net capital stock

Net Capital Stock

I According to Solow,1 there is no such thing as net capital stock.

Nor, for that matter, is there any such thing as depreciation. All that we have is an array of capital instruments, of increasing age and de- creasing eficiency. (Whoever first used the word ‘vintage’ in this connection must have been a barbarous wowser who was under the impression that wine deteriorated with age.)

Interesting conclusions follow. Industrial profits are of the nature of a quasi-rent, depending upon the difference between the efficiency of the more modern equipment, and of the marginal equipment which just has to be kept in use to meet current demand. In this way, profits may vary considerably with demand, but depend also upon the steep- ness of the gradation of efficiency between the old and the new equipment. In the 1950s, after two decades of abnormally low investment, modern equipment in some industries was still competing with the old equipment of the 1920~3, thereby generating higher profits than normal; this state of affairs was ended in the 1960s.

This interesting formulation is most applicable in electricity generation, where the efficiency of each plant can be precisely measured, and where the controlling authority scraps old plant as soon as it is no longer needed to meet current peak demand (with a margin for contingencies). Here the profits accrue to public authorities (or, under the public utility laws of America, have to be redistributed to consumers). A similar state of affairs prevails in a few industries with large units of plant that are entirely specific to the industry in question. A good example is the paper industry, Solow’s own hunting ground.

When this state of &airs prevails, any form of allowance for depreciation, or statement of net capital stock, can at best be a rather bad approximation to a state of affairs capable of much more precise analysis (though very little of such analysis has really in fact yet been performed) .

But these propositions no longer apply, Solow agrees, as soon as capital has alternative uses. In most communities the net capital stock (apart from housing and consumer durables if we count them as capital) consists to the extent of about two-thirds of structurm, and

R M. Solow, Capital Theory ond the Rote of R e t m (North-Holland, Am- sterdam, 1963).

449

450 T H E ECONOMIC RECORD DEC . only about one-third equipment. Though many public structures (railways, roads, harbours, etc.) do not, nearly all private structures do have alternative uses. Some forms of industrial equipment are highly specific to industries; others (vehicles, motors, etc) are not; and even for the specific forms of equipment there is usually an export market for sale of old equipment to countries where demand and labour conditions are different.

It is still therefore worth pursuing the concept and measurement of net capital stock ascertained by the perpetual inventory method. There should be no need now to defend the perpetual inventory method, pioneered by Goldsmith in the United States and used almost universally today. Some well-known earlier studies-the nine- teenth century produced studies of national weath almost as abun- dantly as national product studies are produced today-proceeded by ‘capitalizing’ income-a deplorable piece of circular reasoning. Most capital studies, even until quite recently, were incapable of making the distinction between land and capital. To generalize a little further, because something is abIe to generate rent or quasi-rent (business ‘goodwill’, etc.), this does not necessarily prove that it constitutes capital. This criticism applies to methods of valuing capital stock from current Stock Exchange share prices. I n the 1930s, when it was fashionable to believe that the world was destroying its capital stock because it had failed to listen to instructions from the Viennese school of economists, Morgenstern solemnly proved that the greater part of Austria’s capital stock had already disappeared, on the basis of current Stock Exchange valuations.

Goldsmith visited Australia in the 1950s and in collaboration with Garland a t the Reserve Bank prepared an original and cour- ageous perpetual inventory for Australia.* Since then, though Butlin has provided a great stock of further information, no one has brought their work u p to date.

The first difficulty about the perpetual inventory method lies in getting it started. How can we know the net capital stock existing a hundred years ago? Goldsmith’s reply was that it did not seriously matter. T t was so small in relation to present capital stock, and in any case most OE i t ma? depreciated away within a few years; so it was permissible to invent any plausible figure of the right order of magnitude. This difficulty becomes more serious, however, in the case of long-lived assets, particularly housing.

Much more serious is the problem of depreciation, of the method of its application, and of the right depreciation rates to be used.

Among economists, it goes without saying that both depreciation and net capital stock must be ‘real’, i.e. assets constructed in times of differing price levels must all be expressed a t a uniform

2 J. M..Garland and R. W. Goldsmith, ‘The National Wealth of Australia’, in R. Goldsrmth and C. Saunders (eds.), The Measurmwnt of National Wealth (Bowes & Bowes, London, 1959), pp. 323-64.

1970 NET CAPITAL STOCK 451 price level before depreciation and net capital stock are computed. Unfortunately, this principle is still f a r from being recognized in the ‘book values’ used in business and also frequently published as official statistics (to the great harm of unwary users). The accounting profession in the United States has decided, by a substantial majority, that ‘replacement cost accounting’ is a desirable principle, to be introduced as soon as practicable. Our present chaos of ‘book values’ at a time of steadily rising prices is, however, not quite as bad as it appears to be to the extent that (1) businesses purchase assets from each other, in which case they are mit ten up to current value by the purchaser, and (2) some large firms occasionally undertake a n all- round revaluation of their assets.

There are three principal methods of applying depreciation. ‘Straight-line’ depreciation assumes a lifetime for the asset, and writes off its value by uniform amounts for each year of the assumed lifetime. ‘Diminishing balance ’ depreciation applies a uniform per- centage reduction each year to the diminishing balance, so that theor- etically the asset never completely disappears from the books. Finally there is a method favoured by some economists, which has acquired the strange title of ‘one-horse’, whereby an asset is supposed to retain its original value unchanged throughout its lifetime, a t the end of which it disappears suddenly and completely.

It is hard to find much justification for the ‘one-horse’ method -particularly in the light of Solow’s analysis. As between the other two, the choice appears to be only one of convenience in our present state of knowledge. In the work that follows, straight-line depreciation will be used for housing and diminishing balance for other assets.

