Showing papers on "Physical capital published in 1972"

Capital Markets: Theory and Evidence

Abstract: This paper is a review of the foundations and current state of mean-variance capital market theory. This work, whose foundations lie in the mean-variance portfolio model of Markowitz, deals with determination of the prices of capital assets under conditions of uncertainty. The Sharpe-Lintner capital asset pricing model which forms the core of this body of literature is an investigation of the implications of the normative Markowitz model for the equilibrium structure of asset prices. The essential characteristics of these models are reviewed along with the current state of the empirical evidence bearing on them. Many of the recent extensions of the theory are also reviewed and some attempt is made to integrate these extensions with the currently available empirical evidence.

Investment Behavior and the Production Function

Abstract: In the economic theory of investment behavior the form of the optimal production and investment policy depends critically on the form of technology. The purpose of this paper is to select an appropriate description of technology on the basis of empirical evidence for United States manufacturing industries. The evidence is consistent with a production function characterized by elasticity of substitution equal to unity and constant returns to scale. For this description of technology the optimal policy determines an optimal rate of growth of capital and associated capital/output and labor/output ratios for any set of prices of output, labor input, and capital input. The desired level of capital is a perpetually moving target to which actual capital never converges. The corresponding model of investment policy has been employed extensively in econometric studies of investment behavior. Characterization of the form of optimal investment policy makes it possible to resolve the considerable controversy over the interpretation of econometric models of investment.

An optimal growth model with time lags

Abstract: The paper discusses the allocation of output among consumption and two types of capital with different gestation periods. Along an optimal path, we show that the imputed prices of capital goods, from the time they start production, do not exceed the prices of output, which are not less than the marginal instantaneous utility of consumption. A simple numerical example helps to illustrate some further implications of the model. RECENT PAPERS on optimal growth consider models of allocation of resources between consumption and investment. It is invariably assumed that investment results in an instantaneous increase in the stock of capital. Such assumptions obscure differences in the gestation periods among various capital goods. In [1] we discuss how a growth problem with time lags can be formulated and interpreted and explain the derivation of the necessary conditions for optimization. In this note we study the effects of differences in gestation periods on optimal investment plans for a growth problem including depreciation and population growth. Consider an economy where two capital goods and labor are used in the production of a single commodity. The per capita output at time t is given by the production function: f (kl, k2), where k, is the per capita stock of capital of type one, and k2 is the per capita stock of capital of type two. From now on, all variables will be per capita and we drop the designation. We assume the following:

Investment in Men Versus Investment in Machines: The Case of India

Abstract: This chapter attempts to evaluate the economic rate of return to society as a whole of investment in physical capital, on one hand, and of investment in secondary and higher education, on the other. The chapter deals exclusively with data from India. It goes into considerable methodological detail in an effort to indicate ways of making as good use as possible of data that are far from ideal. Poor data are characteristic of underdeveloped countries—indeed, the Indian data are probably better than those for the overwhelming bulk of poor countries. Part of my purpose in presenting this study is to help ‘break the ice’ by suggesting a variety of ways of overcoming potential inadequacies in the data. The other part of my purpose is to draw some inferences about the Indian situation.

Optimum Investment in Human Capital

Abstract: Recent empirical studies (Schultz [8] and [9]) show that an accumulation of knowledge contributes much more to the growth of per capita income than does an increase in the capital-labour ratio. Major parts of the increase in productivity come from investment in human capital and learning by doing. While the learning-by-doing theory has been well formulated (Arrow [1]), there is no theoretical formulation of the link between productivity change and human investment. The purpose of this paper is to provide such a discussion by incorporating the theory of investment in human capital (Becker [2], Ben-Porath [3]) into a model of economic growth. It is shown that for a simple form of a return-to-labour function the existence of nonHarrod-neutral technical change, when it is the result of investment in human capital, is a source of externality. A general result which relates the form of the return-to-labour function to the form that technical progress must take if externalities are to be avoided is then established.

