THE MARGINAL PRODUCTIVITY OF CAPITAL

There are good grounds for believing that there must be a slow downward trend in the average rate of return to capital, as time advances and increasing quantities of capital are accumu- lated throughout the world (barring wars or fundamental economic disturbances). A method for the precise measurement of the marginal productivity of capital has been suggested by the work of Professor P. H. Douglas (dealt with in a separate article in the forthcoming Economic Record). He has been able to make some estimates for the U.S.A. and Australia, and shows that the share which capital is actually able to obtain in current output is mathematically related to its marginal productivity, as anticipated by theory. The share which capital obtains in output is defhed as 1 - k, while the amount of output obtained per unit of capital (a measure of the degree of capitalization of

any industry) is defined as -. The product of these two factors,

as can be shown mathematically, gives a measurement of the marginal productivity of capital.

Bearing these considerations in mind, we can see that a study of the share of the product obtained by capital in different industries and difFerent countries may yield results of impor- tance. For the U.S.A., this share is found to be surprisingly low.

Dr. Kwnetz gives the following figures showing the share taken by property in all output in the U.S.A. for the average of the period 1919-1934.

TULE I Share of Property in Output in U.S.A., 1919-1934

P

C

Per Cent. Agriculture . . . . . . . . . . . . . . . . . . . . . . 6.0 Mining . . . . . . . . . . . . . . . . . . .’. . . . . 14.5 Manufacturing . . . . . . . . . . . . . . . . . . . . 13.7 Construction . . . . . . . . . . . . . . . . . . . . . . Z.3 Transport and public utilities . . . . . . . . . . . . 27.0 Trade . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1 Government . . . . . . . . . . . . . . . . . . . . . . 22.5 Service . . . . . . . . . . . . . . . . . . . . . . . . 1.6 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 9.3

13.2

110

To deduce the marginal productivity of capital, these figures of the share of capital in the product of each industry, or (1 - k)

m a t be multiplied by -, which is about 0.2 for the U.S.A. as

a whole. Unfortunately exact figures are not available for the other subdivisions, but it can be estimated that the figure is about 0.1 for railways, 0.6 for agriculture, and possible 1 or more in the spheres of trade and services.

This table shows clearly the types of industry in which capital may still be said to have “value.” The figure for “trans- port and public utilities ’’ comprises the following subdivisions :

P

C

Electricity and gas supply . . . . . . . . 57.2 Steam railways . . . . . . . . . . . . . . . . 21.3 Street railways, pipe lines, water transport 19.4 Telephone and telegraph . . . . . . . . . . . . 22.8

The figure of 26.1 per cent. for “ h a m e ” is compounded of 36-6 per cent, in banking, minus 4.3 per cent. in insurance, and 30.2 per cent. in “real estate’’ (including the ownership of leased houses and‘ flats).

Only in the spheres of transport and public utilities, finance and government does capital now retain any considerable share of the product of industry. Its share is seen to be lower than in the public utilities and finance, while in the output of agricul- ture, trade, construction, services and miscellaneous industries (between them producing 41 per cent. of the national income in 1935), the share is trifling.

In general the conclusim must be reachced, that the highest marginal return t o capital, under present day con- ditions, is to be found in investment in public utilities, housing and banking; and it is t o be anticipated that the main flow of capital in the future will be into investments of the two former types. (High profits in banking are probably to be regarded as temporary; at any rate the idea of any substantial flow of new capital into banking must be regarded as absurd.] The amount of capital absorbed by new investments in manufacture and mining wil l be small, and in other types of industry, smaller still.

The exponent of capital in the production formula in Great Britain is now distinctly lower than the figure of -45 calculated from the capital data as wages and salaries now absorb 75-80 per cent. of national income. The post-war figures for the share of rent, interest and profits are much below the 1911 level,

112 THE ECONOMIC RECORD APRIL

but at the same t h e there appears to have been no further downward trend between 1924 and 1935. Professor Bowley has shown that between 1880 and 1913 the share of wages and salaries in home-produced national income remained almost constant at 69 per cent.

