Capital and Technical Progress

The capital stock of a country increases through the process of net investment (I), which is the difference between a country’s net income in an accounting period (i.e. gross income minus depreciation) and how much it consumes out of that income in the same period. Capital accumulation enlarges a country’s capacity to produce goods. As we saw in Chapter 2, however, production-function studies, at least for advanced countries, cast some doubt on whether capital accumulation by itself is central to the development process. A lot depends on how capital is defined and whether it is inclusive of technological progress. Capital is certainly a wider concept than capital goods traditionally defined, i.e. goods which yield no immediate utility but produce goods which do. If capital is defined as any asset which generates an additional future stream of measurable income to society, many goods and services commonly regarded as consumption goods ought strictly to be included as part of a country’s capital stock. Expenditure on education, for instance, which may permanently enhance the earning capacity of individuals, as well as giving immediate satisfaction, must be regarded partly as investment expenditure. Similarly, if certain types of ‘consumption’ goods, e.g. clothes, durable consumer goods, etc., are necessary to induce peasant producers in the agricultural sector to increase their productivity, they, too, ought to be considered as part of the capital stock. If it is agreed, therefore, that the only way to build up a country’s productive potential, and to raise per capita income, is to expand the capacity for producing goods, this need not refer simply to the production of physical capital but to the production of other types of capital such as ‘incentive’ consumer goods and the expansion of facilities for investment in human capital, all of which can contribute to increased productivity and higher living standards. In addition, there is the very important type of capital referred to as ’social capital’ which again need not produce other goods directly, but none the less expands the capacity to produce by facilitating the smoother operation of directly productive activities. Housing and transport facilities are obvious examples. If the production-function approach to the analysis of growth is to be employed, it is of the utmost importance to define investment and the capital stock as meaningfully as possible if the relation between capital and growth is not to be misconstrued. This is in addition to the fact, which we dwelt on at some length in Chapter 2, that capital accumulation may be the main vehicle for the introduction of technical progress in the productive system. The rate of technical progress in the capital-goods sector itself is also important because this will determine the price of capital relative to labour.