The Role of Capital in the Process of Economic Development

Résumé du livre

This study is directed toward the role of capital funds as differentiated from capital goods in the process of economic development. Capital is discussed in three different, but related ways and the conclusions are tested by application to the flow of capital funds into underdeveloped countries which is presumed to facilitate the growth process. First, capital is examined within a historical context where it has been assumed that accumulation of funds through saving precedes and causes growth. However, Keynes demonstrated that saving, under conditions of less than full employment, does not contribute to economic progress, but is, in fact, detrimental to it. Thus the classical rationale for income inequality is no longer valid and there is no reason to assign a special position to the accumulation of capital funds in the growth process. Second, studies of primitive economies have shown that production is a function of a delicate balance between ceremonial patterns of status and power on one hand, and the level and utilization of technical skill on the other. In this simple model it is seen that while the institutional patterns allow the various factors to come together in such a way that production takes place, this is not the causal element. Third, recent studies of the aggregate production function have shown that capital funds are becoming increasingly significant as a factor of production. One study shows capital to account for only 15 percent of the percentage growth rate, assuming other factors to be held constant. On the other hand, changes in technology account for 53 percent of the rate of growth. This implies that causal role given to capital has been greatly over-emphasized, and that more emphasis should be placed on technological improvement and its causal counterpart: education. Within this context, the analysis is extended into the international arena where it has been assumed that capital funds make a significant contribution to the economic growth of underdeveloped areas. If the above conclusion concerning the efficacy of capital funds is correct, then this assumption comes under serious question. The international flow of investment funds is analyzed and it is demonstrated that, as well as being inefficacious in general, capital outflows from developed to underdeveloped areas actually finance, because of the cumulative nature of compound interest, a return flow larger than the outflow. Using the United States international investment position as a case study this is demonstrated both theoretically and statistically. When combined, these four approaches to the role of capital provide a powerful argument to the effect that capital is not a significant causal factor in the development process. Implicit in this discussion is the conclusion that a valid theory of economic progress must be built around an operational treatment of the technological process.