Capital Formation and Economic Policy

THE CURRENT DISCUSSION of capital formation in the United States reflects a general belief that investment has been inadequate during the 1970s and that this shortfall explains a large part of the current economic difficulties. The productivity slowdown, in particular, is often blamed on the failure of investment to keep the capital stock growing as fast as the number of workers. Specific conclusions about the "capital scarcity problem" in the United States and many of the policy measures offered to solve it are often derived from a neoclassical model of an economy operating close to full employment. The economy is also viewed as moving along a competitive equilibrium growth path in the sense that the returns to factors of production measure their contribution to output. At full employment the analysis of capital formation quite properly emphasizes allocative issues, such as the choice between current and future consumption (saving) and the distribution of private saving among competing uses (home building, business investment, and government deficits). Most important, the model assigns relative prices a primary role in the allocation of resources among industries and over time: resources flow where returns are highest, and the rate of interest determines intertemporal consumption decisions. Using such a model, some commentators have attributed an alleged