U.S. economic growth from 1976 to 1986


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U.S. economic growth from 1976 to 1986 prospects, problems, and patterns : studies
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Economic conditions -- United States -- 1971-   ( lcsh )
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Full Text

*I-, iK~ rt







Volume 8-Capital Formation: An Alternative View





oj FLo0

DECEMBER 27, 1976

Printed for the use of the Joint Economic Commi





(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)

HUBERT H. HUMPHREY, Minnesota, Chairman
RICHIARD BOLLING, Missouri, Vice Chairman

EDWARD M. KENNEDY, Massachusetts
WILLIAM V. ROTH, JR., Delaware

HENRY S. REUSS, Wisconsin
GILLIS W. LONG, Louisiana
OTIS G. PIKE, New York
MARGARET M. HECKLER, Massachusetts

JOHN R. STARK, Executive Director
RICHARD F. KAUFMAN, General Counsel









D i,(" i, -%f ," k 22. 197 1 ,-
To the M1embers of the Joint Fcmnomic Committee:
Transmitted herewith is the eighth voltmie ) the Joint Eoimojuii
Committee study series entitled "T.S. Ecoioiiic (i-owti Froii 19'(1)
to 1986: Prospects, Problems, and Patteris. This ser-ies of over 40
studies forms an important part of the Joiint lEconloiiie Comiillittee's
30th anniversary study series, which was itldeW taken to provide in-
sizht to the Menbers of Congress and to ile public at liare oil the
important subject of full employment and economic 'iloCwthI. Ihie Emii-
ployment Act of 1946, which established the Ioint Eoi ioi ic (O,,init-
tee, requires that the committee make reports ad Pecoum.eilRati mis
to the Congtess on the subject of niaxiniiziiig employment, priodliction
and pI)rchasing power.
Volume 8 comprises three studies which add press the (testi 'I : ist
business investment and growth he altered and if so. in whlt ways +
Their examination of future capital needs ond how capital contribltes
to economic growth is done in a manner that challenges the conven-
tional wisdom on these issues. The authors are Prof. Carl Maddlen. 1)*.
iu-irkhard Strumpel and Prof. Mason (hiffney. Th committee is il-
(ebted to these authors for their fine contributions which we hope
will serve to stimulate interest and discussion among economists, pol-
i'ymnakers and the general public, and thereby to improvement in pub-
lic policy formulation.
The views expressed are those of the authors and do not neeesa
represent the views of the committee members or committee staff.
Chairynan, Joint Econominc Coin ;tc, .

I )EC'E_.1BER 17. 1976.
Chairman, Joint Ecovomic Co'miittee,
U.S. Congress, Washington, D.C.
DEAR MR. (CIrATRrAN: Transmitted herewith are three studies en-
titled "Toward a New Concept of Growth: Capital Needs of a P'ost-
Industrial Society" by Prof. Carl Madden, "Induced 1Iivestnit or
Induced Employment-A1lternative Visions of the Anier'i'a Eeo'n-
onmy" by I)r. Burkhard Strumnpel. and ( 'apital Reqniirenients -or
Economic Growth" by Prof. Mason Gaffney. Tlese thiv stmlies com-
J)'se volume 8 of the Joint Ionotoic (miitte, s tidy >eries "' .
l':eoiion ,c (-rowth fromn 19,) to 1986: Prosj)ects. 1 'olbl)eIls. e ,i Ii.:-
t (nsIii. r Iiis series forms a su bstaut ial )art of the .J )i t lIA olimil ( om111itl ee, 3(0t 1 ainniversarv stuIdv series.
rI 1 ,e p)bipev. are inovative iii theeir approic],b to ex:nii 1i ,11
,a 1jitail needIs aiid how capital ('21 ilmtes to the *eco11oiiic
t,, ',:r(lu teBo il '')I)ll'/ ',v l

1 )I'E) The. Tluc lasivall v collide that the covnNentional wisdom niust
I,. 'lvhatm l if we are to reslo)in with policies that will be capable of
Ica:lir,u witll cha:I 1in, realities.
The p per by l)ro f. Carl Madden holds that debate about capital
re~liirements turns largely on the deeper questions of growth prob-
lems, prospects. and patterns. Rather than seeking more labor-intensity
or Cxl~l)bi a L O-societ, he argues that we need a deeper
umu1erst andin" of oi-owth and its twin soiur'ces, knowledge and enter-
~ri le. I I,(,th iom the al)proachl of conventional demand-supply and of "no-
,Mth." Ile gc ( rowth as a vast and iirreversible transformation
,oC('e.SS havinty. integral social, political, and economic dimensions in-
vol vinilr not only a ral)id rise in per capita output and productivity,
buit aiso a transformation both of society and the economy, growing
world interdepen(lence, ideological change, and a lag of about three-
(fulaters of the world's population behind the rapidly growing
oIiet ies.
Ile stresses that investment policy has to recognize that growth
Mearts changes in the structure of public and private processes, insti-
tultions. and industries, e.g., appropriate investment policies should
emphasize investment in human capital; and the need to change our
o ver-Coisum ption style, fostered by three decades of conventional
Crowthinmship. Shifting the tax base from income to a progressive
ConslImption tax he believes is sound post-industrial investment policy
for a people and Nation of great wealth.
Dr. Strumnpel attempts to "stimulate a reorentation of thinking".
Ie asserts that the core of the present economic difficulties is of a struc-
tural rather than cyclical character. He also maintains that the fron-
tier of economic growth has shifted from natural resources to human
resources. Thus. in order to achieve growth we must change our
factor input and utilization so as to make more intensive use of avail-
able human resources while husbanding scarce physical resources. A
third conclusion is that it is hardly possible to produce the currently
producedd set of material goods with a greatly different factor mix
containing more labor. Ie believes that the main obstacle to growth
which fqces the American economy is rooted in the existing composi-
tion of final production and demand. Since conventional fiscal and
monetary policies are geared to aggregate demand management, and
due to various ideological and technical reasons, they are hardly able
to influence the composition of final demand. He discusses in consid-
erable detail the government programs and initiatives which he feels
brin together underutilized human resources with unfulfilled human
needs for public and private services.
Prof. Mason Gaffney claims that we can achieve our growth goals
1y lowering the capital and resource coefficients per worker and con-
sumer. Ie ass:erts that the resource and capital coefficients of labor
are not fixed and therefore can be lowered. lie urges that we produce
commodities having a faster pay-out so that the capital associated
with each unit of labor is tied up for a shorter period of time.
Ifis study points out various institutional biases that need correcting
a ,d ,oes into son. detail on tax policy which tends, in his view,
to encourage the substitution of capital and labor for land. To remove
the bias, he calls for reducing taxes on payrolls and increasing the

tax cost of holding la)id and capital. lie also ealls Toir -ello i'111- lie
capital-intensive bias f t-loi Federal sPending l)1'gI'al(01 and. reIlia-
tory policies.
The committee is deeply grnteful to these autlwi-s for t1lir creativee
and challenging papers. Prof. Madden is on tlie 'actiltv of tlie School
of Business Adiniiistiit ion at Anmerican I 1iveDity, )r. Strumipel is
the Program I)irector for the Institute for Social iResearch at tHi e
University of Michigan, currently on leave as Senior Fellow, Inter-
national Institute for Environment and Society in Berlin, and Prof.
Mason Gaffney is on the faculty of the Graduate School of Adlilis-
tration of the University of Californi at Riverside.
Dr. Robert D. Hanirin of the committee staff is responsible for tlhe
planning and compilation of this study series with sirgeit'ions from
other members of the staf. Tie administrative assistance of ]leverly
Mitchell of the committee staff is also appreciated.
The views expressed are those of the authors and do not necessarily
represent the views of the Members of the committee or the comnnittee
Executive Director. Jo;nt Eonowm e Cow in'te.

