ABSTRACT
In the examination of the process of economic growth, the role of capital has received what can only be called a ‘mixed press’. During the 1950s, largely as a result of the impact and development of Keynesian theory, primacy was given to investment as the key variable. This interpretation led to changes in the ratio of investment to income accepted as the indicator of industrialization. Analyses with this premise stimulated a search for empirical evidence with which to test the hypotheses on which they were based. Initially it seemed that too much emphasis had indeed been given to the relationship between the growth of investment, its consequent increased absorption of income, and structural change. It appeared that instead of the investment ratio rising from about 5% to 12–15% within the space of 30 to 50 years, the accumulation of capital assets during industrialization was far slower and less dramatic. Deane and Cole's work on British economic growth indicated that the needs of investment took up about 5% of national income in the decades before the 1780s, increased to only 7% by the 1800s, and only reached the level of 9–10% with the railway construction booms of the 1830s and 1840s. Although research by Hoffmann and others on the German economy found an appreciable rise in the ratio of net capital formation to national income from about 8.5% in the 1850s to 13.5% in the early 1870s, this was partly due to the abnormal amplitude of the upswing of the trade cycle in the latter decade. In the 1880s the ratio was still below 14%. Testing of what may be termed the Rostow–Lewis thesis of the explanation of industrialization appeared to find it wanting. The role of capital was also apparently diminished by findings from sources of growth analyses in which the growth of output was accounted for by the growth of factor inputs. Results, which initially met with some surprise, showed that generally at least a third of the growth of real output was attributable to a residual, not being explained by increases in the volume of land, labour, and capital employed.
