This dual characterofthe investmentprocessmakesthe approachto the equilibriumrate of growthfromtheinvestment(capital)pointofviewmorepromising:if investmentbothincreasesproductivecapacityand generatesincome, itprovidesuswithbothsidesoftheequationthesolutionofwhichmay yieldtherequiredrateofgrowth. Let investmentproceedat therateI peryear,and lettheratioof

thepotentialnetvalueadded(afterdepreciation),i.e.,oftheproduc-

tivecapacityofthenewprojectsto capitalinvestedin them,i.e.,to I, be indicatedbys.? Thenetannualpotentialoutputoftheseprojects willthenbeequaltoIs. Buttheproductivecapacityofthewholeecon-

6 Whethereverydollarinvestedincreasesproductivecapaoityis essentiallya matterofdefinition.It can safelybe said thatinvestmenttakenas a wholecer- tainlydoes. To make thisstatementhold in regardto residentialhousing,im- putedrentshouldbe includedin thenationalincome.See also note 19. 7 The use oftheword"project"does notimplythatinvestmentis donebythe government,orthatit is alwaysmadein newundertakings.I am using"project" (in the absenceofa betterterm)becauseinvestmentcan meantheact ofinvest- ing and the resultofthe act.

140

EVSEY D. DOMAR

omymayincreasebya smalleramount,becausetheoperationofthese newprojectsmayinvolvea transferoflabor(and otherfactors)from

otherplants,whoseproductivecapacityisthereforereduced.8Weshall

definea-,the potentialsocial averageinvestmentproductivityas dP

(1)

dt

The followingcharacteristicsofo-shouldbe noted:

1. Its use doesnotimplythatotherfactorsofproductionandtech-

nologyremainconstant.On thecontrary,itsmagnitudedependsto a

verygreatextenton technologicalprogress.It wouldbe morecorrect tosaythato-referstoanincreaseincapacitywhichaccompaniesrather thanonewhichis causedbyinvestment.

2. o-refersto theincreaseinpotentialcapacity.Whetherornotthis

potentialincreaseresultsin a largerincomedependson thebehavior ofmoneyexpenditures.

3. o-is concernedwiththeincreasein productivecapacityof the

wholesociety,andnotwiththerateofreturnderivedorexpectedfrom investment.Thereforeo-is notaffecteddirectlybychangesin distribu- tionofincome.

4. s is themaximumthata-canattain.Thedifferencebetweenthem

willdependon themagnitudeoftherateofinvestmenton theone hand,andthegrowthofotherfactors,suchas labor,naturalresources, andtechnologicalprogresson theother.A misdirectionofinvestment

willalsoproducea differencebetweens and o-. Weshallmaketheheroicassumptionthats and a areconstant. From(1) itfollowsthat

(2)

dP

I.

dt - It is importantto notethat,witha giveno-,dP/dtis a functionof I, and not ofdI/dt.WhetherdI/dtis positiveor negative,dP/dtis alwayspositiveso longas a andI arepositive. Expression(2) showingtheincreaseinproductivecapacityis essen- tiallythesupplysideofoursystem.On thedemandsidewehavethe multipliertheory,too familiarto needany comment,exceptforan emphasison theobviousbutoftenforgottenfactthatwithanygiven

marginalpropensityto save, dY/dtis a functionnotofI, butofdI/dt.

Indicatingthemarginalpropensitytosavebya, andassumingitto be

constant,9wehavethesimplerelationshipthat

8 I am disregardingthe externaleconomiesand diseconomiesof the older plantsdue to the operationofthe newprojects.
'

Overtheperiod1879-1941theaveragepropensityto save (ratioofnetcapital

(3)=

CAPITAL

EXPANSION,

RATE OF GROWTH,

dY

dI

1

dt

dt a

AND EMPLOYMENT

141

Let theeconomybe inan equilibriumpositionso that10

(4)

Po =

Yo.