CO N T Ei N T8

Letters of transmittal III


By Carl I. Madden
Summary ------------------------------------------------------------ 1
Growth as usually portrayed -------------------------------------------5
A new economic epoch ------------------------------------------------- 6
Challenges to growtli ------------------------------------------------ 9
Growth as transformation -------------------------------------------14
Knowledge: Source of value -----------------------------------------20
Investment policy implications --------------------------------------- 25
Conclusion ---------------------------------------------------------31


By Burkhard Strumpel
Major conclusions and recommendations --- --------------------------- 33
The ideology of induced investment-a critique ------------------------ 36
The case for induced employment --------------------------------------41


By Mason Gaffney
Summary ----------------------------------------------------------56
1. The obstacle that capital and land coeffiients are fixed, or predestined
to grow, for technological and efficiency reasons -----------------
2. The obstacle that labor is overpriced by unions and politics ------------ 63
3. The obstacle that labor produces capital ---------------------------66
4. The obstacle of inadequate investment outlets ------------------------ 69
5. The obstacle of inflation associated with high employment -------------71
G. The obstacle of a resource ceiling on throughput 2-------------------
Conclusion ---------------------------------------------------------73
Appendix. Construction of table 3 -------------------------------------74

Digitized by the Internet Archive
in 2013

http://archive.org/details/growthuspatt00u nit


Debate about capital requirements in important part turns on a
deeper question of the possibility and desire for economic growth
which affects growth problems, prospects, and patterns. Seeking more
labor-intensity or exploring a "no-growth" society is not the issue.
Rather, we need deeper understanding of growth and its twin sources,
knowledge and enterprise. To argue this way is to offer an alternative
analysis of capital needs, differing both from the approach of con-
ventional demand-supply and of "no-growth".

A New Concept of Growth
The idea that growth is merely as "an increase of output per head
of population" is absurdly too simplistic. Both logic and empirical
evidence suggest a new concept. Growth is a vast and irreversible trans-
formation process having integral social, political, and economic di-
mensions. Empirical evidence for this view is the authoritative work
by Kuznets and others examining the "modern growth epoch" of the
last two centuries. Hallmarks of the growth process are not only a
rapid rise in per capita output and productivity. Also integral is rapid
transformation both of society and the economy, growing world inter-
dependence, ideological change, and a lag of about three-quarters of
the world's population behind the rapidly growing societies.
The evidence, supports the hypothesis that, despite the complex
causation of growth, the advance of science was the great innovation
propelling the astonishing growth record of the last two centuries.
However. economists have neglected study of the impact of science.
Now, evidence abounds that science itself in the twentieth century
is undergoing a revolution. Its form is to supplant earlier basic sci-
entific assumptions about the nature of time-space, human life, and its
origins, the nature of organisms, the structure of matter-ener!y con-
figurations, the structure of the universe.
Study of scientific revolutions by Whitehead, Kuhn and others con-
eludes that these conceptual happenings change a culture's prevailing
imaze of mankind and the basic tools of thought about reality. Of
course, they also create ensuing advances of knowledge and new hu-
man insight. Twentieth century science rejects the earlier materialist
and mechanistic view of reality as faulty and misleading. Processes
*Professor, School of Business Administration, The American University, Washington,


and~l ivv. ituii is Iterneil a fter these earlier ideas have encountered
-""of Lrowth as onveltionally understood
ide;'. fr, m e.a 11ir V i,.ws a iil -ii t'ers from its wn defects.
Tl ,enl ruit of lwenieth century sevnce do not interpret
retl it V cdl ei loii of 1 1a er1a:l ()ltjects indepenldeltly and identically
ex-i~t i19 inl al)ll1te 111ie or simply located in space. Instead, reality is
*,I- zattens and conigrurat ions of wholes, of systems whose parts
ca! exivt a, iiiI 1 i 1it dtifiedl only in relation to the whole. Reality also
:'1), wr- :Is pro, Is in action, as events irrversillv unfolding in growth,
tc~tl, l mienrlrvt liii. !, id flow. Processcs a r irreversible in that they
(l:aHW' tlieu' own li}a racter. that tIhrogh sub-periods of time identity
alt ,'s fr xivit in. th at cbl-anje is irrever'si ble.
I'e idea of ev-olution IZa spread from biology to encompass the
oi8'in anid (evelopinent of the i enlents, their constituent sub-atomic
part". the creation of matter itself, and the interplay of energy and
matter in tlie orniation of hle constituent parts of the universe itself.
Econon ic( evolution is hardly a subject fit for conventional discus-
Sion. Apar from a small handful of intellectual giants. economics re-
mains oM inated in conventional thought and study by mechanistic
id(ea that are analogies to eighteenth century physics and mathe-
TiI(tit. Te (Ie})ict activity in terms of mechanistic balancing of
fr<'.;, of "-Illi lilbrium states" of self-identical zvstenis. Indeed, the
lorie of ofliuits to !rowt1" models itself suffers from difficulties pre-
c(ielv a~oc, ted in other sciencees with the loa'ical fallacies that have
en din anomolis. in, oserve(l behavior inexplicable in the
terms of the l re-twentietli century theories or models of behavior.
J, )rtbernor., leadi tn "no-srrowt" critics see growth in similar sim-
ulistie temps. Qo tlev reject the idea of ising advances in knowledge to
increase human effectiveness. They prefer, "st ead-state eqiilihrium".
But it is a notion that hardly accomts for the Inrue and stubborn facts
of irreversible evolutionary advance.
Twentieth century studv of energy and its behavior in concrete
processes las such general application that it illuminates economic
proeesses and the idea of. rowth. After all. economic processes are
ener'y processes. The laws of energy-mass conversion, conservation,
and dissipation strongly support the idea that advancing knowledge
and ordered structures are always threatened by inherent tendencies
to-ar' ls disorder and waste in all enerrv processes, including economic
ones. Indeed. economic inputs are. poorly depicted as capital, land, and
labor. Rather. these sources are better understood as energy, knowl-
edge. materials, and organization. But since energy and matter are
convertible, and since organization is itself a form of knowledge, these
reduce to knowledge and energy.
To realize that knowledge and energy are key sources of wealth, that
economic growthh is a va4 and irreversible energy transformation
process, represents a fundamental change in the concept of growth.
Tle realization sets in motion new trains of thought, that recognize
generally the integral and inherent role played by what conventional
econor cs interprets only as "exogenous" forces or "externalities"
often neglected or dimissed to other fields as being secondary to
economic policy consi derations, now held to be dominant and primary.
It is time to realize along with Kuznets and twentieth century cmcience
flat tlo!se who want growth must also take urbanization, industriali-

zation., increases in scale of organizations, clhaiiges in the family,
chaln2es is iduolo'. piloIde i- of social comp llexity; and ten tle y
must Ilse the fiu il s off Lirowvt i to (!o something sensible about them.

Growth as tran formIation "imelled by a(lances in kn xved-e an
CnterpriSe should accelerate. iot slow donVII, if klmo-wledge keeps vIo'v-
in(r alld enterprise flourishes. What future growth requires is stea(lv
infn -ian into social and econoilic processs of more new knowledge
and understanding. Indeed, new and innovative econonine rprocesses
are themselves an important aspect of advances in knowledge.
What stirel y is required is net new investment, both public and
private, to imbed know-how into concrete physical configuIIrat ionIs.
Structural change ensues irrevocably. Therefore tho-liht slioil (t be
given to anticipating its benefits and costs. Basic economic coneplte s
will change in content as new insights change people's percept ionis and
values. Above all, productivity flows from healthy, vigorous, cilioice f id
and free individual human beings possessing knowledge, understand-
ing, skill, and good will. Therefore, public policy about education,
jobs, and welfare is paramount. Increased effectiveness also flows from
org-anization in free and competitive markets that test the survival
value of competing technologies. But it hardly flourishes amid jobless-
ness and welfare dependency.
Investment policy has to recognize that growth means changes in
the structure of public and private process es, institutions, and ilidus-
tries. A strong case can be made that subsidizing real costs of existing
industries amounts to slowing down the growth process., while policy
that levies full real costs impartially speeds it up. Policy fo ering
monopoly is likewise anti-growth policy, compared to fostering new
enterprise and impartial competition. Vested institutional interests,
both public and private, already have too many advantages over
Finally. it is clear that we are lagging in the full use of knowl-
edge-of science and technology-in many of our major institutions.
Large net social benefits are available in innovative and largoe scale
adaptations of knowledge, in both social and economic proceses. that
would add to human wealth and effectiveness while sharply econo-
mizing energy and materials.
To be more specific:
1. Appropriate investment-policy should emphasize investment
in human capital. We need more rapid. widespread, and con-
tinuous improvement in people's knowledge and skill. to put the
need paramount. Our view of formal education is far too narrow.
Involvement in goal-setting is education: volinta rv leadership
is education: meaningful work is education. "We need to infuse
our society with concrete learning experiences for everyone. (on-
tinuously. without outmoded and invid ioii distinctions between
the employed and the }obless. the independent and the welfare-
dependent. the, non-old and the old. 'e en-re in itantie aid
icrnorant waste of human potential out of lack of imaiuation and
outmoded ideology. But we need also to achieve widespread mean-