The choice of industry mix in the division of labour between developed and developing countries

Abstract: Die Wahl der Industriezweige innerhalb der Arbeitsteilung zwischen Industrie- und EntwicklungslAndern — Die vorliegende Studie untersucht, wie die internationale Arbeitsteilung in der Industrieguterproduktion zwischen Industrie- und EntwicklungslAndern verbessert werden kann GegenwArtig ist in vielen EntwicklungslAndern eine Fehlspezialisierung festzustellen, durch die nicht genugend ArbeitsplAtze fur die schnell wachsende Erwerbsbevolkerung bereitgestellt werden

The treatment of intangible resources as capital

Abstract: The author describes the results of his current research designed to measure total investment, tangible and intangible, and the derived capital stocks for the U.S., 1929–1966. With respect to total investment, the estimates show a marked increase in its ratio to GNP. All of the increase occurs in the intangible component comprising R & D, education and training, health, and mobility. The increase was concentrated in the government sector, although households increased the proportion of disposable personal income devoted to total investment. Consistent with the relative investment trends, the stock of intangible capital grew considerably faster than the tangible stock. The growth of total capital stocks was somewhat less than that of GNP, however, in both current and constant prices. Thus, the rate of return on total capital rose somewhat over the period. Average rates of return on human and nonhuman capital were closely similar. In real terms, the growth of total capital stocks accounted for two-thirds of the growth in real GNP, 1929–1966. One-third of the growth is attributed to residual forces, chiefly economies of scale, changes in inherent quality of human and natural resources, changes in values and motivations, and changes in rates of utilization of capacity. The growth of the ratio of real intangible stocks to real tangible stocks accounted for less than half of the increase in total factor productivity 1929–1966. This is significantly less than the contribution of intangibles as estimated by Denison, and the author adduces several reasons why his estimates may understate the contribution. Nevertheless, it seems that the net effect of the residual forces enumerated above must also have made a substantial contribution to the growth of tangible factor productivity and real GNP over the 37-year period.

The economic returns to higher education in twenty-five countries

Abstract: During the last decade empirical estimates have become available of the yield of educational capital in a number of countries. In this article the meaning of the phrase ‘rate of return to investment in higher education’ is explained and then the relevant evidence in twenty five countries is reviewed. A distinction is drawn between the returns enjoyed by the individual and those accrued to the society as a whole, and the results of the comparison are discussed in terms of their implications for public subsidies towards higher education. Moreover, a comparison is attempted between the returns to physical capital and the returns to investment in higher education at given stages of economic development. The result of the comparisons is that in less developed countries the returns to investment in education are well above the returns to physical capital whereas the returns to university education in advanced countries are of the same order of magnitude or even less than the returns to physical capital.

Investment Behavior in the U.S. Electric Utility Industry, 1949-1968

Abstract: Jorgenson and Handel (J-H) applied their recently developed econometric model of investment behavior in U.S. regulated industries to four subindustries of the regulated sector. In their derivation of the demand for capital, they assumed constant returns to scale and unitary elasticity of substitution between capital and labor. For application to the U.S. electric utility industry the author finds it desirable to relax these two assumptions. Econometric studies on production and cost functions pertaining to this industry show that economies of scale are quite important and that the scope for substitution between capital and labor is limited. Using a CES production function, the author derives a more general expression for desired capital stock. This expression is incorporated in a logarithmic version of a rational distributed lag function in a manner suggested by Eisner and Nadiri. As in the J-H model, it is assumed that replacement investment is proportional to net capital stock.