Goldsmith assembled all his results in his monumental A Study of Xavhg in the United States? For housing Goldsmith used a uniform 1-5 per cent a year straight-line depreciation. This led to the important (erroneous) conclusion that real net housing stock was rising more slowly than real income, i.e. that the long-run income elasticity of demand for housing was less than one. This conclusion was successfully attacked by Margaret Reid of Chicago University.‘ A series of cross-section studies, using so fa r as possible the ‘perman- ent income’ method, showed that the long-run income elasticity of demand for housing was a t least one, and probably higher. (The important question of long-run price elasticity of demand €or housing was much less thoroughly studied ; the suggested preliminary result was about 0.75.)

What appears to be a satisfactory method of depreciating housing was proposed by Bryan Anstey, President of the U.K. Institute of Valuers. A brick house, he suggested, suffered no real depreciation for the first thirty years of its life. After that, a straight-line depreciation of 2 per cent should be applied, making its real value zero (i.e.

3 Three volumes (Princeton University Press, 1955). 4 Housing and Income (University of Chicago Press, 1962).

452 THE ECONOMIC RECORD DEC.

maintenance costs exceeding rent) at the age of eighty. For wooden houses, the suggested depreciation-free period is twenty years.

This theorem has been tested from the records of the Real Estate Research Institute of San Francisco.6 The Institute has undertaken an extensive and costly programme of periodic revaluations of the same houses over a long period of years. Anstey’s theory is satisfac- torily confirmed.

The deterioration of an old house is, of course, partly physical and partly social. There are some interesting externalities here. A new house may gain even in real value, as well as in money value, according to the diligence with which the neighbours tend their gar- dens. Old houses may often be in good physical condition but decline in value because the neighbourhood is becoming less attractive. It may be said that this is the trend to be expected-though there are sometimes sudden reversals, as in Carlton and Redfern. In the long run, these deteriorations (or recoveries) may be said to represent changes in the value of the site, not of the house; but so long as the house stands, there are quasi-rents attached to it. The whole subject requires much further analysis, both theoretical and factual.

Outside housing, Goldsmith classified fixed asset8 into the two main categories of structures and equipment. These he divided into a great many sub-categories, to each of which he applied what he considered to be an appropriate rate of depreciation. The weighted averages of these rates for recent years, expressed in diminishing balance terms, were 4.2 per cent a year for structures and 11.8 per cent for equipment. Experience elsewhere approximately c o d r m s the equipment figure, which will therefore be used generally. Regarding structures, however, it appears that the U.S. rate of depreciation is abnormally high (representing a tendency towards rapid change in the use of commercial buildings, with consequent transfer of the older buildings to inferior uses, and early demolition).

Conventional depreciation rates, though approximate, are based on the collective experience of accountants and taxation officials of the rate at which structures are likely to be converted to inferior uses, or the productivity of equipment to fall behind that of its more newly installed rivals, and for maintenance costs to rise. While these are better than nothing, the only satisfactory method of measuring depreciation, for the purpose of national accounts, is to collect suf6cient information about the actual market prices of used assets of varying age. Though details are not given, this method has been used in pre- paring a fully articulated set of accounts of both national product and net capital stuck for a period of 100 years in NorwayP

As we extend our comparisons over long periods, the choice of a 6 Though the Institute is not a part of the university, the records are filed in

6 Lmgriclrlinjpr i Nor& gRmmi 1865-1960 (Central Statistical Office, Osla. the Departmental Library at Berkeley.

1966).

1970 NET CAPITA& STOCK 453

base becomes a serious problem. It becomes even more serious when we want to make international comparisons. About two-thirds of the net capital stock of most countries consists of structures, even if we exclude housing and governmental capital, and a very much higher proportion if we include them. The production of capital equipment is itself a business with about the average degree of capital-intensity (perhaps a little higher). Many kinds of construction, on the other hand, are abnormally labour-intensive. An exception can be made for such operations as road construction, which is now highly mech- anized. At the other end of the scale we have residential construction, where only a limited degree of mechanization prevails even in the most advanced economies. Industrial and commercial construction stands in an intermediate position. These differences are of an order of magnitude fa r greater than economists have suspected. A t prices of the early 196Os, what we would regard as a standard house, of the sort erected by public housing authorities, could be built in India, Taiwan, Egypt or South Africa at $US2-3 per square foot, while the same type of house in the United States would cost five or six times 88 much. Similar, though less extreme, changes in relative values can occur within the history of one country if comparisons are made over a long period.

When we have to make welfare comparisons between times or between countries differing significantly in their relative prices, I have always been an upholder of the ‘ideal’ index number, developed by Irving Fisher and Pigou. This calls for comparisons ufp;ng the weights of each country (or period) in turn, and then taking the geo- metric mean of the two results. Bat it has its practical difficulties. Suppose you are comparing an advanced modern economy, with an abundance of motor cars, with its o w n past a hundred years ago, or with a primitive country now, in which motor-cars do not exist-and therefore cannot have a price to be used in weighting the index number. Or, to take a less extreme case, suppose you a r e comparing the economy of a country with its own past fifty years ago, or with a poor Asian country in which there are only a few highly-taxed motor-cars -doesn’t this give cars a quite anomalously high price in the weighting! And for practical use in national accounting, we have the still greater objection that this method is quite intolerably cumbrous. There are very strong practical reasons, and some theoretical reasons too, for using a single set of weights. The basic work in international comparisons of national products was that undertaken by Gilbert and K r a ~ i s . ~ They took as their base for real product comparisons the quantities of goods purchasable within the United States for one dollar in the year 1950. For convenience in linking to their work, therefore, this unit is used throughout.

For future studies it may be that someone will devise a satisfac- IM. Gilbert and I. B. Kravis, An I n t e r n u t i d Comparison of National

products and the Purchasing Power of Currmcies (OEEC, Paris, 1954).

THE ECONOMIC RECORD DEC . 454

tory unit based on relative prices in some middle-income country, rather than at the top of the income scale. But I owe to Simon Kuznets the interesting idea that, as people in other countries and periods have clearly been desirous of developing their nation in the direction of a n advanced modern economy, then the relative prices prevailing in the United States may be suitably used by them in measuring their rate of economic progress.