ingful lifetittle employment for every person wanting it and
seeking it.
2. We need to change our over-consumption style, fostered by
three (lecades of conventional growth-nianship. To achieve capital
needs while conservilg resources, and to expedite the shift of
capital an(l human eftt front old to new processes, we need to
generate more savings by rewarding it better. Shifting the tax
base from income to a progressive consumption tax is sound post-
industrial investment policy for a people and nation of great
we alth.
Investment policy should promote new forms of interaction between
goverl m11nt, business, and society to create new markets, set new
standards. create supply for new life styles, and systematically address
basic world goals by ftll and organized use of science and technology
widely understood and of beneficent purpose. Then, enterprise can
flourish and human effectiveness can advance. The issue before policy-
makers is not protecting vested interests, hurling outworn programs
at old problems. abandoning growth, or creating make-work jobs for
listless people on unproductive projects. The issue is a deeper under-
standing of growth all round and creative action in response.

A full explanation of economic progress involves a study of the
society's entire culture.---George J. Stigler, "The Theory of Price"
(New York: Macmillan, 1974), p. 39.
Slort run appraisal of capital needs relies on conventional analysis
of the demand and supply of capital executed with greater or less
sophistication of logic or mathematics and greater or less awareness
of elementary capital theory. The result is often a turgid debate over
numbers. obscurin as much as it clarifies.'
To provide some sense of the meaning of ti debate requires taking
one view or another about the possibility and the desire for economic
growth, a view that in turn affects its problems, prospects. and pat-
terns. Critics of prevailing economic and political orthodoxy, in a
recent outpouring of literature, have challenged the growth obsession
of the last twenty years. When exploring the possibilities of a "no-
growth" society,. the critics have invoked the well-known Malthusian
devils of population explosion and resource exhaustion. And they have
added a new devil of pollution accumulation.
It has become fashionable to say that from now on, economic growth
will slow down. Yet, there are more reasons than ever to think that
after a transition period, economic growth is much more likely to ac-
celerate. For it becomes ever clearer that economic growth depends
mainly on the advance of knowledge; indeed that such growth is itself
a form of the advance of knowledge, plus the innovators drive to put
tfhat knowledge into productive effect. It is of vital importance that
we achieve a deeper understanding of what growth means.
Growth means learning how to get more from less and then having
the will to do it. Kenneth Boulding has characterized the present
period as "the moment in this history of the planet when exhaustible
I 'oe Ienry Wallloh, "Statement before the Committep to Investigate a Balanced Fed-
eral Budget of the Democratic Research Organization," Washington, D.C., March 26, 1976.

resources have to be tur(el into enough'l !knowledre to ellale us to dlo
without tlm." 2 But it wOil 1(1 be odd if. at tie very tinme when human
al)ility to perform lo,"ical aiii matllelfl atlc&l 1alcilIations aniid to trans-
mit in-formation s eens to be (rrowin,' ex)oill we a"re seeing the
prelude to a slowdown lie lai|ce of lknowled "Wha't instead we
may be seeing is a temporary social witlidraNwal fromii its implications.
'Ilie issue of thie need fo"- caital to 1til a post -i dust trial economy
is not that of explicitly seeking more labor-intensity or of exploring
a "no-growth" society, but of (leveloping a deeper understanding of
the w ellsprings of econoni advance in its twivi sources, knowledge
and enterprise. To argue along such lines is to oiler "In alternative
analysis o~f capital needs., differing both from the conventional de-
mand-supply approach and from the no-growth approach. The purpose
here is to sketch out such an analysis and explore some of its implica-
tions for policy.
A simple definition of growth is "an increase of output per head
of population."13 A slightly more elaborate definition is "a long term
rise in the capacity to supply increasingly diverse economic goods to
a population, this growing capacity based on advancing technology
and the institutional and ideological adjustments that it demands." 4
Economic growth in the last two centuries, so defined, has been nothing
short of startling. In 1776, output per head for the world's estimated
750 million people was only about $100 in terms of today's money,
scarcely more than it had been in A.D. 1 for 250 million people living
then. The average Roman citizen seems to have had a slightly higher
standard of living in A.D. I than his successor U.S. citizen in 1776.
But, as London Economist editor Norman Macrae points out:
Between 1776-1975, world population has increased sixfold, real gwp [gross
world product] eightyfold, the distance a man can travel a day between a hun-
dredfold and a thousandfold, the killing area of the most effective megadeath
weapon over a millionfold, the amount of energy that can be released from
a pound of matter over 50 millionfold (with much more to come), and the
range and volume of information technology several billionfold.'
For the non-Communist developed countries in the epoch dating
back to the late eighteenth century (most of Europe, the overseas off-
shoots of Western Europe, and Japan-barely one-quarter of world
population), rates of growth were almost 2 percent for product per
capita, 1 percent for population, and 3 percent for total product. These
rates mean roughly a multiplication over a century by five for product
per capita, by three for population, and by more than fifteen for total
Kuznets points to six characteristics of such modern economic
growth: (1) A high rate of growth of per capita product and of popu-
lation; (2) a high rate of rise in productivity, i.e., of output per unit
of all inputs; (3) a high rate of structural transformation of the
economy, including a shift from agriculture to industry and then
2 Daedalu4, Fall. 1973, p. 99.
3W. Arthur Lewis. The Theory of Economic Growth (Homewood, Ill.: Richard D.
Irwin, Inc., 1955), p. 9.
'Simon Kuznets, "Modern Economic Growth: Findings and Reflections," American
Economic Review. June 1973, p. 247.
5 "America's Third Century," The Economi8t, October 1975, Survey p. 19.
6 Kuznets, op. cit., p. 248, footnote 3.

fro I II i ItI I ist rv I () So r ices. all i1 ill th1 scale f I) roluction. aid
ilanQ frponi P)l>011al enterprise t illIeWs'dal orgaization of eo-
1111 ic fimsIll (4) a rebtt ed rapi4 I claiue iil t ie strlcilllce ofsociety and
ts ileology suci as u rban izat ion an d secularization: () a growing
lilt r(.detndelice of the world, as transport and cownlmileations al-
14)\,e1 econ1mlica11i liv develole I c(OMIlt I'es to re'(l1 out ( 1oth in var and
Peae) to thle rest of the world : and( (G) a remlaini)g t hre-ce-quarters of
wold( oplitltioll Ia (ot 1 h Illion people ill 19,,) in countries whose
e4OlIohi c p)erfolna lice still falls far shlort of mininin levels feasible
wit l1 t le potential of modern technology.;
KIzct., coiicldes thlat tle six cli;nma'teristics of iuiodern economic
grow th justify the working assuitipti 1liat inodern economic growth
markss a(listinct e o&"': tlat is. represents a major breakthrough
in the advance of knowledge justifiably termed an epochal innova-
tio1. A11(1l altllorh t lie stationon is complex, it can be argued that the
n:jor 2r)owth sou0ne eneratiug radieallv different patterns of the
last two centuries is tle ewe1ItOVence of inodern science.
Kiiznets note that high aggregate growth rates have been associ-
ated with rapid changes in econoieiG structure and in other aspects of
soc ietv-faniilv formation. urbanization. nan's view of his role and
the ncasre, of his aclievenient in society. It has been, as Kuznets has
observed it, the difficult of making institutional and ideological
changes "needed to convert the new large potential of modIern tech-
nology into econoinic growth in the relatively short period since the
late eighteenth century" that has limited the spread of the system.
Some of the obstacles to such a transformation were, and still are,
leinlr imposed on the less developed regions by the policies of the
developed coint ries, according to Kuznets.