To retaintheequilibriumposition,we musthave

dP

dt

dY

dt

Substituting(2) and (3) into(5) we obtainourfundamentalequation

(X6)

thesolutionofwhichgives

(7)

I

I

=

dl 1

-

-,

dt a

Ioeaat.

ao-is theequilibriumrateofgrowth.So longas it remainsconstant,

themaintenanceoffull employmentrequiresinvestmenttogrowat a con- stantcompound-interestrate.

If,as a crudeestimate,a is takenat 12 percentand a-at some30 percent,theequilibriumrateofgrowthwillbe some3.6 percentper year.lOa The readerwillnowseethattheassumptionofconstanta and afis notentirelynecessary,andthatthewholeproblemcanbe workedout withvariablea and a.

formationto nationalincome) was fairlyconstantand approximatelyequal to some 12 per cent. See Simon Kuznets, National ProductSince 1869, National Bureau ofEconomicResearch(mimeographed,1945) p. II-89 and the Survey of CurrentBusiness,Vol. 22, May, 1942,and Vol. 24, April,1944. In a problemof cyclicalcharacter,an assumptionofa constantpropensityto save wouldbe very

bad. Sincewe are interestedherein a secularproblemofcontinuousfull employ- ment,thisassumptionis nottoo dangerous. 10 The problemcan be also workedout forthe case whenPO> YO. lOa Afterthispaper was sentto the printer,I founda veryinterestingarticle by E. H. Stern,"Capital Requirementsin ProgressiveEconomies,"Economica,

Vol. 12, August,1945,pp. 163-171,in whichthe relationbetweencapital and outputintheU. S. during1879-1929is expressed(inbillionsofdollars)as capital =3.274 income-3.55. My estimatesgave roughlysimilarresults.This would place s around30 percent,thoughthisfigureshouldbe raisedto accountforthe underutilizationof capital duringa partofthat period.It is also not clearhow thejunkingprocess(see p. 144) was reflectedin thesefigures. The averagerateofgrowthofreal nationalincomeovertheperiod1879-1941

was some3.3 percent.See Table V, p. 818,and AppendixB, pp. 826-827,in

paper,"The 'Burden'oftheDebt andtheNationalIncome,"AmericanEconomic

Review,Vol. 34, December,1944.

my

142

III.

EVSEY

D. DOMAR

THE EFFECTS

OF GROWTH

Ournextproblemis toexplorewhathappenswheninvestmentdoes growat someconstantpercentagerater,which,however,is notneces- sarilyequaltotheequilibriumrateac-. It willbenecessarytointroduce two additionalconcepts:averagepropensityto save IIY and the averageratioofproductivecapacityto capitalP/K. To simplifythe problem,weshallassumethat

1. IIY= a, so thataveragepropensityto saveis equal to

marginal.

2. P/K=s, i.e., theratioofproductivecapacityto capitalforthe

wholeeconomyis equal to thatofthenewinvestmentprojects.

We shall considerfirstthe special simple case a- = s, moregeneralcase when - <8s.11

Case 1: a-=s. SinceI = oert,capital,beingthesumofall netinvest- ments,equals

and then the

(8)