On similar grounds, the 1950 purchasing power of the dollar in the United States is used as the basis for capital stock comparisons. This of course has the effect of substantially raising the valuation that we put on net capital stock in the form of structures (but not in the form of equipment) in all but the most advanced economies, because of the labour-intensive nature of construction.

Comparable measures of real national product are needed for comparison with net capital stock-the results would be of little interest without such comparisons. A change in the method of defin- ing and measuring national product is now proposed, which will be developed a t greater length later. This relates to the treatment of services. Expenditures on public administration, defence, education and medicine all represent additions to welfare ; and in that respect they are part of the national product. But how can we possibly measure them 1

Some may say that they do not regard the activities of the De- fence Department-or for that matter of some other government department-as an addition to national welfare, but as positively harm- ful. But we cannot accept their valuation. We must adhere to the convention that when a community, through a decision of parliament (or whatever is its normal form of government) embarks on any type of public expenditure, then this is reckoned as adding to the welfare of the community.

The proposition that defence and other objects of government expenditure should be treated as intermediate rather than final products, on the grounds that they were necessary in order to facilitate other production, tentatively discussed by Pigou, categorically advanced by Kuznets, and also upheld for a time in published Swedish and German national accounts, was finally dismissed by Hicks.s Hicks established the convention mentioned above, that a n object of public expenditure should be considered a final product if it was decided upon by the country’s normal process of government. Quite apart from theoretical considerations, it was becoming apparent towards the end of the 1930s that when different countries had such very different ideas about the proportions of their national products that they wished to spend upon their armed forces, it was hardly rational to treat all these varying expenditures (whether one regarded them as protecting or endangering world peace is for the moment imma-

J. R. Hicks, ‘The Valuation of the Social Income’, Economica, Vol. VII, May 1940.

1970 NET CAPITAL STOCK 455 terial) as necessary minima to facilitate the production of the rest of the national product.

There are two different conventions adopted in national accounts statistics for dealing with the problem of the real product of the service industries ; and both are clearly incorrect, though erring in opposite directions. The first is to consider output as measured by input, i.e. the numbers of persons engaged. Whether in making comparisons through time for one country, or in making international comparisons, this method gives results that are too low, thereby understating rates of growth, and also understating the differences between countries. It hardly appears likely that the productivity of a doctor of medicine, or a teacher, is as low now as was that of his predecessor a hundred years ago; or that an American professional man has the same productivity as an Indian,

The other method adopted by some countries (Japan appears to be one of them, but one cannot be quite sure from the way in which the statistics are presented), which leads to an overstatement of the rate of growth, is to deflate the output of services, consisting pre- dominantly of wages and salaries paid to service workers, by an index number based upon prices observed in the more measurable sectors of the economy. This method, in effect, treats the productivity of, say, a public servant as capable of being measured by the product that we would have obtained from a similarly paid man employed as an industrial worker.

There is at present just no method of measuring the productivity of these specified industries, and of certain other personal services. I n the United States an attempt has been made to include in the price index number the charges for a visit to the doctor, or a day in hospital (both of which are increasing rapidly). But after all, we are not dealing with a homogeneous measurable product. The quality of the service may be improving too. (Almost the only successful effort in this direction has been to construct a price index for specified operations in car servicing, where productivity does appear to be increasing substantially.) As time goes on and an increasing proportion of the labour force in the advanced countries is devoted to service activities, these difficulties become greater.

In so fa r as we are using our studies of national product to estimate improvements in welf are-that treacherous but necessary pursuit-there may be a case for adopting some convention, however arbitrary, between the two erroneous methods described above for measuring the real output of services. However, to the extent that we are using our national product data for the very difEerent purpose of measuring improvements in productive efficiency, we should exclude the conventional figures for the output of these service industries from national product, and also exclude employment in these industries from the labour force statistics with which national product is compared. (We do not exclude commerce, transport, construction, services to business and the like.) While these service industries use

T H E ECONOMIC RECORD DEC. 456

some capital, they are not such heavy capital-demmders as primary industry, manufacture and transport. For capital/output comparisons we also use national product defined exclusive of these services.

In measuring the efficiency of production, net rental of housing (including imputed rental of owner-occupied houses) should also be excluded from national product. This does not represent sny current productive activity (a new house enters the national accounts as an investment good) but is a payment for certain past activities. Current net rental may bear some relation to net capital stock of housing; but this relationship is greatly affected by rent restrictions, taxes, changes in site values, economic inertia, and other things not related to the more general factors determining the capitd/output ratio. It is thus clearly desirable to exclude net rental of housing from the national product, and to treat net capital stock in the form of housing separately from other net capital stock.

What we exclude therefore from the tabulation ‘industrial origin of gross domestic product at factor cost of base year’ (i.e. dealing with real product, not money product) are the entries headed, in the international system of national accounting, ‘ownership of dwellings’, ‘public administration and defence’, and ‘services’.

The use of the above method is dictated by considerations of practicability, in view of the availability of information. It has certain defects, though their order of magnitude appears to be small. ‘Gross product ’ will include interest and depreciation on buildings and other capital assets used in the service industries. In some cases it may include some allowances for interest and depreciation on public buildings, according to the conventions adopted for public expenditure accounting; but most countries do not make such entries.

The output of the service industries will also include some intermediate products used by other sectors of the national economy, e.g. professional services to businesses. The result of these exclusions therefore is somewhat to understate the product of the remainder of the economy.

‘Cross product’, it must be remembered, is a ‘value added’ concept, debiting the purchase of services as well as of material products from outside the sector, but before debiting depreciation. This means that the current production of commodities used by governments (warships, typewriters, etc.) and by the housing sector (maintenance work) remains included in the measure of national product as part of the output of other sectors.

I1 Data for net capital stock, in comparison with gross domestic

product, re-defined to exclude services and net rental, are now given for three countries (Tables I, I1 and 111): for Norway, because it has a better articulated set of data over a longer period than any other country and, more urgently, in order to obtain defensible depreciation rates which can be used elsewhere in long-period perpetual

1970 NET CAPITAL STOCK 457 inventory studies; for Japan, of unique interest in illustrating the process of growth; and for Australia.

