Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
Trends in investment and labour Inputs with economic development, as indicated in the data of Jorgenson and Vu

Trends in investment and labour Inputs with economic development, as indicated in the data of Jorgenson and Vu

Ratings: (0)|Views: 7|Likes:
Published by John Ross
Analyses trends in capital and labour inputs during economic development as shown in the data of Jorgenson and Vu
Analyses trends in capital and labour inputs during economic development as shown in the data of Jorgenson and Vu

More info:

Published by: John Ross on Aug 29, 2010
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

08/29/2010

pdf

text

original

 
Trends in investment and labour inputs with economic development
 
Page
1
Trends in Investment and Labour Inputs With Economic Development as Shown in theData of Jorgenson and VuBy John Ross, 22 August 2010
 
Key Trends in Globalisation
has published two articles on: (i) the contribution of capital investment to GDP growth in developed and developing economies,
1
(ii) differing patterns  of labour inputs in developed and developing economies.
2
These are based on analyses of the major database on international growth published by Jorgenson and Vu (Jorgenson & Vu,2007b). The reason for such detailed analysis is both the importance of the issues involvedand a relation to long standing research topics. The present article introduces these papers.The most fundamental issue involved is that of the tendency of the contribution of investment to economic growth to increase with economic development. This trend wasfirst analysed by Adam Smith and affirmed by other economists including Keynes.
3
However,it was rejected in analyses of economic growth put forward by various mid 20
th
centurytheorists. The latter asserted, against the analysis flowing from Adam Smith, that thedivision of the economy between investment and consumption remained constant witheconomic development
 –
this is, of course, a central assumption of the widely employedCobb-Douglas production function, of the economic growth model put forward by Solow
1
(Ross, 2010a)
2
(Ross, 2010b)
3
 
In The Wealth of Nations, Adam Smith analysed that the role of capital and intermediate inputs, which he
 jointly termed ‘stock’, would increase as an economy developed. Smith noted: ‘As the accumulation of stock
must, in the nature of things, be previous to the division of labour, so labour can be more and more subdivided
in proportion only as stock is previously more and more accumulated… As the division of 
labour advances,therefore, in order to give constant employment to an equal number of workmen, an equal stock of provisions,and a greater stock of materials and tools than what would have been necessary in a ruder state of things mustbe accumulated befo
rehand.’
(Smith, 1999, p. 372) Keynes, arrived at the same conclusion of an increasingrole of capital investment in economic development via a somewhat different chain of reasoning related to
savings behaviour: ‘the ric
her the community, the wider will be the gap between its actual and its potential
production… For a poor community will be prone to consumer by far the greater part of its output, so that a
very modest measure of investment will be sufficient to provide full employment; whereas a wealthycommunity will have to discover much ampler opportunities for investment if the saving propensities of its
wealthier members are to be compatible with the employment of its poorer members.’
(Keynes, 1983, p. 31)For a wider discussion see (Ross, 'The Asian and Chinese economic growth models - implications of modernfindings on economic growth', 2009).
 
 
Trends in investment and labour inputs with economic development
 
Page
2
(Solow, 1957), and continues to be repeated in many
4
, although no longer all
5
, economictextbooks.As discussed in detail elsewhere (Ross, 2009), the present author from the early 1970sconcluded, on the basis of the long term historical data on growth that was then beginningto be published, than Adam Smith and those who followed his analysis were clearly correct.Despite the fact that the theories of Solow et al of a constant contribution of investment toGDP growth were the prevailing orthodoxy they were contradicted by the historical data.Jorgenson has outlined more general reasons for the breakdown of such econometricmodels. (Jorgenson D. W., 2009) The theory that the proportion of the economy devoted toinvestment remained constant, rather than rose with economic development, waserroneous and classical economics was correct.Initial statistical unclarity in this discussion was undoubtedly aided by the fact that the US isuntypical in that, unlike the great majority of other economies, the proportion of the USeconomy devoted to fixed investment has indeed not risen for the approximately 150 yearperiod for which reliable statistical data exists. (Ross, 2008a) (Barro & Sala-i-Martin, 2004).
6
 Analyses based on generalisations from the US, therefore, arrived at the erroneousgeneralisation of a constant, rather than rising, share of investment in GDP.
7
 
4
 
Romer for example asserts ‘The growth rates of output and capital has been about equal (so that the capital
-
output ratio has been approximately constant).’
(Romer, 2006, p. 17)
Blanchard asserts: ‘the savings rate doesnot appear to systematically increase or decrease as a country becomes richer.’
(Blanchard, 2006, p. 226)
5
It is clearly rejected, as noted below, in (Barro & Sala-i-Martin, 2004)
6
The initial data on which the present author arrived at the conclusion of confirmation of a rising share of investment in GDP was based on calculations from (Deane & Cole, 1967), (Feinstein, 1972), (Mitchell, 1980),(Economist, The, 1982), (Lister, 1989). Barro and Sala-i-
Martin note: ‘For the United States, the strikingobservation… is the stability over time of the ratios for domestic investment and saving… The United States is,
however, an outlier with respect to the stability of its investment and saving ratios; the data for the other
seven countries *analysed+ show a clear increase in these ratios over time… The long
-term data thereforesuggest that the ratios to GDP of gross domestic investment and gross national savings tend to rise as aneconomy develops, at least over some range. The assumption of a constant gross savings ratio, which
appears… in the Solow
-
Swan model, misses the regularity in this data.’
(Barro & Sala-i-Martin, 2004, p. 15)Baro and Sala-i-Martin do not, however, draw out all the implications of this.
7
Similar assertions were, however, also made by those who were centred on the UK economy - despite thefact that the UK economy showed a clear tendency for the proportion of investment in GDP to rise with time.
Kaldor for example, in a widely cited paper, claimed as one of his ‘stylised facts’ on economic growth: ‘Steady
capital-output ratios over long periods; at least there are no clear long term trends, either rising or falling, if differences in the degree of utilisation of capacity are allowed for. This implies, or reflects, the near identity in
 
Trends in investment and labour inputs with economic development
 
Page
3
A consequence of the difference between the pattern in the US economy and the generalinternational trend of a rising share of investment in GDP, is that the US share of fixedinvestment in GDP, which was above the international average in the 19
th
and first half of the 20
th
century, has now fallen below the international average
 –
in particular the US levelof investment in GDP has fallen below the level of rapidly growing Asian economies. Thiscontributes to the slow growth of the US economy compared to Asian competitors, the USbalance of payments deficit with Asia, and present international financial developments.(Ross, 2008b)The question of whether the role of fixed investment in economic growth rises witheconomic development, or remains constant, has numerous practical economic implications.The key pieces of evidence demonstrating the rising contribution of fixed investment to GDPgrowth with economic development, prior to the publication of the database of Jorgensonand Vu, included:1. Trends in leading international growth economies. The analysis of leading growtheconomies, in successive historical periods of economic development from the 18
th
century,carried out by the present author from the 1970s onwards, showed that each such leadingeconomy
 –
in chronological succession the UK, the US, West Germany, Japan, South Koreaand now China
 –
was characterised by a higher percentage of fixed investment in GDP thanthe preceding lead growth economy. This trend is shown in Figure 1.
the percentage rates of growth of production and the capital stock
 –
i.e. that for the economy as a whole, andover long periods, income and capital tend to gro
w at the same rate.’
(Kaldor, 1961, p. 178)

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->