chapter  5
19 Pages

National Frontiers and Economic Growth

The reader is warned, however, that these results should not be interpreted to mean that capital formation has little to do with the growth of productivity. Capital formation plays a small role in the rise of GNP per man-hour if the level of technology is assumed to be constant, but an increase in both variables entails an interconnection between the two. Not only is investment needed to finance research expenditures which contribute to technological change, but the rate of capital formation also serves as a restraint to the application of new production methods; in the absence of positive net investment, new equipment utilizing advanced technology could be used only to replace worn-out machinery. Therefore, although capital formation by itself is only a minor determinant of productivity growth, the invention and application of new technological methods would be hampered if the capital stock did not increase.