Long-period national product figures for Norway and Japan re- calculated to exclude services are given without details, which would require too much space ; they will be published later.

Norway. The Norwegian figures of net capital stock as published do not distinguish housing from other structures. Separate estimates are therefore made by the formula described above, namely no depreciation for the first twenty years (most of the houses being of wood) followed by straight-line depreciation of 2 per cent a year. This method does indeed call for extremely conjectural estimates of the volume of housing construction in the remote past, but this will have only a limited effect on the estimates of net capital stock for recent years. We do, however, also have figures of net housing stock for four widely separated years, which serve to calibrate our e~t imate .~

We may first note that the demand for housing in relation to income has been exceptionally high in Norway in the past (although it is now declining), which is only to be expected in a country with a very cold climate. The data suggest a long-run income elasticity of demand for housing of 0-55 before 1900, but only 0.2'7 subsequently.

Contrary to general impression, the net stock of governmental capital per unit of income has been substantially reduced. Many forms of government capital--roads, harbours, schools, hospitals, eta.-are 'economic indivisibilities'. This phenomenon is particularly marked in

TABLE I Net Stock of Fixed Capital and D e p e c k t w l z : Norway

PART A

Net capital stock. excluding governmentb I DepredationC raten % O f I (millio.lls of krone of 1938 purchasing power) nimininhlnn balance Year

1885 1870 1875 1880 1885 1890 1895 ls00 1905 1910 1915 1924) 1925 1930 1935 1940 1945 1950 1955 1960

Netde- predated "&:- stock of housing --- 1.613 1,357 1,713 1,421 1,866 1.889 2,094 1,749 2,321 1,848 2,514 1,946 2,768 2,105 3,126 2.349 3,436 3,736 2,759 4,149 4,579 4,285 4,879 5,229 7,790 5,750 8,810 8,740

6,990 9,930 8.300 11,600 9,400 13,400

Ship and

boats

107 140 193 200 216 258 315 386

531

680

1,209

1,494

2,200 3,045

868 714 743 792 837 897 977

1,073

Other equip ment

165 192 249 306 357 415 478 591

821

1,294

1,591

2,358

4,520 6,210

2.06 2-04 2.15 2.52 2.65 2.72 2.80 2.98

1,206

1,453

1,981

2,492

3.15

3.15

2.07

2.58

3,858 5.08 4,890 I 3.11

Ships and

boats

12.1 13.5 12-4 14.0 13.4 13.6 12.1 11.4

10.7

11-3

11.3

12.9

13.9 14.9

Other eqntp- ment

9.7 8.8 9.3 9.1 9.2 9.1 9-4 9.1

9.1

9.2

10.3

9.9

11.8 12-0

9Net housing stock (in million krone at 1938 prices) given by J. Bjerke, Fourth Conference of the International Association for Research in Income and Wealth (1955) was as follows: 1865, 1,613; 1899, 3,066; 1939, 6,200; and 1953, 7,282.

458

a B s 2 8 m a - 57 74 104 110 190 235 407 437 639

790 638 862

1,193

THE ECONOMIC RECORD

TABLE I (continued) PART B

,

DEC .

5 s 231 250 264 298 367 396 470 615 688 777 830 970

1,338 1,698

-

Year

- 1865 1871 1877 1887 1889 1905 1916 1926 1930 1935 1939 1950 1955 1960 -

E 2 B

-__ 484 530 588 720 916

1,029 1,268 1,485 1,569 1,725 1,980 2,097 2,490 2.820

293 321 397 412 576 588 897

1,038 1,316 1,925 1,725 2,159 2,625 3,139

Net capital stock (million $ of 1950 PUrchasiW! Dowerd)

Private and public enterprises

__ m

* a 2 -

b %2 E-3 - 471 504 573 654 797 886

1.275 2,215 2 705 $855 3,000 3,445 3,030 4,650 -

56 65 90 126 184 221 382 468 543

805 062 646 250

Ratio of net capital stock to gloss domestic product

Private and public enterprises

1.61 1.57 1.45 1.59 1.38 1.50 1.42 2.13 2.06 2.00 1.74 1.80 1.53 1.48 -

__..I_ -

I Y

2 M e , . $ ! z --I

.79 1.65

.78 1.65

.67 1.48

.72 1.75

.64 1.59

.67 1.75

.52 1.41

.59 1.43

.52 1.19

.54 1.21

.48 1.15

.45 .97

.51 .95

.54 .90

Notes a Table I a LangtiaSlinjCr i NorsE 0kononri 1865-1960, pp. 146-7.

' Ibid., pp. 138-41. * Conversions affected as follows (see ibid., pp. 144-5 for price Indexes). The Gilbert-Kravis corn

Public enterprises are not excluded.

is used for equipment prim but revlsed figures for residential and non-mldential constructcn. rison

____ Norwegian prices Doliar purchasing Value of 1938 Value of 1955 1950 compared power of krone krone in 1950 krone in 1950 I with;zmge I in1950 1 dollars 1 dollars

(parity .140) -- Non-residential construction 0.88 .159 '347 .114 Ships Other equipment

,0955 .I41 ]I :::: I .I205

Housing 1 0-76 .184 .300 ' 098

a large and sparsely populated country. Every increase in population and national product reduces the relative burden of such capital.

Net stock of structures other than housing and governmental, in relation to national product, rose to a clearly marked peak in the 1920s and since then have heavily declined. There are probably important ' economic indivisibilities' in this sector too.

Norway has been exceptional in that net capital stock in the form of shipping has been in the past (though it is now ceasing to be) of the same order of magnitude as the sum of all other producers' durable equipment. The combined figures for these two forms of equipment rose until the 19209, after which period they did not show a down-turn, as did structures, but did rise much more slowly than before in relation to national product.

It is interesting to see that depreciation rates on ships and other equipment a hundred years ago did not differ greatly from those of the present day. Wooden ships, horse-drawn vehicles and old-fashion- ed industrial equipment also rapidly wore out or became obsolete.