In France,' omitting income from foreign investments from the national income, we find the following shares of national income going to land and capital:

1850 . . . . . . . . . . . . . . . . . . . . 24.7 1890 . . . . . . . . . . . . . . . . . . . . 25.5 1900 . . . . . . . . . . . . . . . . . . . . 22.4 1911 . . . . . . . . . . . . . . . . . . . . 26.0 1924 . . . . . . . . . . . . . . . . . . . . 23.6

a fairly constant share. It appears that the share of rent in the national income was very high in 1790. For over a century it has been steadily falling. Now it probably barely represents interest on the capital invested in improvements to the land, and true agricultural rent is probably non-existent.

In French manufacturing industry, on the other hand, the Census of 1930 showed that wages and salaries obtained only 57 per cent. of the net product. In France, unlike America, the marginal return to capital engaged in manufacturing is high, and in the long run a further flow of capital into French industry is to be anticipated.

These analyses of the marginal productivity of capital in various uses and in various countries should, if correct, throw some light on the problems of the composition of capital: that is to say, the relative proportions of the different types of investment to be found in the existing stock of capital, so far as it can be measured, in m e r e n t countries and at different dates, and in the flow of new capital.

To throw some light on the accumulation of capital in the earlier stages of economic development, Lord Stamp's figures of capital in the principal countries in 1913, and the British series from 1865 onwards, can be analysed into buildings, railways, farm capital and other commercial capital. The various figures for the U.S.A. are, unfortunately, defective and inconsistent and it is impossible to obtain any more detail from them.

Comparing the temporal data for Great Britain with the spatial comparison between difPerent countries in 1913, together with certain supporting data for 1880, we find in each case approximately the same laws of growth of capital.

1. Data from Leroy-Beanlieu. Simiaad. and De Bcrnonville.

1939 MARGINAL PRODUCTIVITY OF CAPITAL 113

TOLE I1 Distribution of Capital Investment*

Distribution of Capital. Tdal capital Inv-tment. Induntrial ( $ per head of working Farm Commercial

population ) CapitaL Railways. Buildin-. Capital. About 500 .. .. .. .. 100 50 100-200 100-300

1000-2000 .. .. . - -. a . 100-300 200300 200-600 300-800 (Japan. 1918: Sweden, Nor- way, Hungary, 1880)

(Great Britain, 1866, 1873 ; Ireland. Austria. Denmark, 1880 : Austria. Hungary, Italy, Spain, 1913)

(Great Britain, 1886, 1900, 1913 : Germany. France, Sweden, 1913)

(U.S.A... Canada, Auatralia. Argentine, 1918)

About 3000 .. .. .. - . 300-400 200-500 900-1300 1200-1600

4000-5000 .. .. .. .. - . 300-500 400-700 1400-2400 1600-2000

*All capital revalued in dollars at present day prices.

The accumulation of farm capital naturally constitutes the first stage of capital accumulation, but from a comparatively early stage it will only represent a small fraction of each new increment of capital. The building of railways absorbs a sub- stantial but not predominant share of the total increment of capital in the first stage, subsequently absorbing only a small share. Most interesting are the relative rates of growth of industrial and commercial capital on the one hand, of buildings on the other. Up to the stage of about $3000 of capital per head (the stage reached by the principal European countries about 1913), industrial and commercial purposes absorb the main proportion of capital accumulation. From here onwards, how- ever, the rate of growth of industrial and commercial capital begins to slow down, and buildings absorb the lion’s share at the next stage of increase.

These tendencies may be studied in more detail by examin- ing the composition of the present flow of new investment in each year, in comparison where possible with other years. The longest series of data are those referring to Great Britain, and here some remarkable tendencies are apparent.

With a slowing down in the rate of population growth, the portion of national income devoted esch year to the con- struction of new dwellings has fallen from 44 per cent. t o 2 per cent., and may be expected to fall further. This, however, by no means fully accounts for the reduced share of savings in the national income. Industrial and commercial investment, which absorbed 8.3 per cent. of the national income in 1860-69, took only 2.5 per cent. in 1907 and less than 1 per cent. in 1929. H

114 THE ECONOMIC RECORD APRIL

At the same time investment in public works, as compared with other investment, shows an upward tendency. These figures show how marked is the contrast between the “mature” form of economy and the “young” economic organism of the 1860’s where manufacturing capital was being rapidly accumu- lated and a t the same time a considerable fraction of the national income had to be saved each year to provide houses for a rapidly growing popdadon.