A NEW EcoxoMc Erocii
That the world is now entering still a new economic epoch is more
tlan a mere clich6 today. As a study by the Chamber of Commerce
of the United States in 1976 stated:
Rapid and radical changes are going on at present in values, in traditional
concepts, and in the global configuration of resources available to mankind .
Their substance is barely suggested by the commonplace observations that
"knowledge" is doubling every ten years; that as a population we Americans
are becoming older, richer, better educated, and more highly urbanized; that our
ect)Iorny is shifting from one predominantly of manufacturing to one primarily
of services; that we are at the threshold of "a post-industrial society"; or that
the world is entering a new "era of shortage." "
What is tle lasis fo r holding that we are enterinir a new epoch?
Tie essence of the explanation is that we are experiencing the conse-
qiences. not of science emerging as a major force, as was true earlier,
1)11t of a massive, twentieth century revolution in science itself. Study
of the science revolution ought not to lie outside the scope of a study
of economic growth. If science inay well be the epochal innovation of
the modern economic age. as seen by the nation's pre-eminent au-
thoiity on economic growth, the neg;lect-by orthodox growth ana-
lysts and their critics alike--of the study of scientific revolutions and

1 ,onotic Growth: New Views and Isue, Chamber of Commerce of the United States,
tshingtonI P.4'.. 197;, p. 1.

their social anld e(onomic ilip)lications is one of the curiosities of our
over-specialized agre.

At risk of belaboring the obvious, tfle list by le late astronomer
Harlow Shapley of what he considers to be the 10 most far-reaching
achievements of 20th-century science can be cited: (1) Knowledge of
the chemistry of life's origin; (2) cosmLic evolutioi--from neutrons
to man to the sentient universe itself; (3) relativity theories demon-
strating that matter and energy converge; (4) the subatomic world
of physics and chemistry; (,5) computers and automation (cyber-
netics) ; (6) the exploration of space., including journeys of machines
to Mars 214 million miles away; (7) discovery of galaxies, quasars,
pulsars, the expanding universe; (8) medical triumphs, including
temporary triumph over major diseases; (9) molecular biology, in-
eluding DNA, RNA, and synthetic genes; and (10) the exploration
of the mind, including electric inducement of behavior.
The 20th century has also produced significant discoveries in the
social sciences. National income accounting has restructured beliefs,
perceptions, and behavior of economic decision-makers. Use of sta-
tistical advances to measure opinion, taste, and epidemiology has in-
fluenced beliefs of people everywhere. Advances in mathematical prob-
ability have enriched ideas of "rationality" in managing and allocating
resources. Tracing the expected consequences of social or institutional
change has been improved by cybernetics, still in its infancy. Major
legislative changes can be analyzed for their expected effects through
mathematical simulation. And there exist many more such major de-
velopments in the 20th century social sciences too numerous to mention
The Industrial Age Now Passing
What is the most profound effect of the scientific revolution on
twentieth century culture? A powerful arrumient is that it changes
the presuppositions of thought, the world view, of the dominant cul-
ture, defined by the views of thought leaders of the times. The sci-
entific revolution through which we are living changes before our
eyes the cultural presuppositions of the modern epoch. And there is
a strong connection, even though not widely recog7ized. between what
people believe is so obvious it is hardly noticed and the rest of their
beliefs. The scientific revolution and its discoveries therefore pro-
foundly change people's values: 'D that is. their beliefs about what is
the hierarchy of thin," they hold to be dear.
Knowied(e of the structure of scientific revolutioils makes it plain
that sciences do not zrow by siniple accretion. In t!hewr early develop-
iuental stag. sciences (fin continual (o1pl)etiti,)n )etweejl a Iuiller
of distinct views of nature. The competition is somlehow resolved ,o
that the range of a(inmissib)le scientific belief becomes restrited,
usually on philosoptlic grounds. These appear often as arbitrary from
9 See Carl H. Madden. Clash of Culture: Monagement In an Age of Changina Valuc
(Washington. D.C. National 1Planning Association. 1972). pp. 16 17.
I Alfred North Whitehead, Science and the Modern World (New York: The Macmillan
Company, 1925., p. 71. ff.)

wifIlin the perse)tive of the history of science but connect the science
with tlle bro.)e ci' llt ire. Then. "nIor-al science" takes over; that is,
r, earcl~1 characterized :Is "a tIenloUs and devoted attempt to force
Hatkluro inlto the conceptual boxes supplied by professional educa-

I' orial science predicated on the assumption that the scientific
con unity knows whvat the worl i really like. Noral science there-
fore ofteIsut)peses fundamental novelties because they would of
necessity threaten to llbverft it basic intellectual commitment and
I -is an
depreciate its iltellctiial capital. It is only the advent of a crisis, an
:momalv that, despite repe:ited effort. cannot be alinie(d with the ex-
reotaIt,-iz of 101,1111 norma l (ience. which (-enerates extraor(dinary investiga-
tions. t1'adition-shattering~ stud thttransforms thescetfcmai
na~tion. Thwz. unexpected disco :erv is not merely factual In implort but
can qualitatively transform the scientist's postuflated world.'2
The twentieth century revolution of science is a revolt against the
earlier world view of Rends Descartes, the French philosopher and
nathematician. For three hundred years Descartes determined what
prol 1 ems would a ppear important, or even relevant. He determined the
limits of "normal s*ence by setting the scope of modern man's vision,
his basic as!umptnons about himself and the universe, and above all.
lis concept of what is rational and plausible.
First, Descartes set for the modern world its basic axiom of thought,
its prime assumption about the nature of the universe and its order.
It is that "the whole is the result of its parts."
Next, Descartes provided the method to make his axiom effective in
organizing knowledge and searching for it. His discovery of analytical
geometry was a stroke of genius that linked together by a one-to-one
correspondence the points on a plane and the real number system.
Analytic geometry allowed analytical use of algebra to be brought to
bear on the dynamics of change that could be depicted geometrically.
Descartes gave the modern age the conviction restated by Lord Kelvin
in saying, "I know what I can measure." Descartes generated the mod-
ern passion for seeking knowledge through measurement and limiting
S 13
the scope of knowledge to that which is measurable.
What was the resulting world view that dominated the modern
economic age of growth, as that growth is currently perceived and
defined? The simplest portrayal is that it was materialistic and mech-
anistic. The stuff of the universe was thought to be bits of matter. The
primary and inherent qualities of matter were designated as mass and
dimension; all else was secondary. Matter was seen to exist within
time and space like billiard balls on a table. The idea was that of simple
location. To be sure, matter "occupied" space, so that dividing its space
divides the matter. But dividing the time did not divide the object. If
material existed during any period, it was equally and identically
existent during any portion of the period.
So, objects in time and space were seen mainly as identical through
periods of time and simply located in space. The seventeenth century
gave as the answer to the question, "What is the world made of," the
answer, "A succession of instantaneous configurations of matter." In
1 See Thomas S. Kuhn, The Structure of Scientific Revolution#, Second Edition (Chicago:
University of Chicago Press, 1970), pp. 1-9.
12 Ibid.
13 Peter R. Drucker, Landmarks of Tomorrow (New York: Harper itnd Row. 1959).

his classic study of scientific revolutions, Alfred North Whitehead
A brief, and sufficiently accurate description of the intellectual life of the
European races during the two succeeding centuries and a quarter up to our
own times (1925) is that they have been living upon the accumulated capital of
ideas provided for them by the genius of the seventeenth century.-'
The Cartesian world view secured by the genius of the seventeenth
century and familiar to all, involved: (1) A materialist view of
reality; (2) a picture of events as cause-effect outcomes of mechanical
systems; (3) growth and systematic use of scientific method; (4)
creation of industrialization through division of labor; (5) increasing
partition of knowledge through specialization and growth of pro-
fessions; (6) indifference to non-mechanistic aspects of nature-
acceptance of the Promethean myth, that man can gain and should
seek control over nature with impunity; (7) a positivistic theory of
knowledge-holding that we know that and only that which we can
measure; and (8) the values of acquisitive materialism, the work
ethic, and the dominance of economic policy.
The results of this world view, of course, have been the fabulous
products of modern technology and industry. But as Herman Kahn
and others have pointed out, the beginnings of the breakdown of this
world view are dramatically shown in the fact that its successes under-
lie many serious problems of our day: (1) A prolonged life span
produces overpopulation; (2) national defense weapons threaten
mass world destruction; (3) machine replacement of human labor
creates new problems of joblessness; (4) transport and communica-
tion advances produce urbanization, complexity, risks of societal
disarray; (5) industrial engineering yields dehumanized jobs (6)
cybernetic information processing threatens privacy and personal-
ity; (7) affluence generates environmental injury; (8) rising expec-
tations create social disruption and increased control; (9) developed-
nation growth widens the gap between haves and have-nots.'5

Growing awareness of the role of science and technology in the
modern economic epoch, especially since Wortld War II, has led
Americans to take it for granted that the economic system should
be able to provide high levels of material prosperity and economic
security. More and more, people are looking to the economic system-
indeed all institutions in society-to respond to new expectations. At
the same time, people have also begun to perceive a wholk new range
of largely ignored and uncounted social and environmental costs of
growth, as conventionally defined.