1970

1.19 1-85 2.79 3.73 5.36 7.29 8.64 11.18 15.39 18.94 20-36 21.6 26-2 34.0 54-8 67.2

NET CAPITAL STOCK

TAEXLE I1 Gross Product Excluding Semices, and Net

Fixed Capital Stock: Japan (All results in billions of U.S. dollars of 1950 purchasing power)

*138 -224 *399 -624 .960 1.466 2.140 2.692 3.445 4.28 5-20 7.34 9.69 16.69 35-73 45.86

459

.027 *043 .099 -163 -267 .399 *497 -762 1.329 1.56 2.00 1-52 2.28 3.96 8.99 11-97

1889-1891 1894-1896 1899-1901 1904-1906 1909-191 1 191P1916 191 9-1 92 1 1924-1926 1930 1935 1938 1950 1955 1960 1965 1967

*579 -772 * 934 1.186 1.320 1.569 1.540 1.492 1.402 1.628 1.428 2.044 1.720 1.554 1.656 1.627

U

35 a! aog 8 r,lp

873

g & C - 3.06 4.19 5.29 5-43 6.76 7.92 10.26 13.30 19.38 20.05 25-35 19.28 29-60 48.84 80.5 00.3

- d - f $8 82 $ 2 a1

1.77 3.23 4.94 6.44 8.93 12-44 15.80 19.85 27-19 32.64 36.16 39-4 50.9 76.0 33.4 63-2

-

-

Net flxed capital stock I Ratio to gros~ product -I.--

-389 .442 -528 .687 -793 -920 *842 -840 -794 - 994 -804 * 120 -885 * 695 -681 a670

,045 .053 ,075 .115 ,142 .184 -209 .202 -178 .213 - 205 .381 a327 .341 *444 -457

-009 .OlO -019 -030 -039 * 050 *048 *067 * 069 -078 -079 -079 -077 * 081 -112 e l l 9

These results justify us in using a uniform figure of 11.8 per cent on diminishing balance (Goldsmith's weighted average) for other countries. For structures, on the other hand, Goldsmith's estimates appear too high. The depreciation rates used in the Japanese calculation were 2 per cent per annum (diminishing balance) up to 1920, rising linearly to 3 per cent per annum in 1930, and stat,ionary from that date onwards.

Net stock of non-residential structures per unit of national product rises to a maximum about 1915 in respect of public buildings, where most of the important indivisihilities may be expected to be found. Apart from the anomalous results for 1950, when national product was abnormally low, this proportion has continued to decline. Private capital requirements, on the other hand, are still rising.

No great weight should be given to the early construction stock data, which still contain a large arbitrary element. This is much less the case, however, with data on equipment stock.

Net stock of equipment per unit of real product still shows a strong upward tendency, less marked in public investment.

Japanese real product per head of labour force in 1967 w;t9 comparable With that of Norway in the early 1950s. But the Japanese capital/output ratio (omitting housing) was much lower. There are

Japan.

460

P

___h___

1.15

DEC . THE ECONOMIC] aEcoRD

TAl3LE

Gross Product Exclu&ng Services, and

1.17 1.45 1-48

1.90

Period

1.06 1.30 1.61 1.74 1.55 1.70 1.83 1.93 1.96 2.01 2.09 2.29 2.40 2.44 2-60 2.87 3.20 3.45 3.44 3.61 3.90

Average of &ye=

centred on : periods

1863 1868 1873 1878 1883 1888 1893 1898 1902-3 1907-8

1913 Average of S-year periods

centred on : 1920-21 1926-26 1930-31 1935-36

1938-39

1948-49 1949-50 1960-51 1951-52

1953-54 1954-55 1955-56 1956-57

1958-59 1959-60 1960-61

1952-53

1957-58

1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69

1.61 1.71 1.61 1-48 1 -82 1-82 1-89 2-00 2.25 2.02 2.30 2.48 2-63 2.96 2.92 3.38 3.38 3-42 3.83 4.06 4.35

$A m. a Prlcea ('

I m F

827 854 887 945 938 ,012 ,062 ,100 ,149 ,172 ,244 ,281 ,342 ,413 ,469 ,552 ,651 ,792 ,875

351 352 364 351 373 415 462 488 509 543 588 630 680 730 794 853 900 927 965

. - - I

'I I

4.73

6.73 7-34 7 -84 7-88 7-87 8.04 8.52 8.76 8.79 9 -04 9-34 9.91 9-82

10-28 10.90 11.50 12.10 12.45 13.03

(13.75) (14.15)

-422 - 624 -887

1-04 1.33 1.59 1.18 1.55 1-66 2.20

3.11

2.96 4.60 4-42 4-97

I I * 201 -218 -305 -370 *436 -468 - 723 -746 * 707 -952

1.157

- 52 -61 -78 .82 a76 -78 -82 *79 .77 -88 -96

1.07 1.12 1.00 1.10 1.26 1.45 1.40 1.49 1.62 1.84

-223 -207 -229 -296 -446 a483 -420 * 552 -546 * 595

-925

*94 -72 *88

1.16

1.33 1-35 1.71 1 -61 1-38 1-47 1.69 1.56 1.55 1.64 1.45 1.87 1.84 2-17 2.12 2.46 2.57 3-09 2.93 3.57 3.07

*400 *635 * 963

1.16 1.32 1-67 1.48 1-74 1.82 2.56

3.34

3.44 4.83 5-15 5.57

6.62

8-59 9.61

10.13 10.31 10.62 10.87 11-37 11.92 12.22 12-31 13.24 13.88 14.13 14-51 15.40 16-55 17.56 17.63 18.86 19.47 21.17

1970 NET CAF'ITAL STOCK

I11 Net Pixed Capital Stock: Australia

461

Net capital stock at end of period- VdUe in U.8. $ of 1960 pmhasing power ibilliom)