Human Capital Losses Resulting from U.S. Casualties of the War in Vietnam

Abstract: As early as 1875, nearly a century before U.S. casualties began to occur in Vietnam, Johann H. von Thiinen suggested that a hundred human beings might be sacrificed in battle in order to save one cannon with a capital value twenty times less than the capital value of the men. The reason a situation like this might occur, according to von Thiinen, is that the cost of the cannon is explicit and comes from public funds, while human beings have no explicit value and, in fact, can be obtained at zero price by means of a conscription decree. Public authorities can acquire the services of any man they wish for military service without compensating him or his family. Since citizens protest against the noncompensated confiscation of property, von Thilnen concluded that physical capital is regarded by them as much more valuable than human beings. He suggested that if the value of human beings were measured with the same care as physical capital, public authorities would have to enact policy measures to compensate families for their monetary losses from fatal casualties and to compensate disabled nonfatal casualties for their loss of earning capacity. In addition, von Thiinen suggested that every veteran should be compensated for the use of his labor, by receiving his earnings foregone while in service.' Other economists and statisticians have suggested that an individual's capitalized earnings stream is capital and that his death or disability resulting from war reduces the nation's stock of wealth. Although many of

Valuation and the cost of capital for regulated industries: comment

Abstract: IN A RECENT ARTICLE in this journal [1 ], Elton and Gruber argued that, notwithstanding the alleged tendency of regulatory commissions to appropriate for consumers via rate reductions the potential tax shield for corporate interest payments, Miller and Modigliani [2] were correct in using their post-tax equations for estimating the cost of capital for the electric utility industry. This is a considerably stronger position than that taken by M-M themselves,' and in fact is incorrect save in the special and unrealistic case considered by Elton and Gruber, in which the utilities have zero operating leverage or fixed operating costs. We shall first show the effect on the Elton and Gruber result of allowing for the existence of fixed operating costs, and then devise the correct equation relating the value of the regulated firm to its operating and financial leverage.

Equilibrium in the Pricing of Capital Assets, Risk-Bearing Debt Instruments, and the Question of Optimal Capital structure: A Comment

Abstract: In a recent article in this Journal , Haugen and Pappas (H-P, hereafter) [1] attempted to prove, within the framework of the capital asset pricing model, the already proven proposition that the cost of capital is invariant with respect to leverage even with risky debt. The H-P proof contains a serious error which we would like to point out in this note.

Impact of property rights in human capital on regional factor proportions

Abstract: Although the case for treating human capital as a productive factor is clear, its introduction presents complications since ownership of (or property rights in) human capital cannot be separated from the ownership of (or property rights in) labor itself. Consider a two-region economy. When labor moves in response to economic differentials, human capital also moves. This may have the effect of necessitating a revision in the standard theoretical conclusion that with more than two factors of production, factor rewards and factor proportions will be equalized between the regions. This theoretical model demonstrates that an equilibrium will be achieved in which both the capital/labor ratios and the quantity of investment per worker in human capital differ from one another by precisely the amount necessary to produce the same return to capital in both regions as well as an equalization of the total wage rates which represent the combined return to both labor and human capital

Vintage capital, joint production and the theory of international trade*

Abstract: THE MODEL set out in this paper is a vintage capital joint production model of international trade. Rather than simplifying the model as good assumptions are supposed to do, they considerably complicate it, so that it is more necessary than usual to justify viewing the trading world from this particular angle. Any model which attempts to describe the world must explain the lack of factor price equalization. The traditional way of doing this is to postulate factor intensity reversals and multiple solutions. However, there are two objections to this. First, if this postulate is made, very little of the positive results of trade theory survive.1 On intellectual grounds alone one would prefer a way of introducing lack of factor price equalization which was not so damaging to the theoretical structure. Secondly, there is some empirical evidence that the existence of multiple solutions is unsufficient in itself to make the standard type of trade theory consistent with the real world.2 The assumption of joint production also leads to a model in which factor prices are not equalized. In addition, all the standard trade theorems remain intact3 and needless to say there is as yet no empirical evidence against it. For these reasons joint production seems a better starting point than multiple solutions. Once factor price equalization is dispensed with, capital poor countries will conserve capital not only by adjusting output ratios, but also by varying the methods of production. They can do this in two ways; they can vary the capital to labour ratios on new machinery and they can vary machine life spans.