Classic Concerns A bout Growth
Ever since the beginning of the modern economic rrowtlh e}ooi.
growth has had its critics. Its benefits carry costs so1ile people liiv-
not wanted to pay. Growth increases peoples range of choice, nd
their command over resources brrt not necessarily' their hi,p)inss.
14 Whitehead, A. N., op. cit., p. 58.
I Madden, C. H., op. oit., pp. 101-102.

(C I -wtli Ii POml;s N, ible ilIItilIIe l -l.ers o lIIIIIn lives in existence
Without necessarily increasing human sat lsfaction. It ive humanity
"rcatcr control over its environment in the ihovt run at the risk
of 1ong run harm. It cives people on earth more freedom from drildg-
erv. the choice of more leisure supported by a !Tiven level of livinlg,
nore services. It improves differentially the life of women, freeing
them from the life of unremitting domestic toll that marks tradi-
tional farm or nomad cultures.
Still. many people olpl)ose the attitudes and institutions engendered
by classicc growth societies. ie acquisitive spirit nc(1d to economirze
resources is seen as a vice. not a virtue. Emphasis needed on individual
ing technology requIires a reasoning and agnotie mind incompatible
with acceptance of authority. As growth advances, the scale of activity
enlar oles, 0( handicrafts are destroyed, work is subdivided and made
monotonous, administrative units grow in size, people are separated
from ownership of their tools. Large scale orLanizations induce sub-
ordinatien, as there Orn w along hierarchical lines and few command
while nny obey. Suc(I organization, some feel. create socil tenson_.
iflipo~-e rouitines nrId mechanical disciplines. (dlinish work roles to
'oo-in-machine character, create 1w man bce-hives. Finlly, growth
c reates urbanigrtioii t1roua!h gains in farm produlctivjty that release
wvorkeirs from aa'ricnlturc: an although most people whej given the
,.han'e choose urban over rural life. there are thIose who throughout
the mo~der- era ave decried urblanism and exfolled country living.

New Co New concerns about whether growth as conventionally defined is
desirable assume a different character. As people's values change from
the impact of new knowledge yielded by the scientific revolution, the
nature of economic demand changes. People more and more want goods
that stretch traditional definitions of output, productivity, and cost.
as well as traditional notions of profit. soch as environmental improve-
ment. health care. and other amenities marked by high risk, long-tern
plavout. and weak or ill-organized markets. The world's poor clamor
for wider sharing of the fruits of growth.
The change in demand creates difficult trade-offs, such as that of
Sop'llation (-rowth and environmental quality. People grow more con-
'erned about assurance of health and safety as technology grows more
nomplex and potentially letll. As greater numbers of people have to
be fed, the growth of nionoculture, the use of chemical pesticides, the
ingestion of highly processed or synthetic food increases. We are un-
likely to reconcile growing urban populations. the demand for a qual-
it y environment, and traditional property rights. The income gap be-
tRween rich and poor nations eventuates in a food gap that challenges
food consumption patterns in richer and more advanced areas.
There is also growing recognition that new kinds of costs are asso-
ciated with the response of growth-oriented economic systems to in-
0caseS in deminand. Ways will have to be found to take these new costs
and benefits explicitly into account in both public and private deci-
sions. The traditional economic concepts of "spillovers," of "external-
16 Lewis, W. A., op. cit., pp. 420-430.

ities' of individual firms and tlI eir operation). j li e ike Ihlec ) ept of
"ie effects" of tclflolwoic- I advance, are per'1 ti c iiore n Io Lo ie
as fimdame-li'l lv i|.,satisfl orv ideas. IRI c(0)we to r(sei,".)11 i 1101 iO'e
1)eo1Ilexs view i' iml of a'ionlay referreO to v V hite hea( 1:n ai~ l'ilin
thai. despite repeated effort. cannot be al ii1(d with (w(lnve : (ox-
!,WctatiolwS in a science and th ierefore creates an iuitellet wil ( I,-
tei iialities appear to b~e inte'rral to (rowtli t)roce ses.
Another type of cost P1ieiionienoi i tei acc( ie.ti .i (),i "o'-1
many traditioral resources. Such resoi tre are likely to 1e oii &,: )re
scarce and costly, not because thev are, ',uiini1ig ot but tXr i' H
reas'Vons important to understand. 'Bisingc world demand. a> it assures
increasing competition for these resources, an(1 the en\virolitielta csts
that will mount with their increasing use, are likely to pui-zi .) tit,
total cost of these resources more than in proportion t l t leir
The impact of these new concerns on more and more people's think-
ing is to raise serious questions about the continuing ability of our
political and economic systems and institutions to respond. There is
doubt in many quarters that private enterprise can take into account
social costs and environmental costs of its activities without being
so heavily regulated as to defy the meaning of 'private." The doubt>
go further. to question whether a market econoi-,y can ta!:e long run
scarcity factors well enough into account in allocating vesource. Some
feel, as do the co-founders of the Club of Rome, that both "private
ani state capitalism are stale ... we have to develop something else."
It is not without public policy significance that these concerns about
growth are explicitly and carefully acknowledged by a group of busi-
ness and academic leaders whose role is to look ahead for the nation's
leading business federation.'7
Doubts About Orthodox Growth Concepts
Symptoms of an intellectual crisis surrounding orthodox ideas of
growth are not b ard to find in the behavior of communities and
regions, the views of growth critics, and the advent of ecology in
public thinking and policy.
No more than a decade ago, it was almost heretical to suggest that
growth might not be desirable. Nearly everyone knew without think-
ing that orthodox growth meant a better life. Serious attention was
paid by national policy makers to setting growth target rate s for
GNP. Local communities, states, and regions competed for industrial
growth. Presidential advisers promoted the notion of a "growth divi-
dend" in GNP terms. Growth, it was held, "created" resources, opened
up new opportunities and new jobs, and made unnecessary substantial
redistribution of income and wealth. Growth was seen as simple and
cheap. It involved hardly more than keeping up the rise in total
national monetary demand to the expected rise in the nation's pro-
jected growth potential. The early 1960's saw the triumph of such
"growthmanship" in domestic economic policy, although foreign aid
based on orthodox growth concepts already was having trouble si-
mounting "cultural harriers" in some underdeveloped countries.
Chamber of Commerce of the United States. op. cit