1-12 1.43 1.78 2.23 2.88 3.75 4.21 4.39 4-87 5.40

6.77

7.01 8-68 9.09 9-73

9.92

11-28 11-90 12-73 13-61 14-36 15-15 15.94 16.68 17.35 18.11 18-95 19.91 20.90 21-81 22-80 23.97 25.33 26.66 28-08 29.63 31.40

a35 -46 -57 -70 -94

1-39 1.38 1.66 1.97 2.39

2.77

3.61 4.41 4.64 5.04

5-13

5-43 5.45 6-61 5.62 5.71 6-81 6-97 6.21 6.50 6.77 7.01 7.35 7-73 8.07 8.48 8-92 9.40 .o.oo .0.52 .1.16 1.91

* 02 -03 -04 -06 -06 *07 a07 -07 -13 a17

-18

-23 *38 -37 *53

.60

-97 1-07 1.21 1.32 1-41 1.56 1.74 1.91 2.07 2.24 2-41 2.61 2.83 3.04 3.27 3.51 3.86 4.25 4-72 5-05 5.42

- 3

US1

k 2s

3g 22; -

- 5( * 7( - 94

1-4: 2-27 3-22 3-77 4-22 4.6E 6-1E

5.82

8-75 10-03 10.28 11.02

11.17

10.73 11-07 11.66 12-18 12.68 13.14 13.61 14-08 14-61 15.14 15-74 16-38 17-06 17-79 18.54 19-39 20-41 21.48 22.48 23-50 24.54

* B 4 P

8 u 3 a

so2 -02 -03 -06 *08 -10 -09 -09 *lo -10

-13

-33 -58 -59 a75

-78

* 74 -85 1.00 1.20 1.35 1-49 1.63 1.78 1-91 2.02 2.15 2.31 2.39 2.50 2-59 2-68 2.82 2-96 3.16 3.41 3-64

- 3

! 2.01 1-67 1-73 1.94 2-11 2.68 2-47 2.56 2.01

1.73

1-96 1.62 1.73 1-68

1-50

1.18 1.17 1.23 1-28 1.32 1.33 1.34 1.37 1.41 1.37 1.37 1.41 1-44 1.42 1.38 1.37 1.43 1.42 1.44 1.40

Ratio of mid-period net capitsl stock to groan domeutw product

-64 a64 a54 -62 -74 -93 -84 a97 -85

-83

-97 -83 -88 -87

-77

-56 -54 -53 - 53 -53 *51 *50 -51 -53 -51 a51 -52 .53 .52 -51 .51 "53 .' 53 s54 4 3 --

- , if 9

B

P 3 c

-04 -04 -04 -04 -04 -06 -04 -05 -06 -05

-06 -06 -07 -08

-09

-10 -11 .12 -12 -13 -14 -15 *16 -17 -17 a17 - 18 -19 -20 * 20 .20 -22 - 23 -24 * 24 -

-95 -83 1.02 1.40 1-75 2-36 2.29 2-45 1-92

1-74

2-40 1.95 1.97 1.91

1.69

1.12 1.09 1.12 1-15 1-17 1.16 1.14 1-15 1.18 1-14 1.13 1.16 1.18 1.16 1.12 1.11 1.16 1-14 1-16 1-12

-03 -03 *03 -06 -06 -06 -05 -05 -04

*04

*08 * 09 - 11 - 12 *12

-08 -08 -10 -11 -12 * 13 -14 -15 a 1 6 - 15 a16 -16 -16 -16 -16 -15 -16 -16 -16 *16

T H E ECONOMIC RECORD DEC. 462 great advantages in having a large population in a compact area, as Hagen pointed out.1°

The higher ratio for governmental capital for Japan shown in Table 11 appears to be due to railways having been classified as governmental in Japan and as 'public enterprises' in Norway.

Australia. The first noticeable feature is the way in which our predecessors used to spread themselves o n housing-as indeed we see from casual observations. The ratio gradually fell t o 1938-39. It seems clear that housing was sti3l in relative under-supply in the 1950% but the ratio has been stable in the 1960s.

In terms of our own prices, rather than international prices, the ratio is stabilizing at a level a little below one year's gross income.

Non-residential structures, both public and private, have had stable ratios since 1950. Perhaps they should have been falling. It is here that many indivisibilities show themselves, as also do opportu- nities for capital-saving improvements.

But the most serious feature is the low investment in equipment, compared with Norway or Japan. It may be that Australian industry is not under sufficient pressure of competition t o induce adequate investment in new equipment; and that we are devoting too much of our savings to public investment, and t o private office buildings.

Yonash University COLIN CLARK

APPEND= A Sources of Japanese Gross Imes twnt and Conversion to $ of

1950 P w c k n g Power All data since 1951 expressed at 1%5 prices from Revised Report on National

Incorns Staristics 19514P67 (Economic Planning Agency, Government of Japan). Data up to 1940 from Long Term Economic Statistics of Jopan since 1868 (Toyo Keizai Shinpo Sha, Tokyo, 1966), Vol. 3, pp. 191-7, sum of producers' durable equipment, ships and fishing boats, a t 1930 prices. Arbitrarily assumed initial values for total net stock of 100 m. yen at 1930 prices in 1877, for publicly-owned net stock 25 m. yen at 1930 prices in 1886. Estimated losses in the earthquake in 1923 of 175 m. yen at 1930 prices, of which one-quarter is estimated to be public property; from data in Hundred-Year Statistics of the Japanese Economy (Bank of Japan, 1966), p. 26.

War damage (including inadequacy of maintenance, and forced removal) from same source, p. 27. Reckoning throughout at 1945 prices, net stock of equipment for industry, railways, gas and electricity, telegraphs and telephones, and ships and vehicles, which was 35.5 billion in 1935, was 46.0 billion in 1945. Allowing for all net additions to capital stock, this latter figure would have been 64.1 billion had there been no war losses. Surprising though it may seem, wartime destruc- tion of equipment was less than the 1935-44 net additions to capital stock, leaving the 1945 figures still 29.5 per cent above 1935. Using conversion factors given below, the 1935 net stock of 5.55 billion yen at 19301 prices is revalued to $4.28 billion of 1950 purchasing power, making the 1945 stock $5.55 billion of 1950 purchasing power.