But the inescapable tendency is for an increasing propor- tion of savings to be devoted t o investments of the “public works” type, where interest returns are low, but where the scope for investment of new capital is almost limitless. Capital, as a factor of production, obtains as we have seen diminishing returns, that is to say, the rate of interest must fall as the average stock of capital per worker rises. And the diversion of the flow of new investment from profitable manufacturing ventures to less remunerative public investments is an inevitable part of the mechanism.

For the U.S.A. figures are only available since 1919.

TABLE I11 Net Capitd Formation (excluding changes in inventories and

in stocks of gold and silver) Yn. t at 1929 Prices.

Dwellinps. Bushes#. Public. Foreign. Tot& 1919 . . . . . . -336 1677 104% 2072 4456 1923 . . . . . . 2273 2312 1242 270 6097 i925 . . . . . . 3079 3282 1868 292 8521 1929 . . . . . . 530 4338 2326 457 7651 1939 . . . . . . -1867 -2600 1744 113 -2610 1935 . . . . . . -1209 -531 2176 -827 -392

In the U.S.A., even in the period of greatest activity, 1923-29, business investment only took 40-50 per cent. of America’s net savings each year, and business has subsequently decumulated several years’ accumulations. Public investment, including all works and buildings constructed by public autho- rities, schools, hospitals and roads, indeed has been the only form of net investment during the last few years, and there is every sign of this predominance persisting.

For 1937, from index numbers of changes in the volume of construction, it appears that the figure for dwellings (in the same units) has risen to +200, and for business investment to over 3000. But 1937 was the peak year of the trade cycle and business investment in 1938 fell back to about the 1935 level.

From N a t i o d I n c m and Capital Fmmuth. Dr. Kuznetz.

1939 MARGINAL PRODUCTIVITY OF CAPITAL 115

Investments in dwellings (with substantial government assis tance) was maintained.

For Germany an analysis of net investment in fixed capital is available from 1924 t o 1934 (Statistisches Jahrbuch) .

TBLE IV Net Investment in Fixed Capdal-Germany, 1924-1934

Mn. Marks.

1924.. 128 314 Z35 648 495 -24 248 2044 6028 1928 . . 328 1081 731 892 1506 1707 729 6974 2648 1932 . . -86 -881 -104 -235 395 -436 -255 -1062 -1863 1934 . . 77 -233 -11 289 2200 136 -100 2358 1282

German conditions immediately after the inflation were peculiar in that a large proportion of the available savings (and borrowings from abroad) had to be devoted to building up stocks of working capital, which had been completely denuded by the inflation. With a temporary set-back in 1926, this re-cumulation of stocks continued up to 1928.

Apart from this factor, however, it is interesting to notice the predominant proportion of the total net investment in fixed capital represented by housing, transport, gas, water, electricity, and other public works.

The net investment in Gxed capital in 1937 was over 10 milliard marks (at 1928 prices) but unfortunately no data are available to show how this was subdivided.

Dr. Wilson's figures for Australian net investment in 1936- 37, (omitting motor cars and other durable consumption goods to obtain uniformity of definition), omitting increment in values of stocks of goods (largely due to price changes) and making a further allowance for depreciation of dwellings and commercial buildings of E8m. per year, can be approximately analysed as follows :

Em.

Industry and commerce . . . . . . . . . . . . 21 Dwellings . . . . . . . . . . . . . . . . . . . . 23 Other buildings . . . . . . . . . . . . . . . . . . 14 Public works . . . . . . . . . . . . . . . . . . . . 28

Agricultural and pastoral . . . . . . . . . . 1

Net capital outflow . . . . . . . . . . . . . . . . 9 - 96

116 THE ECONOMIC RECORD APRIL

Generally speaking, we can say that data from all countries confirm our conclusion of the tendency for relatively less capital to be invested in industry, relatively more in public services, the position of housing being left ambiguous, as time and economic standards advance.

COLIN CLARK. Brisbane.

SUMMARY O F DISCUSSION MT. Hytten: Asked for further elucidation of the connec-

tion between Table I and the statement immediately following it. He was also uncertain as to the significance to be attached to Table III.

Mr. Clark: Replied that the figures in Table I had to be multiplied by the factor -. Capital in most cases had a very low productivity. Table I11 was intended to illustrate the ten- dency for more capital to be invested in public services and *latively less in industry. The year 1932 was one of intense depression, but in Great Britain and Australia there had been no violent decumulation of business capital comparable with that experienced in the United States.