~Wiat are the soulrces that cast into doubt the validity of orthodox
cowt 1 nWnship? In only a decades. values and expectations had
rViged enough to achieve political signifi(ance. One reason was the
nitlition that got underway after 1965 from the guns-and-butter
o1,i4.> Another was the continued rise in affluence, education, and
e()ono IC security that led people to expect higher quality in output,
'ore hinmane treatment in the market place, and less destruction of
.neties such as privacy, convenience, recreation facilities, and urban
life than was in fact occurring.
Also. the last decade saw the rise of the "transfer economy" in the
-nited States. the multiplying set of programs, regulations and inter-
v(,ntions that keeps having an increasingly important impact on in-
cOnIes Government redistributes income in many ways: through direct
grant programs: through its influence on prices, wages, and interest
rates: through differ'eiJti:, effects of monetary and fiscal policy on
individual incomes and shares of labor, management, owners of capital
and land. By 1973, government through direct transfer payments
alone-benefit payments from social insurance and public assistance
programs-was redistributing 11 cents out of every dollar of personal
Growing redistribution of income by government acknowledges the
erosion of the link between incomes and productivity. The erosion
results from many factors related to the increasing complexity of
economic processes. As a result. says the Chamber of Commerce study
of growth:
The neoclassical eflonomiic theory that an individual's income is determined
by the productivity of his labor and his property clearly has become an increas-
Ingly poor explanation of the real situation.18
Perhaps the most flndamc ntal source creating doubt about orthodox
a'rowi c'iep~ts iS t],(, Impact of ecology on economics. Ecology, as a
S1 .. of b)iolo.,y 1lealing with environmental relations, or even as a
,rWaWh of social science dealing with human relations to the physical
environment, is not new. What is new is public awareness of ecology.
It lerivel front tle shok of postwar nuclear testing that showed
People hoow little wa.s known about the environmental network. Since
the 1950's, miany other instances were reported of far-removed, de-
layed, and unintended effects of technology, drugs, tobacco, all show-
inig that the earth's natural systems, including human beings, exist in
an intricate balance easily upset to people's detriment by man's ac-
tivities. Ecology has gained significance from "technology gone
wro)n&"-rnuclear fallout, smog from auto exhausts, DDT in food
(hains, chemical pesticides in such chains and on food for humans,
water eut rophication from nitrogen fertilizer runoff, and the like.
The e revelations, combined with disgust over deployment of high
technology weapons and technologically-managed policies of "grad-
uated spongee" in Vietnam, had a powerful impact on attitudes to-
var~b t*1chnolov T1ey effectively shattered the naive faith in tech-
,olo, v that prmeated public thinking only a decade before. And they
gave rise to the Congressional initiative to asess technology, first set
i N,-Fonnl Environmental Policy Act of 1969 requirement

Ibid., l). 19.

of environmentall impact" statements in every najor proposed law
or Federal progrann activity land then in the 1972 law setting up a
Congressional Office of Technology Assessment. By now, thought given
to eiivironniental consequences of new projects designed to feed growth
have had significant impact in delaying and increasing conventional
costs of the Alaska, ipeline, many land, development scheme es, utility
eXlIM~lsi: ,ttle tliining of I\Vestern coal dredging and dam-building by
Ferla! agencies, and many other schemes.
Less fundamental but .ore highly visible than the ,npact of ecol-
oivY is the effect of inflation and shortares.I During the fuart er century
after Wor!W War I1. orthodox economic growth has been per',i vcd in
the guiise of Kewnesian economics. Economic growth has been, albeit
superficially, seen mainly "as the growth of aggregate dexand-total
flational ionetary demand. The assumption has been that national ag-
gresrate (leIl:mnd creates its own supply. The growth of productive ca-
pacity and its internal structure have both been largely taken for
t'ranted. while "growth policies" have been aimed at keeping demand
for goods and services growing fast enough to assure full employment
of productive capacity. Indeed, the recession of 197-1-5 only re-em-
1)liasized Keynesian doctrine and came as a relief to some who have.
like devotees of "normal science," resisted giving attention to the
an onialies crowding around orthodox growth theory.
Jihe real possibility that availability or accessibility of resources
mi,iht become a. serious constraint on growth neither fit into orthodox
growth theory nor was believed by prevalent economic thinking. That
the resources of the earth are finite and impose a volminetric linit to
growth is an od and obvious idea-. During the past three centuries of
modern economic tirowfli. howeverr advancing technology has actually
expanded i,'A.V,*old loth Ihe (',antjity and the number of resources
earlier thomsli to be available. Most lately and dramatically, the
"Groll Pevolition" of the 1960's at first. appearedd to offer the hope of
raisin" yields per acre to ease the Malthusian 0,rip on population in
soa ur' less developed countries.
croj) failures from -,n.nexplained weather changes, the shrinking of
world .. res j, ,ine, of x N v te !i: 1 1
dramatically questioned the assumption that the supply sidk of the
pzrowth equation can be taken for granted. The inflation does ceem to
su-vfest tflat worldwide demand has (Yrown faster over the !hst decade
Or t wvo than c, pacity in many primary industries. The world opiula-
fion of 4 billion keeps growing and may re,ch 6 billion 1y theend of
Or' ,,n p,.Growth itself .aintains the pace of indistrializelion and
r ,am~zt.tjon, both -processes that feed on resource sunpliei. Pr0 re*,1-
h'ItrTI T)!,nlv conceived !,,is spnrre( consumption of s(,Prce meieria,.q
ft less T!b' fn!1 eost to consnmers. It has al o inhibited invo,,t4nmit ii
added su:,)v. Tnflhtion itself ha 4Prcafd b:ntom inventory ",-ofits
"'11 I to ,0 1r11 s 'vtq ed allow .-e(2 Tor c A,1( jf (0 1P T1P ti,)n : t fVOr ffre.
iW I'1' ism'','", ',d Ofnvestmcnt. Filfialy 1,'" OT n"il v' in I' ) 1,t' ,,O -
V, 0 "i,,fc'!Z ve j. r o tl "n flo ze in n!wt lgo fel o 1
lireC'' '81'A ~1' (~' I ((,1rOf ~Tc

'A W I! I Il z I I I I\ltJ

It belies inreasinglv clear iat short-ri i a( iiiiainly ieo-classical
perception of economic growth is seriously if not fatally flawed. Al-
though economic greats from Adam Smith, Karl Marx and Thorstein
Veblen to Joseph Schumpeter have pounded away at the point that
economic growth is a cultural process marked by social transforma-
tion. economic orthodoxy persists in clinging to basic economic ideas
derived from analogies to the statics n(d (Vflil(c5 of' Newtonian
)h 1 l. Hemmed in by the most mechalnistic chaoat o'f the modern
social sCi1ces. economic theory creates too mniarrow a pattern of anal-
ysis to rain a rj sp of orintegrate anonalies representing the major
insights of the scientific revolution of the twentieth century. That
revolution quest ions the conceptual foundations o)f ecoliomics. The
current concern over envi Ponmentalisn the atigrowti movement are
symptoms of the crisis. As these movements express and affect new
human values, they are a stimulus to the search for new means of more
effectively understanding economic growth and relating growth to
luimian welfare.
The evidence seems overwhelming that modern economic growth
represents an irreversible process of cultural and social, as well as
economic, transformation. It has resulted from the increasingly sys-
tematic ue of new scientific knowledge in the processes of allocating
resources in industry and agriculture. To the extent that the process
of growth conforms to human undeitanding and human values, it
can and does contribute to human welfare. To the extent that economic
growth. conceived in an orthodox way. violates canons of knowledge
about natre and human settlement patterns, such growth is threat-
enin, to human life and welfare. In any event, the real concrete process
of the last two centuries has been a social. ideological, and economic
trarnsfonnation marked by advancing technology and by institutional
and ideological adjustments. as the evidence of Kuznets clearly shows.