Less satisfactory data from 1945 to 1950 from Huvdred-Year Statistics of the Japanese Economy, p. 48.

Non-residential construction from H. Rosovsky, Capital Formt ion in Japan 10 'Social Accounts and the Incremental Capital Output Ratio in Under-Devel-

oped Countries', Third Conference of the International Association for Research in Income and Wealth (1953).

Machinery Tools and fixtures Rolliig stock Steel ships Wooden ships

Weighted average

Long Term Economic SMi8tics o/ Japan dines 1868, Vol. 3, pp. 194-7. Relative weights in grow capital formation 1928-30.

1960 price8 as

1930b Weight&!' multiple of

-63 374 .13 433 -08 452 .14 445 .02 405

40 1

mid., Vol. 8, p. 163.

0.957 yen to the 1960 $, i.e., 1.2W yen to the 1950 $. In this sector therefore the purchasing power of the 1930 yen was 384/401 or

Non-residential construction is converted on U.S. weights : I t

U.S. construction* 1957 S m.

At Japanese'

coeta of 1968 Floor spaceb average construction

*'mz , billfonyen -

Offices Shops Factories Warehouses Schools Hospitals

Total

Converted on average Construction coat per square foot in 1967 given by P. A. Stone 'International Comparison of Building Costa with Particular Reference to U.S.A. and Great Brit&', BuUclin 01 the Oxford Inatit& of Stntislies. Vol. 22, May 1960.

1,940 11-2 387 1,670 11.7 486 4,030 52-6 872

440 li . 9 90 3,350 24.0 312

880 4 .6 83

12,310 2,229 ____

Japancue Month& Conatrudion skuistics.

11 Free Press of Glencoe, New York, 1961.

464 THE ECONOMIC RECORD DEC.

I n this sector therefore 181.3 yen in 1966, or 171.1 yen in 1%5, were equivalent to the 1957 $; and 222 yen of 1960 purchasing power, or 232 yen of 1965 purchasing power, were equivalent to the 1950 $. The pre-1960 values are expressed in yen of 1935 purchasing power. From 1935 to 1%0 prices of reinforced concrete construction rose by a factor of 409, of brick by 439, and of steel frame building by 419. An average of 420 is adopted, for 1960, corresponding to 439 for 1%5,12 making 0.528 yen (232/439) in 1935 equivalent to the 1950 $.

Stone also gives U.S. residential construction costs in 1957 at $125/m2. One square metre of residential construction, costing 19,900 yen in Japan in 1%5, can therefore be equated (on the US. residential deflator) to 103.2 dollars of 1950.

885 197

APPENDIX B Sowces for Australion Data rmd Factors for Expressing

in US. $ of 1950 Purchasing Power 1. Corwersim Factor

For personal consumption other than services, conversion is effected via a comparison with British prices: B. D. Haig, Real Product, Income, and Relative Prices in Australia and the Udted Kingdom (Australian National University Press, Canberra, l W ) , pp. 46, 79.

6,320 1,145

- Personal consumption Deductions: Housing

Entertainment Education Medicine Other household and persoml services MiaceIlaneous BBrvices

Remainder to be compared

fA m. 1958-5Q

4,178 350 46

148 161

64

285 3,124

Equivalent in fSQ. m. at 1958 prices

3,318 312 26

165 123

39

158 2,495

British prices now have to be converted from 1958 to 1950 and then converted to $ prices on the Gilbert-Kravis comparison (op. cit., 1957 ed., Table 43). The British figures for 19% were revalued at 1954 prices which then had to be converted to the 1958 base: National Income and Expenbitwe, 1958, Tables 26, 27, 56, 57; and lm, Tables 18, 19, 54, 55.

Value in 1958 j atcyr i tpnces At 1950 prices Valueat1950

Coneumer expenditure in U.K. : Total To be excluded :

Housing Entertainment Domestic service Other eervices

Remainder to be compared

15,008

1,362 253 92

1,156

12,145

10,900 48,260

I 8,991 1 36,995

In this sector therefore the purchasing power of the Australian f: in 1958-59 was exactly equal to its exchange rate (0.80 fstg.) or 2.44 $ of 1950 purchasing power.

Data from the same sources show that for vehicles, plant and machinery, the 12Revi.wd Report on Nafiotzul Income Statistics 1953-1967 (deflator for all

private fixed investment other than dwellings).

1970 NET CAF’ITAL STOCK 465 fstg. in 1958 had a purchasing power of 2-24 $ of 1950. Haig gives the f A in 1953859 a purchasing power of 0.592 fstg. over locally-made machinery, 0.516 over imported, or a mean of 0.554. This gives it a purchasing power of 1-24 $ of 1950.

For residential construction, Queettsland Year Book, 1%2, p. 228, gives the cost of a standard house at 25-95 fA/m2 for 1959-60, to be compared with 105.5 $/ma in the United States in 1956, or 89-4 in 1950, i.e. a factor of 3.55 for the Australian pound.

For non-residential construction (based on experience in Europe), a factor is taken half way between the residential construction factor and the exchange rate.

Imports, and additions to stocks, are converted to $US at current exchange rate for the base year 1959-60, then converted to 1950 $ on the U.S. general price index. Exports treated similarly except that conversion back to 1950 is effected on the U.N. index of world prices for primary products.

This gives us the following factors for converting the Australian dollar of 1959-60 (the base year for pricing real national product) to $US of 1950 purchasing power :

ConsumDtion f not services) 1.185 . ~- ~ - ---, Machin& and equipment 0.605 Residential construction 1 - 775 Non-residential construction 1.30 (1958-59) Imports and stocks 0-882 Exports 1 * 152

In the real product tables, non-residential construction is not separate from machinery and equipment so a weighted composite of 0-84 is used.

