Knowledge that Transforms

SO many important documents born on both sides of the Atlantic -the Fifth Report of O.E.E.C. on the one side and the Randall Report on the other, to name the most recent -have stressed the desirability of increased private investment in Europe as a means of correcting the continuing weakness (to put it no more strongly) of Europe's dollar trading accounts, that it is refreshing and salutary to read the persuasive criticism of the concept presented by Mr. Ernest Bloch.2 His discussion leads him to the view that States private investment cannot be considered as making any appreciable contribution either directly or indirectly to the dollar shortage. I Looking this problem from the receiving end, so to speak, I wonder if this somewhat sad conclusion is wholly warranted? As to the facts, there can be relatively little disagreement. Private investment by the United States in the world as a whole during postwar years, Mr. Bloch suggests, has been at least equal to that of the twenties; 4 certainly this is so if one allows for the re-investment of undistributed earnings during postwar years and for the changes in prices. Taking the net movement of long-term capital during the I92 0'S shown in recent data, private long-term United States investments abroad (including the reinvestment of undistributed earnings) rose from $6.5 billion the end of I9I9 to $I5.2 billion the end of I930, an annual average growth of $790 million.5 For the post-war period, the same data indicate a growth of private long-term United States investment abroad from $I2.3 billion the end of I946 to $22.I billion the end of I953, an annual average growth of $I400 million.6 As Mr. Bloch remarks, post-war private foreign investment has been very much lower in relation to GNP than during the I920'S. I make the ratios 0.95 per cent over I920-29 and 0.47 per cent during I947-53.7 It is true, of course, that if one adds in the enormous dollar flow pumped out to the world economy since the war in the form of United States government grants and loans, the ratio of the total dollar-flow to GNP is vastly increased. But the significant fact remains that the private United States propensity to invest abroad is only one half of what it was in the twenties. Now that the flow of government grants to the outside world is coming to an end, it would be an optimist indeed who would argue that the private propensity to invest funds abroad will rise as the public propensity declines. The shift in the private propensity, one suspects, is a great deal more permanent than the enormous postwar flow of government dollars. But it is on the flow of private American capital to Europe that the discussion must center in this context. As Mr. Bloch points out, the flow to this area has been relatively insignificant. In I929, about I9 per cent of United States direct investment abroad was directed to Europe; of the increase of $4.3 billion in such investment between I929 and I950, only $0.3 billion, or 7 per cent, has gone to Europe.8 Between end-i95o and end-I953, the total value of private long-term United States investments abroad increased by $4.6 billion; the value of such investment in Western Europe increased by only $o.s8 billion.9 Nor is this all. Earlier data have indicated that for the world as a whole re-invested earnings accounted for about 37 per cent of total private United States foreign investment dur-

Whether the relatively underdeveloped areas can accelerate their process of development by recourse to deliberate inflation has, in the recent past, been a subject of widespread contention. It now appears to be settled in the negative, at least by most professional economists and responsible central bankers. Nevertheless, it may still be useful to give some thought to the problem, particularly emphasizing aspects of the economic structure of underdeveloped countries that condition their response to a deliberate attempt to use inflation as a method of stimulating and accelerating economic development.' For the purposes of this paper inflation will be defined as any steady increase in the general level of prices (no matter whether at an increasing, decreasing, or constant rate), reflecting an expansion of money income relative to available goods and services, over a period of time. Once this rise has come to a halt, there is no further inflation.2 This steady increase in the price level is, if the monetary authorities are willing to make credit, available, basically the result of one group (private individuals or the government) in the economy attempting the consumption of a larger share of (given) real output than other groups are willing to acquiesce in.3 If the group is successful, the real income of some sector(s) of the economy must be reduced as the general price level rises through the process of competition for a given quantity of goods.4 If the amount of real output available to some groups (whose money income does not increase in proportion to the price level) is reduced, inflation may encourage economic development if the group gaining command over additional real resources purchases resources, such as machinery, which themselves will produce a stream of income in the future. The reason inflation is needed to secure these results is attributable to a situation where the existing level of voluntary savings is inadequate to sustain a desired rate of increase in real output; inflation, by redistributing income, may increase the amount of savings and therefore the possibility of increased real investment.5 The redistribution of income and wealth, the immediate decline in the standard of living of some segments of the community, a possible allocation of resources to luxury goods, inappropriate construction, investment in inventories or foreign exchange, and a possible deterioration in the country's external position are some of the costs of inflationary financing. If the additional savings go into undesirable investment, this will very likely prevent the inflation from having a significant effect on the rate of development.