K =Ko +

IoJ

rt

ertdt= Ko +-

O

10

(ert-1).

~~~~r

As tbecomeslarge,K willapproachtheexpression

(9)

-

ert,

 

r

so thatcapitalwillalso growat a rateapproachingr. As Y= (l/a)Ioert,theratioofincometo capitalis

(10)

 

1

Y

-

a

Ioert

.

Ko +-(ert-1)

 

r

and

 

y

r

C

 

lim-

=

-

t(11

goo

K

a

Thus so longas r and a remainconstant(or changein thesame proportion)no "deepening"of capital takes place. This, roughly speaking,wasthesituationin theUnitedStatesoverthelastseventy yearsorso priorto thiswar.

11 It is also possiblethat,owingto capital-savinginventionsin existing plants, a>s. Formallythis case can be excludedby fallingback on the definitionof depreciationgivenin note 2. This, however,is not a veryhappysolution,but the approachused in thispaperwillhardlyoffera betterone. I think,however, thata in oursocietyis sufficientlyhighto makeof>s in a continuousstateoffull employmentmorean exceptionthana rule.

CAPITAL EXPANSION, RATE OF GROWTH, AND EMPLOYMENT

143

SubstitutingK = P/s into(11) we obtain

 

Y

r

(12)

lim-=

t-*O

P

aS

Sincein thepresentcase o=s,

 

Y

r

(13)

lim-=-*

t- o

P

ao

The expression

(14)

r

0 =-

maybe calledthecoefficientofutilization.Whentheeconomygrows at theequilibriumrate,so thatr= ao-, 0= 100percentandproductive capacityis fullyutilized.But as rfallsbelowao-,a fractionofcapacity (1-0) is graduallyleftunused.12Thusthefailureoftheeconomytogrow at therequiredratecreatesunusedcapacityandunemployment. Case 2: o-<s. As investmentproceedsat therateI, newprojects witha productivecapacityofIs arebuilt.Sincetheproductivecapac- ityofthewholeeconomyincreasesonlyby Io, it followsthatsome- wherein the economy(not excludingthe new projects)productive capacityis reducedby I(s - o). Thereforeeveryyearan amountof capitalequal to I(s - o-)/sbecomesuseless. The problemcan nowbe approachedfromtwopointsofview.The

amountsI(s-o)/s,

can be lookedupon as capitallosses,whichare

nottakenintoaccountin calculatingincomeandinvestment.13In this case,I stillindicatestherateofnetinvestment,andall othersymbols

retaintheiroldmeaning,exceptthatcapitalhas tobe redefinedas the integralof investmentminuscapitallosses: everyyear chunksof capital(overandabovedepreciation)arewrittenoffandjunked.The annualadditionto capitalwillthenbe

(15)

~

~

and

dK

I-

dt

=

(16)

K = Ko + Io-f s

-

I(s-)

s

= I-,

Of

s

ertdt = Ko + Io -(e't

sr

-

1).

144

EVSEY

D. DOMAR

Also,

(17)

 

Y

r

s

lim-

=

-.-,

)K

a

a

and

 

Y

r

(18)

lim-=-,

t

c

P

ao

whichis exactlythesameresultwehad in (13). The secondapproachconsistsintreatingtheamountsI(s - o)/s not as capitallossesbutas a specialallowanceforobsolescence.Netinvest- mentwouldthenhaveto be definednotas I, butas IoIs. Othersym- bolswouldhave to be redefinedaccordingly,and thewholeproblem couldthenbe reworkedoutinthesamewayas onpp. 142-143. In a sensethe choicebetweenthesetwo methodsis a matterof bookkeeping;dependinguponthecharacteroftheproblemin hand, oneortheothercanbe used,thoughI suspectthatthesecondmethod can easilybecomemisleading.The natureoftheprocesswillbe the samewhichevermethodis used.Thefactis that,owingto a difference betweens and o-,theconstructionofnewinvestmentprojectsmakes

certainassets(notexcludingthenewprojectsthemselves)useless,be-

causeunderthenewconditionsbroughtaboutbychangesin demand, ora riseinthewagerates,orboth,theproductsoftheseassetscannot be sold.'4Asstatedonp. 140thedifferencebetweens and o-is created eitherbymisdirectionof investmentorbythelackofbalancebetween

thepropensityto save on theonehand,and thegrowthoflabor,dis- coveryofnaturalresources,and technologicalprogresson theother. So longas mistakesaremadeorthislackofbalanceexists,thejunking processis inevitable. Froma socialpointofview,thejunkingprocessis notnecessarily undesirable.In thiscountry,wheresavinginvolveslittlehardship,it maybe perfectlyjustified.But it maypresenta seriousobstacleto the achievementof fullemployment,becausethe ownersof capital assetsheadedforthejunkpilewilltryto avoidthelosses.So longas theyconfinethemselvesto changesin theiraccountingpractices,no specialconsequenceswillfollow.But it is morelikelythattheywill tryto accumulatelargerreserveseitherby reducingtheirowncon-

