The Interrelation between Capital and Output in the American Economy

  • Evsey D. Domar
Part of the International Economic Association Series book series (IEA)

Abstract

That capital is a necessary factor of production must have been known to men, beavers and bees from time immemorial, but serious and fruitful attempts to find a quantitative relationship between capital and output and to incorporate it into the body of economic theory have, with a few exceptions, been remarkably recent.1 Part of this delay may be conveniently attributed to a lack of statistical data. Yet sources which could have yielded reasonable estimates of capital for the country as a whole and by industries had existed for quite some time,2 and might have been utilised earlier if demand for information of this kind had been present. The principal blame for the neglect of this subject should be attributed, I believe, to traditional economic theory. With the exception of the quantity of money, it has been very wary of stocks and has almost completely neglected the balance sheet as an economic document.3 But more important in this connection has been its general preoccupation with the static optimum combination of factors of production as determined by relative prices, and its exaggerated emphasis on the elasticity of substitution between factors and products. If capital and labour were easily and freely substitutable for each other, their respective relationships to output could hardly have much significance.

Keywords

Depression Europe Petroleum Steam Transportation 

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Notes

  1. 1.
    A brave attempt was made by Paul H. Douglas in The Theory of Wages, New York; see also Paul H. Douglas and Grace Gunn, ‘Further Measurements of Marginal Productivity’, Quarterly Journal of Economics, vol. 54, May, 1940, pp. 399–428. This article also lists his previous writings on this subject. It is very regrettable that his work became involved in methodological questions and failed to make a lasting imprint on the profession.CrossRefGoogle Scholar
  2. See Horst Mendershausen, ‘On the Significance of Professor Douglas’s Production Function’, Econometrica, vol. 6, April, 1938, pp. 143–53.CrossRefGoogle Scholar
  3. 2.
    Official estimates of American wealth were made for the years 1850, 1880, 1890, 1900, 1904 and 1922. For a discussion of them see Simon Kuznets, National Product since 1869, New York, 1946, pp. 185–234; alsoGoogle Scholar
  4. Raymond W. Goldsmith, ‘A Perpetual Inventory of National Wealth’, Studies in Income and Wealth, vol. 14, New York, 1950, pp. 5–61.Google Scholar
  5. 3.
    See, however, Kenneth E. Boulding, A Reconstruction of Economics, New York and London, 1950, and the numerous recent surveys of consumers’ assets published by the Board of Governors of the Federal Reserve System.Google Scholar
  6. 6.
    R. F. Harrod, ‘An Essay in Dynamic Theory’, Economic Journal, vol. 49, March 1939, pp. 14–33, and Towards Dynamic Economics, London, 1948. In his treatment, the ratio between capital and output depends on psychological responses of firms to a given rise in income and it is not readily ascertainable in quantitative terms; it may also differ considerably from the magnitude of the capital coefficient in the more usual sense.CrossRefGoogle Scholar
  7. 7.
    E. D. Domar, ‘Capital Expansion, Rate of Growth, and Employment,’ Econometrica, vol. 14, April 1946, pp. 137–47.CrossRefGoogle Scholar
  8. 8.
    Wassily Leontief et al., Studies in the Structure of the American Economy, New York, 1953.Google Scholar
  9. 9.
    Simon Kuznets ‘Long-Term Changes in the National Income of the United States of America since 1870’, and Raymond Goldsmith, ‘The Growth of Reproducible Wealth of the United States of America from 1805 to 1950’, both in Income and Wealth of the United States, Trends and Structures, published in the Income and Wealth Series II by the International Association for Research in Income and Wealth, Cambridge, 1952. See also the references given in notes 2 and 8.Google Scholar
  10. 12.
    US Bureau of Internal Revenue, Bulletin F, Income Tax Depreciation and Obsolescence, Estimated Useful Lives and Depreciation Rates, revised January 1942.Google Scholar
  11. 14.
    From Kuznets, National Product since 1869, New York, 1946, pp. 50–1, 115; Survey of Current Business Supplement, National Income and Product of the United States, 1929–50, Washington, 1951, pp. 146–50.Google Scholar
  12. 15.
    That a new firm may need no replacements for a number of years after its organisation is, of course, known. For a more thorough treatment of this whole problem see E. D. Domar, ‘Depreciation Replacement and Growth’, The Economic Journal, vol. 63, March 1953, pp. 1–32.CrossRefGoogle Scholar
  13. 23.
    For a distribution of investment by industries see J. Frederic Dewhurst et al. America’s Needs and Resources, The Twentieth Century Fund, New York, 1947, pp. 373–410; US Department of Commerce, Markets after the Defense Expansion, Washington, 1952, p. 35; and the recent issues of the Survey of Current Business. Google Scholar

Copyright information

© The International Economic Association 1987

Authors and Affiliations

  • Evsey D. Domar
    • 1
  1. 1.Johns Hopkins UniversityBaltimoreUSA

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