THE purpose of this paper is to consider the probable increase in the volume of Soviet investment since I940, while subjecting to critical analysis such official figures as exist, as well as the attempts made outside Russia to throw light on this problem-the calculations of the Economic Commission for Europe 1 and of Dr. Naum Jasny.2 It goes without saying that the most we can expect from calculations of this kind is rough orders of magnitude. Apart from the many statistical doubts and uncertainties which we will encounter, investment covers a great variety of activities (from the Volga-Don canal to central heating installations, from turbo-generators to tractors), and both volume and price indexes naturally depend in part on the base-year weights chosen. However, we do know that the bulk of investment expenditure over 6o per cent in I940 8 and in the plan for I946-50 4 went for construction and installation. While it is true that there may have been relative shifts in the costs of different kinds of construction, which would affect the indexes to some extent, there is no reason to suppose that there was any substantial change in the dominant share of construction in total investment expenditure. Before tackling the question in detail, it is important to be clear about the meaning of the term investment. It is used to render the Russian words kapitalnye vlozhenia,5 which in principle means gross investment in fixed capital.6 Investment may be financed in the following ways: (a) by allocations from the state budget; (b) from resources (e.g., profits or a portion of the amortization fund) accumulated by state enterprises in the course of their operations; (c) from accumulations made outside the state-owned sector, above all by the collective farms (kolkhozy); (d) by loans granted by state credit institutions to, for instance, the kolkhozy, or to individuals (e.g., for housebuilding). Year by year, the Minister of Finance (Zverev) in his budget speech gives a figure to represent investment in the national economy, that is, covering items (a) and (b) of the above list. Unfortunately, it is not always clear just exactly what is included. In some years (consistently since I950, occasionally before that date) he specifically included in his investment figure the growth in the stocks of building organizations.7 Down to I946 inclusive, he made a distinction between centralized and investments (the former were centrally planned, the latter were smaller-scale investment projects in the state sector of the economy). After I 947 the figures he gave related to investment without any adjective, and the evidence suggests that those included decentralized investment from I949, or possibly from I948. (In I95I the category of

THE purpose of the present article is to clarify and suggest improvements in national income and product concepts as used particularly by the Department of Commerce. In developing the proposals, major problems of definition, duplication, and conceptual difficulty will be presented, together with a brief survey of the development of ideas, including some of the recent debates which focus attention on unsettled questions. Broad relations between the national income and product series developed by the Department of Commerce are indicated in Chart i, the various bars being drawn approximately to scale, as of I952.1 In national income accounting the emphasis on net value added by, or income accruing to, the various economic factors, as a result of productive services currently rendered, is well understood. On the whole this represents current money income (with some imputations), but it omits three important money income items: realized capital gains (losses), unproductive transfer payments, and government interest. It also omits one imputation of major significance: the value of housewives' services. Of the two main subdivisions of what are regarded as nonproductive government outlays, transfers and government interest, the latter was shifted from productive income in the official revisions of July I947. These conventions and changes, though generally recognized, are by no means universally accepted by specialists in the field. In fact, some of them are receiving renewed discussion in recent debates.2 All the factor shares on productive account are now entered in the Commerce national income totals before direct taxes are deducted. The addition of indirect taxes and depreciation or capital-consumption allowances raises these net totals to the Commerce gross national product totals, but this development has created confusion over the meaning of net product and the extent to which double-counting is involved in the gross totals.3 The Commerce Department also takes the national income as a base for developing its personal income series. By subtracting corporate profits (before direct taxes are deducted but after dividend allocations) and adding transfers and government interest (in the main), the Department secures a mixture of productive and nonproductive items of personal income and savings. Realized capital gains and losses are still omitted however.4