Ne.Potulate of Srjcnrce
Now. the scientific revolution of the twentieth century questions the
conceptual foundations of industrial society itself. First, it rejects the
view that we can only know the whole of an event. organism, system,
or iiititution by identifying or knowing its parts. It rejects the Car-
tesian view that there is no "whole" as altogether separate from the
different t sums, structures, and relationships.
The centrall concepts of twentieth century science, in every one of
our (iseiplines, sciences, and arts are not concepts of individual objects
idependently and identically existing through periods of time and
simply ] :,ed in space. The central concept-s are of patterns and con-
fiurations, concepts of a whole. Indeed, the parts can exist only. and
,'an be i, notified only. in contemplation of the whole.
Se, ui 4. ell Cw world-view assumes the idea of process, of an un-
filding of events lthar rever sible. Every sinlgle one of these con-
cepts eml)odies in it the idea of growtLh development, rhythm, becom-
in [r. Pmre s are irreversible b because it is seen th-at th e process changes
]+ "wu ,] -te re thant th ioul Tl!hpe7 (b] of' time identity alters from
v-i~o- ti-l,( i~eli 'eizsl -ecitn

Third, tie twe tieti celit ,ry scientific ie\olition niakes abill(1alltly
clear that the prospect iS open to he lillan ra"ce. to re(ogze and
adapt to the dawning possibility of conscioils iicultitral evolution!. It is
the knowledge provided by science that makes possible the realization
of the age-old dream of adeqpuacy -for all the people of i] he earth. Even
though since 177 world population lies Qrown ftoii ll m)le' I billioil to
over 4 billion, the goods anid services available to people o average
has also grown, and faster than population. rI'e risk 1" n ret from
taking up added resources in continued rapid population growth is
the risk], to human siuirvival in futur-e geueratiols 1hIt it is ,a U IoIIIIt-
able risk.
Org~a,)Iic e\ ,l utiol ra-t her than mechtanist ic equilibrium is the charae-
teristic of post-inidustrial eilture. The evolltionary prores is I Ilried
by nat uralisni holist. ami inalanentismn. Natural- in holds that mlan
is part of nature, not separate, and that, he must tei trn to live in
harmony with the natural order rather thlan assuming dominion over
nature. Naturalism follows the Orphic rather than the Promethean
myth. Holism is the perception of how it is pattern and configuration
that determines, indeed identifies, parts; that a philosophy of stark
individualism is biologically inaccurate; that the view of nature as a
collection of objects falls far wide of the mark. The third is perception
of the immanence of events and organisms; the recognition that
oro'anisms and processes are importantly determined from within
them-selves and not from outside.

AAfl;-(4,ovth ind Global EquiH 1'i//U
The Forrester-Meadows studies for the Club of Rome intentionally
seek wide debate over their "world model," and Forrester has called
for "an end to population and economic growth" as the only way to
avert an al-arming future.'!' Howev er, in the debate over "no-grrowth."
there is much confusion. Hardly anyone has seriously sinoested no-
(yrowth as the best wav or even a possible way, to deal with environ-
mental and resource problems. Rather, the call has been for develop-
inent and use of products, processes of production, and "life styles"'
more economical of n',sourves and less damnagiiuo to the environment.
Even the authors of the Club of Rome study do not discuss zero
economic growth. 1hev try instead to explore -the idea of a globall
equilibrium state." a state of ecological aiil economic stability that
could be perpetuated o-er a lono' period. Their global equii ibrIml state
has three minimum re(Iiifrementso:
1. The capital jlant and the population are constant in size. The
birth rate equals the d(,ath rate 911 1 the cajntal iuvestinew rate
equals the depreciation rate.
2. All input and output rat e>'-birtbs, deaths, investment, and
deprecitioni-are kep)t at a niivimi.
,. The levels of ca pital t11(d populatio lfn( tbl ratio of the t wo
nnre set in accordal,-'e with t1mhe values of tile society. Thev mav be
deliberately revise and slow]v adjusted as the advance. of teeb.-
nology creates new options.
19 See D. TI. MAeadols. D. L. Meadows, T. Rangers, W. W. Behrens III, The Limits To
GrTowth: A Rieport for the Club of Rome's PIrojcct on the Prdicz f't of Manl,ind (Poto-
mae Assocliates-Universe Books. New York 1972; J. W. Forrester, World D"'nqmie,
rWright Allen, Carnbrld!Ze Mass.. 1971).

It is 1:1ear that such a global equilibrium state i,- nutt a stagnant one
with no technological change. The authors suggest that substantial
a(lv'alces 'i technolog,,y would be needed merely to arrive a' equI-
I)VIi and sI)ecificall" say that "technological advance would be both
neu> -a v, and WI(Th1LQ in the equilibrium state." Their examples of
enh8 J'in1 iso,r for the statlonarw state are caree v radical new
1nethods of waste collection, to decrease )llution aid make discarded
material available for recycling; more eflicient techniques for recycling,
to reduce rates of resource depletion; better product design to increase
product lifetime and promote easy repair, so that the capital deprecia-
tion rate would be minimized; harnessing of incident solar energy, the
most pollution-free power source; methods of natural pest control.
based on more complete understanding of ecological interrelatinships;
medical advances that would decrease the death rate; contraceptive
advances that would facilitate the equalization of the birth rate with
the decreasing death rate.
Ts it not, however. apparent. that the hypothetical construct of the
"rlobtal equilibrium state." concentrating as it does ( levels and rates
Of change in physical objects existing identically in periods of time
and impIly located in sIace n a mechanistic system of equations
exactly repeats the fallacy characteristi of the thriving of the indus-
trial age? It is the fallacy of misplaced concretenes-. The analysis of
the world model in the Forrester and MIeadow> work for the Club of
P.ov(-. to he smU(,, omits price considerations, but such an omission is
11,0t fatal. What is fatal is more subtle and concerns the assumptions of
the model reg-arding the nature of the concrete processes of the real
Vclrld. The simple location of instantaneous material configurations-
l11nIp of capital. mounds of pollution, truckloads of food, tons of nat-
ural resources, and numbers of human bodies-through a stretch of
time has no inherent reference to any other times, past or future. If this
is the nature of the concept of time employed-and such is the assump-
tion behind the definition of time in Cartes:in analytic geometry--
then. W itfhea(1 long ago l)ointed out, "it immediately follows that
Smvture within any period does not refer to nature at any other period.
Ai '(riily, indMtion Is lot based on anything thai cu1n be observed
as inherent in nature." 20
The point is that we do not see growth in the glii e of relationships
between lumps of capil al, mounds of pollution. truckloads of food,
toii- of natural resources and numbers of human bodies. These ideas
are high level abstractions from a concrete process that remains un-
6iiscl (ed by examining such relationships. To be sure. watching such
relationships has its uses, and they are important uses. Similarly, body
counts in Vietnam, analysis of bomb hits in North Vietnam, accounts
of acres defoliated in Vietnam had their uses. However, they failed
to reveal the proces es at work in Vietnam for exactly similar reasonS.
To be sure, it is possible to treat the "global equilibrium state" as
lo!rmAll science," and to explore its limitations. Boulding's analysis
points out some implications. First, the quality of a stationary state
depends almost entirely on the relationships relating stocks to flows.
\ t oie extreme is the "state of misery," where Malthisian relation-
si~I) nl r il. Alonz the spectrum are many quavi -stationar3"y states,
in which, for example, a change in the structu: e o' the capital stock
r WhitflhAd. A. N,., op. cit., pp. 74-75 et pa-,qim.