14 To be strictlytrue,the statementin the text would requireconsiderable divisibilityof capital assets. In the absence of such divisibility,the expression "junking"shouldnot be takentoo literally. The factthat theseassets may stillbe operatedto someextentor that their productsare sold at lowerpricesor that both theseconditionsexist,does not invalidateour argument,because o, beingexpressedin realterms,willbe higher thanit wouldbe ifthe assetswereleftcompletelyunused.

CAPITAL EXPANSION, RATE OF GROWTH, AND EMPLOYMENT

145

sumptionorby charginghigherprices(or payinglowerwages).As a result,thetotalpropensityto save mayrise.Thiswillbe exactlythe oppositemeasurefromwhatis neededto avoid thejunkingprocess, andwillofcourseleadtogreatertrouble,thoughI amnotpreparedto say to whatextentcapitalownerswillsucceedin passingon these losses. In so faras theyare able to controlnewinvestment,theywilltry toavoidlossesbypostponingit.Consequently,therateofgrowthmay wellbe depressedbelowtherequiredao-,andunusedcapacitywillde- velop.Ourpresentmodeldoesnotallowustoseparateunusedcapacity intoidlecapitalandidlemen,thoughmostlikelybothwillbepresent.'" Becauseofhumanitarianconsiderations,we are moreconcernedwith

unemployedmen.But unemployedcapitalis extremelyimportant,because its presenceinhibitsnew investment.'6It presentsa gravedangerto a

full-employmentequilibriumina capitalistsociety.

IV. GUARANTEED GROWTH OF INCOME

In theprecedingsectionsit was shownthata stateoffullemploy- mentcan be maintainedifinvestmentand incomegrowat an annual rateao. The questionnowarisesas to whatextenttheargumentcan be reversed:supposeincomeis guaranteedto growat theao rate;will thatcallforthsufficientinvestmentto generatetheneededincome? We are concernedherewitha situationwherespontaneousinvest- ment(i.e.,investmentmadeinresponsetochangesintechnique,shifts inconsumers'preferences,discoveryofnewresources,etc.)is notsuffi- cient,andthereforea certainamountofinducedinvestment(madein responseto a risein income)is also required."To simplifytheargu- ment,letus assumethatspontaneousinvestmentis absentaltogether. It shouldalso be madeclearthattheproblemis treatedfroma theo-

reticalpointofview,withoutconsideringthenumerouspracticalques-

tionsthattheincomeguaranteewouldraise. If an economystartsfroman equilibriumposition,an expectedrise inincomeofYao willrequirean investmentequalto Yao/s.Asbefore, twocaseshaveto be considered.

15 The presenceofunemployedmenmay be obscuredby inefficientutilization oflabor,as in agriculture.

16 It is truethata givencapitalownermayoftenhave a hardtimedistinguish- ing betweencapital idle because ofa<s, and capital idle because ofr< aa. The firstkindofidleness,however,is relativelypermanent,and cannotbe corrected by greaterexpenditures,whilethe secondis temporary(it is hoped) and is due to poorfiscaland monetarypolicies. 17 Cf. Alvin H. Hansen, Fiscal Policyand Business Cycles,New York, 1944, Part Three,and particularlyp. 297.

146

EVSEY D. DOMAR

1.

If a is equal or reasonablycloseto s, theresultingamountof

investmentof Ya willequal thevolumeofsavingsthatwillbe made at thatlevelofincome,and equilibriumwillbe maintained.18Thusa

mereguaranteeofa risein income(iftaken seriouslyby the investors) willactuallygenerateenoughinvestmentand incometomaketheguarantee goodwithoutnecessarilyresortingtoa governmentdeficit.

2. If u-is appreciablybelows,investmentwillprobablyfallshortof

savingsandequilibriumwillbe destroyed.Thedifficultyarisesbecause

a full-employmentrateofinvestmentin thefaceofa u<s makesthe junkingprocess(discussedon pp. 143-145)inevitable,whilea mere guaranteeofa risein income,as a generalrule,lackstheinstrument toforcethecapitalownerstodiscardtheirequipment.Theywillsimply invest Yao-Is insteadof Ya. Onlyifin theeconomyas a wholethere is a considerablenumberofproductsthedemandforwhichis highly

