Capital Shortage: Myth and Reality
Abstract
A couple of years ago a New York Stock Exchange study (1974) pointed to a of some $650 billion by 1985. Treasury Secretary William E. Simon, comparing his estimates of capital requirements current dollars over the next decade with capital expenditures current dollars over the last decade, came out with a gap of over 2-1/2 trillion dollars without noting the noncomparability of prices (p. 3871). We have indeed a host of estimates from a number of econometric models, government bodies and private institutions, from Barry Bosworth, James Duesenberry and Andrew Carron and many others. A major Bureau of Economic Analysis study under the direction of Vaccara projected a total of $986.6 billion, 1972 prices, for business fixed investment from 1975 to 1980, or 12.0 percent of cumulative gross national product, in order to insure a 1980 capital stock sufficient to meet the needs of a full employment economy, and the requirements for pollution abatement and for decreasing dependence on foreign sources of petroleum (p. 7). Scarcities are sometinmes seen terms of sources of financing. Benjamin Friedman wrote 1975, To an unusually great extent, financial considerations may act during this period [1977-811 as effective constraints on the amount of fixed investment which the economy aggregate is able to do (1975, p. 52). In May 1976, however, Allen Sinai declared, There are no financial shortages of any consequence (p. 2). But with the plethora of articles, studies, claims and warnings, what meaning can we attach to the notion of a capital shortage'? In what sense can there be a shortage a free economy where markets are cleared by the impetus of price movements? In an uncontrolled, competitive system, the rate of investment is not imposed as a prior constraint. Business investment, particular, is the resultant of the utility-maximizing saving propensities of households and the profit or wealth-maximizing production decisions of business. These are subject to the constraints of the general economic atmosphere determined by the monetary and fiscal authorities of government, particular tax and monetary influences, and general currents of the world. Any argument that there is a capital shortage must either imply a literal failure of market clearing or some standard external to the economic system. A failure of markets to clear an equilibrium sense implies fixed or sticky prices. If government were to control prices and set those for capital goods too low, the quantity of capital goods demanded could exceed the quantity of capital goods supplied. Perhaps more to the point, government regulatory agencies might hold prices of certain products, such as electric power, so low that, while the quantity of electric power demanded might be very high, firms anticipating continued low prices would not find it profitable to invest the capacity to meet future needs. Similarly, there may be price fixing financial markets. If the monetary authority and/or inflation force up interest rates while regulatory *Williarn R. Kenan Professor of Economics, Northwestern University, and Senior Research Associate, National Bureau ot Economic Research. I amil indebted to Martin Feldstein, Benjamin Friedman, Marc Nerlove and Beatrice Vaccara for helpful commiients.
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