2. National Product From the national product tables are extracted money values of gross product

a t factor cost of the service industries, which are converted to 1959-60 prices by the deflator for public authorities expenditure; and of expenditure on housing plus two-thirds of rates, which are converted to 1959-60 prices on the c o n s q e r price index for housing. Product figures since 1948-49 from Aus#rakan Nahonul Ac- counts J848-49 to 1961-62, and 196869. The 1948.49 data are linked to 1938-39.h real terms on Haig‘s results (‘1938/39 National Income Estimate’, Australran Economic History Review, Vol. VII, September 1%7).

From 1938-39 back to 1913, exports (including gold produced) and imports (it was assumed that one-fifth of imports went into stock-building except for 1938-39) were revalued directly to 1950 $. The real value of national product less exports and four-fifths of imports was extrapolated on data in the author’s conif%- tiom of Economic Progress (Macmillan, London, 1951). I t is not necessary .to make any adjustment for changing proportion of services and rents which ( H a g , ~OC. cit.) constituted 21.2 per cent of gross product in 1933839. Cogh1an:s figures for 1889-!W3 showed them contributing 23 per cent of national income, 1.e. again about 21 per cent of gross product.

Prior to 1913 data were from N. G. Butlin, Australian Domestic Product, In- vesfmmt and Foreign Borrowing 1861-.21938/39 (Cambridge University Press, Lon- don, 1962). Exports from pp. 410-11 deflated by the mean of Butlin’s price index for pastoral products (p. 455) and W. k Lewis’s index of world prices of primary products (‘World Production, Prices and Trade, 1870-1%0’, Manchester School .f Ec-k a$ Social Studies, Vol. X X , May 1952, pp. 117-18; befpre 1870, W. Beveridge, Mr. Keynes’ Evidence for Over-Population’, Ecomm*ca, Vol. IV, February 1924), to which value of gold production in 1950 $ was added. Imports (same assumption of one-fifth used for stock-building) from Butlin,.p. 413 (less his items 5-8) deflated by Lewis-Beveridge indexes for manufacturing prices. From 1901 onwards Commonwealth Statistician’s revaluations of exports and imports in real terms were used (Commonwealth Year Book). From Butlin’s gross domestic product at market prices (pp. 6-7) were deducted exports, gold production and assumed stock-building, imports added, then rent and government and other services subtracted (pp. 10-11). Result deflated by Butlin‘s retail price index (p. 455, heading ‘distribution’).

13 See Colin Clark and J. G. Crawford, The National Income of Australia (Angus & Robertson, Sydney, 1938).

THE ECONOMIC RECORD DEC., 1970

3. Gross Investment Residential construction (including public) up to 1938-39 at 1910-11 prices

from Butlin, pp- 462-5. Official data from 1948-49 at 1959-60 prices; 1939-40 to 1947-48 from Reserve Bank data produced by Garland. Price factor relating 1938- 39 f to 1959-60 $ is 5.73 (Qlreensland Year Book), making the 1910-11 f to 1959- 60 $ price relative 11.78 (Butlin, p. 459).

Anstey’s formula for depreciation with 20-year depreciation-free period to 1920, 25-year from 1920 to 1945, thenceforward 3Gyear. Arbitrary estimates of pre-1861 construction giving a net stock of 0.84 billion $ of 1950 at end of 1860.

Private non-residential construction to 1938-39 from Butlin’s commercial buildings, plus half manufacturing and mining gross fixed investment, at 1910-1 1 prices. Relation of 1910-11 to 1959-60 prices as for residences above, but different factor (1.30) for conversion to $ of 1950. Three per cent depreciation. Assumed arbitrary initial stock of 0.3 billion $ of 1950 in 1860. Private equipment investment extrapolated back from 1948-49 to 1912 on sum of manufacturing value added Class IV and Imports Class XII, deflated by U.S. deflator for producers’ durables, adjusted for exchange rate. Between 1928-29 and 1937-38, hqwever, better information (at current money values) is available in Roland Wilson, Public and Private Investment in Australia’ (ANZAAS proceedings, 1939) .I4 Basing on 1937-38, his data (excluding private cars and consumer durables) are used to adjust the other series back to 1928-29. Before that date Butlin’s values (pp. 462-3) at 1910-11 prices for shipping, plus half manufacturing and mining investment. Assumed 1860 initial stock $20 m.; 11.8 per cent depreciation.

466

2.36 2.36 2.36 2.61 2.41 2.32 2-14 2.09 2.06 2.06

1928-29 1929-30 1930-31 1931-32 1932-3 3 1933-34 1934-35 1935-36 1936-37

1938-39 1937-38

* 309 .310 .297

~ 357 -316 .204 .217 -216 .218 -236 *238

Wilson

I

37-7 32.6 17.4 11.9 16.2 20.3 28-5 36.8 43.3 52.8

Clam IV plus Clllaa XI1

8

89 77 41 31 39 47 61 77 87

106 101

Rstio to Wilson Price index 1959-60 base

The fluctuations in the price index are mainly due to changes in the dollar exchange rate.

Pidlic Fixed Investment (Including Pztblic Enterprises) Housing investment in this sector has already been included. Non-housing

investment is only shown distinguishing structures and equipment from 1955-56 onwards, since when the equipment proportion has ranged between 22 per cent and 28 per cent. It has tended to rise with the increasing relative importance of electricity generation. For earlier years, using some experience from other countries, arbitrary proportions of 5 per cent are fixed up to 1910-11, rising linearly to 15 per cent in 1928-29, 20 per cent in 1938-39, 22 per cent in 1948-49 and 28 per cent in 1955-56.

Butlin’s figures (pp. 464-5) at 1910-11 prices extrapolated to 1948-49 on Reserve Bank‘s estimates at 1936-39 prices. Converted to 1950 $ on same factor as non-residential construction. Arbitrarily assumed initial values of $25 m. at 1950 prices for stock of equipment and $300 m. for structures in 1860. Depreciation 3 per cent on structures, 11.8 per cent on equipment.

‘4This important document is now very rare. Copies are available in the Reserve Bank and the Commonwealth Statistician’s libraries.

net capital stock

Documents