elasticwithrespectto income,and thereforea goodnumberofothers thedemandforwhichis negativelyelasticwithrespecttoincome,will

a largeramountthan YaorIs be investedand a correspondingamount ofcapitaljunked.Ofcourse,iftherisein incomeis accompaniedby shiftsin consumers'preferences,the appearanceof new products, aggressivecompetition,and otherchanges,thejunkingprocesswillbe speededup,butifthesechangesdo takeplacetheymaygiveriseto

spontaneousinvestmentoftheirownandtheguaranteedriseinincome

willnotbe important.Still,theassuranceofa highandrisingincome is undoubtedlyone ofthebestmethodsforencouraginginvestment. As explainedbefore,a substantialdifferencebetweens and ufsimply indicatesthatwiththeavailablelaborforceand thecurrentprogress oftechnology,themaintenanceoffullemploymentundera givena requirestheaccumulationofcapitalat a fasterratethanitcanbeused. As a ge.neralrule,thisappliesequallywellto bothprivateand public investment,thoughtheremay be specialcases when,owingto the developmentofparticularconsumers'preferences(e.g.,forvacations), or to technologicalreasons(e.g.,needforpower),or to institutional conditions(as in urbanredevelopment),considerableneedforpublic

investmentstillexists.'9

18 There is a slighterrorin the magnitudesin the textbecause of the use of discontinuousfunctions. 19 As soon as thegovernmententersthepicturewe findourselvesin a maze of definitionalproblems.Fromthe pointofview ofthispaper,savingand invest- ment should be understoodin referenceto the whole economy,includingthe government,and notto its privatesectoronly.But whichgovernmentexpendi- turesshouldbe regardedas investment?The difficultyis presentin the private sectoras well,exceptthattherewe can take refugein formaldefinitions,which cannot be well applied to government.I leave the question open. Certainly, investmentneed not be limitedto inventories,steel,and concrete.

CAPITAL EXPANSION, RATE OF GROWTH, AND EMPLOYMENT

147

I am notpreparedto say whetherwe alreadyare orshallsoonbe

facedwitha seriousdifferencebetweens and o-,thoughI doubtthat it was an importantproblemin thepast,exceptperhapsfortheshort boomyears.My ownguessis thatweshallbe moreconcernedwiththe disparitybetweenao-and r,thatis withthefailureofincometo grow at therequiredrate. If,however,thedifferencebetweena-and s becomesseriousandin- hibitsinvestment,orifthejunkingprocessproceedsat a fasterrate thanis deemedsociallydesirable,thesocietywillhaveat itsdisposal two methodsnot mutuallyexclusive:(1) the reductionof the pro- pensitytosave,or(2) thespeedingup oftechnologicalprogress.I hope thatthemainemphasiswillbe placedon thelatter.

Thispaperattemptedto analyzetherelationbetweeninvestment, rateofgrowth,and employment.The analysiswas carriedout on a veryabstractandsimplifiedlevel-a procedurewhichmaybe justified at thebeginningofan investigation,butwhichmustbe correctedlater on. In general,thereis no sucha thingas an absolutelygoodorbad assumption:whatmaybe safein onekindofa problemcan become fatalinanother.Oftheseveralassumptionsmadehere,thatregarding depreciationis likelyto causethegreatestdifficulties,butit is by no meanstheonlyone.I hopeto developthewholesubjectfurtherat a laterdate. The centralthemeof the paperwas therateofgrowth,a concept whichhas been littleused in economictheory,and in whichI put muchfaithas an extremelyusefulinstrumentofeconomicanalysis. One doesnothave to be a Keynesianto believethatemploymentis somehowdependentonnationalincome,andthatnationalincomehas somethingto do withinvestment.But as soonas investmentcomesin, growthcannotbe leftout,becauseforan individualfirminvestment maymeanmorecapitalandlesslabor,butfortheeconomyas a whole (as a generalcase) investmentmeansmorecapitalandnotlesslabor.If botharetobeprofitablyemployed,a growthofincomemusttakeplace.

Washington,D. C.