Trends in investment and labour inputs with economic development
(Solow, 1957), and continues to be repeated in many
, although no longer all
, 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).
Analyses based on generalisations from the US, therefore, arrived at the erroneousgeneralisation of a constant, rather than rising, share of investment in GDP.
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)
It is clearly rejected, as noted below, in (Barro & Sala-i-Martin, 2004)
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.
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