Mr. YelvaZle: Asked how the margin of risk between gilt- edged securities and industrials had been estimated.

DT. Coombs : Said that the paper represented an .exposition of the view recently revived by Mr. Keynes that there was a long-term tendency for the return on capital to decline. This was a fundamental part of the theories of the classical econo- mists. This tendency for the return on capital to decline was temporarily disturbed by other factors during the 19th century, e.g., the opening up of new territories for exploitation from about 1850 onwards. Another factor restraining the downward tendency was the rate of technical development. This was clearly apparent in the countries where technical development had been rapid and extensive. Mr. Clark, however, seemed to consider technical development to be a factor which speeds up rather than delays the decline in the return on capital. Could this point be clarified?

MT. Clark: Replied that his approach was to divide inven- tions into labour-saving and capital-saving. He agreed with Dr. COombs’ point about new territories, the development of which allowed high interest rates to be earned. But we could not look forward to much more of this, nor to the discovery of many new fields where capital could be invested. It would be interesting to find out if labour-saving devices were invented in the 19th century and capital-saving devices in the 20th.

DT. Mauldon: Asked whether there was no scope for the investment of capital in so-called “tertiary” fields.

P C

1939 MARGINAL PRODUCTIVITY OF CAPIT.4L 117

Mr. Clark: Replied that investment of that type would be almost entirely in buildings. These tertiary industries need very little capital of other kinds.

Dr. C o m b s : Asked whether capital-saving invention did not destroy capital.

Professor Bdshaw: Inquired what would be the effect on capital investment if the attempts to satisfy tertiary demands took the form of providing adult education and so forth.

Mr. Clark : Thought investment in such circumstances would still be largely limited to buildings.

Professor Cfiblin : Asked Mr. Clark to amplify his statement of the reasons why the formulae failed t o predict the course of production after 1920.

Mr. Clark: Said that there was something in Menders- hausen's criticisms that it is easy to get a spurious result. The best answer was that a similar result was obtained from a horizontal comparison between industries. With regard to the increase in Australian manufacturing production, it was true that this was less than would have been expected from such a formula. The discrepancy could be explained by the operation of diminishing returns when Australian industry expanded so rapidly into new fields in 1929, 1930, and 1931. He hoped that this phase of diminishing returns was now over.

Professor Copland : Said that decreasing returns would again operate on the introduction of an immigration scheme.

Mr. Clark: Replied that returns per head were increasing very rapidly up to 1926 and fairly rapidly after 1926. He suggested that the solution to the problem might be found by introducing the factor of V((L2 + 0).

Mr. Melville: Said that he was sceptical of mathematical formulae applied to such problems aa this. However, the con- clusions at which Mr. Clark had arrived could be drawn from the facts without the use of the formulae.

I n projecting his figures from 1937 to 1947, Mr. Clark estimated a certain increase of capital from the current rate of saving. But it was not at all certain that increased saving and increased investment could in all cases be considered as increasing the total capital of the community, e.g., investment in aeroplanes might reduce the value of railways or ships. Thus the physical equipment of the oommunity might be increased while the value of that equipment was diminished. There would be an optimum point after which increased saving and increased investment would actually lead to a decline in the value of capital.

He suggested that the return on good industrial securities, as compared with government securities, would normally be about one per cent. higher. Perhaps Mr. Clark would maintain that the return on industrial securities was calculated on the market value of the shares, not on the capital invested, but this

11s THE ECONOMIC RECORD APRIL 1939

was a very difEcult question to decide. The margin between industrials and gilt-edged securities tended to decline as rates of interest fell. He thought the tendency towards capital- saving rather than labour-saving inventions was making for a much more rapid fall in the rate of interest. On the other hand, surely more investment was necessary for tertiary industry, not only residential building but construction for all sorts of amuse- ments, travelling facilities, etc. Future investment in tertiary industry would call for increasing government investment and decreasing private investment. He could not help feeling that there were many ways of employing capital in tertiary industry to absorb all the savings of the community long before we reached a zero rate of interest.

Mr. Clark : In reply, pointed out that Mr. Melville’s opinion was contrary to the views expressed by Loveday, Fisher and Reddaway that risks would increase rather than decrease.