thr t(, i techno ogical a(t vance piro(uce7 a ..arer Iiroi ig '.l (
s(ui-, s. thms larger piodu, tion and consumption, wit 1, fix'a ptlN-iial
size of capital stock. The trouble is that tV flomodel g1ives Iittle icasY
to determine the future shape of fund ions ain(l )arantIeI2rs.
Taking population, what a policy arej
state lina 1. popult io with risin" a vcra e -,I lo !, ., -
"' pt to the sii ii I Poin a t iangi ar-shaped t L, ,Y .. (1)"L (1
!)iItimIMu It means, in a Society ol Y age-scaie Or'rniZ:!,ii, that Iinore
1 -, 0 1* (t i ~
() (iSi U I 1C :lI J l: S(M I II ( (,.(V I,%1 1) i1( f 111 i lfr icOIfle }I Vr( an(V IceS.
A ,,lt I)iCes to nf istribute iecoI. twceL generations would be
Tf i~ p2 irn ,,ne itself. is fo- -al
U( I afce to be distribulted Only in 1icreaved leisure 'l a g1i1 1
),ia, I it~t) baalace t1'o1igh limiting phyicu.! stocks a d ier,
egin .( rain i such stocks and flow S is another's ]cs" thC net ,a
of ph)sic,)l~ly Ie(listri t Ji11inc ph-,sLca] wealth to so-., Qa OliS
force net losses to others. The, tendency toward exploitation o ,in
region by another is increased where competition becomes a zero-s uml
The implications of a society throughout the world in which net ad-
ditions to the physical capital stock are zero, net increases in population
are zero, net physical amounts of resources used are zero, and net
physical quantities of food produced and consumed are zero are mind-
b-oggling, mainly because human experience is so extremely limited
in such an accounting scheme. How to impose this type of ac,.ount nil
a'- a regulatory device is equally unclear.
Is Growth Itself an Anomaly?
Critics of growth have questioned whether the past two ri1', ,1
rapid economic growth may not be simply a rare event in th e evoli-
tion of the human species.21 Humanid ancestors, dating back 3.5 to
1.0 mon years, have left. evidence in the O(lduvai Gorge of anzai,*,,
n(l in, Ethiopia. Man lived as food gatherer throughout the (C00P
years of the Old Stone Age, numbering hardly more than 20,000.000,
the population ceiling for such a technology, assuming two square
Sper person needed in the limited areas suitable for gathering
and hunting. Taking-, the last 50,000 years and dividincr them t to "o
lifetimes of 62 years each, about 650 such lifetimes have been spent
living in caves or makeshift temporary reed and thatch }ouses.
have been able to read and write only about 70 lifetinms. print z'bout
5. tell time exactly about 4.
Another argument is that if growth at 3 percent per year per l er--on
is extended onlv another 150 years, to 212., a ,,.10T, ince(nle would be
100 timesas ar e ai today, al(I in still another 140 1var' w. )e
10,000 times as how can thle c.r Ih yiel(l Ie),r 1 112 11te,'ials
to meet, sch fintast,c st,-nd(, s -(. l(v on :! I 11f I ll v I I p
family i anage to a)Sor tim ? ,
As to the firtr arrimnnent, the rarit y of economic -rrowth i: (,
a mystery, taking the argument seriously, than is the co' rv
logical evolution. going on for about 3 billion years on earth, that l)- a
i Boulding,. op. cit., p. 98.
.2E. J. Mishan, 'Growth and Anti-Growth: What Are the Issues?," Challenge May/
.Tiuno 1973. p. 28.
79-156 .76 ---4

seen that improbable event, life, advance in variety and organization
from submicroscopic. preamoebic units to vertebrates, even far rarer
events than life. No more a mystery than evolution, no more rare than
evolution, economic growth is hardly defensible within the develop-
ment of human culture -when interpreted as a mere chance event,
rI dom V propagated. The ar0umnent that ra rity of growth mp lies
it l iould or is likely to stop is essentially a Chicken Little argument:
and it is indeed possible that the sky will fall in. though not high
on the scale of risks human life must face and deal with.
The second argument, that today's growth projected 300 yers ahead
yields fantastic incomes, would have been valid 300 years ago. In
1676. scholars would have scoffed at many modern developments as
fantastic. The idea that the earth may be 4.5 billion years old seemed
fantastic to prelates convinced it was either 6,200 or 6,400 years old.
The idea, of talking at global distances, sending pictures at global
dk1ances, curing infectious diseases with molds. hurling machines 214
million miles to Mars and receiving pictures back, coping with a world
population of 4 billion people. and so on, all would have seemed
ftantastic to scholars 300 years ago. This would not have made their
argument cogent, it would only have attested to their lack of imagi-
nation and open-mindedness. There is no logical way to resolve an
argument questioning human ability to achieve results that are not
inconsistent with physical scientific principle. For example, the argu-
ment asks how can the earth yield energy and materials to support
such incomes. It is not necessarily true that the earth itself would
be the only source. It is not necessarily true that real incomes 10,000
times present incomes are impossible with energy and materials from
Growth and Evolution
Widespread evidence from astronomy. geology, biology, nuclear
physics, and nuclear chemistry suggests the hypothesis of cosmic
evolution. Twentieth century concepts of the spn ce-time continuum
disallow simple location in time and space of material as the stuff of
reality. Up to now, economic theory employs a concept of time drawn
directly from classical Newtonian physics, in turn derived from
Cartesian mathematics. Economics employs a concept of economic
growth that is permeated with seventeenth century ideas of matter as
being made up of objects having an identity through sub-periods of
the time period in which they exist. The exceptional theorists of
economic evolution such as Karl Marx, Max Weber. Thorstein Veblen,
and others have remained at the periphery of normal economic science,
their insights largely ignored.
Cartesian analytic geometry assumed that time is cardinally
measurable. That is. it assumed that in measuring events through time,
the qualitative differences between sub-periods of time could be
ignored, just as when we count objects we ignore qualitative differ-
ences 1)etween them. Cartesian mathematics allows for subtraction of
units of time, just as numbers of objects can be subtracted because
qualitative differences between them are ignored. Cartesian mathe-
matics. because it assumes that time is cardinally measurable, also
assumes that time is reversible.
Economists. in employing the mathematics of Descartes to formu-
late fundamental economic concepts of cost, price, revenue, and value

also assumes that time is reversible, that the "stuff" of economics con-
sists of self-identical objects hanging independently in absolute and
simple configurations in time and space.
Therefore. in analvzinv the relationships between revenues and
costs, econoni iFfts pay little or no attention to evolutionary l)ros. to
the e" ergTv-(laill oi costs. to the dissip'Ition of energy Il 2cInoDoic
processes, or to tlie relationship of benefits ailid costs conlecte(d with
tl,, (lissipatimo of resources. These aspects of economic processes( : Are
considered, if at all, as 4externalltis," that is, as costs or benefits
,- 1ich ar-b "externall" to the theory of the firm, or the market w.o the
history y of econon ic development. In the large, historic resource deple-
tion is observed as "exogenous" to historic analysis; is talent for
granted. In the same manner, economists pay little attention', to the
dynanmics; of the evolution of advancing technology.
It has been in the theory of thermodynamics that physicists have
had to face up to the concrete nature of time as we have so far
observed it in the universe, as irrevocable and irreversible; and in the
theory of relativity, in which simple location and simultaneitv have
given way to the realization that there is no unique meaning to be
1yiven to space or to time, time inheres in events as perceived by
observers, and there is no unique present instant.
Thermodynamics arose to account for the flow of energy in physical
systems, such as heat engines. The first law of classical thermo-
dynamics holds that, throughout the concrete flow of time, in any
closed physical system, total energy remains constant. Energy may be
transformed (e.g., from heat to mechanical motion) but not created
or destroyed.
The second law involves entropy. Broadly, entropy measures the
rate at which available energy called free or latent, becomes bound
energy no longer able to do work. The Entropy Law, the second
law of thermodynamics, says simply that the entropy of energy in-
creases steadily and irrevocably. In other words, in any energy sys-
tem (apparently including the universe, although this is debated),
there is a continuous and irrevocable qualitative degradation of avail-
able energy into unavailable energy, of free into bound energoyv. If
this were not true, we could burn a piece of coal, a barrel of oil, over
and over again. Scarcity would not exist because, up to a certain level,
with increases in the population, we could simply use our existing
stock of supplies more frequently.
The Entropy Law means that waste and pollution (i.e., bound
energy, unavailable to do work) increase inevitably in the flow of
energy in any closed energy system operating through concrete.
dynamic and irreversible time.
The Entropy Law. as Nicholas Georgeseu-Roegen. has demonstrated,
clearly applies to any other energy process.23 As energy is trans-
formed from a free to a bound state, dissipated energy piles ill).
Indeed, other things being equal, waste and pollution pile up at a
faster rate than "useful" output grows. In this sense, energy syste-'0s
tend to run down.
A probabilistic inter!i'etation of entropy in suib-atomnic phy-is
holds that all closed energy systenis tend toward randomness; that is.
2 See Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (Cam-
bridge, Mass. : Harvard University Press, 1971).


I ow ird equal stabilityy t hat ulb-atOlnic I'artiPS~ l0 will l) locate(l ill
any ajven re~ii of space. Such a definitionl f sp 'al distribution of
t,: 1)Iil)I,)3 10 OUCII V IHV|I1,Uli I JOliB)y1a.yis tie exact
e~ livalent of disorder.
To offset the (jualitative degradation of cnlergv and the tendency of
energy y syst-eis tu 1,1111 ltdown tova rds disorder r, living organisms con-
,t T, ,(,rv 1!t :~aP(fV. (',I (larI f ,i the >Ui, iil 0~ nion-iranldom
laterns, configurations. and action, seeking low ,ntropy from their
environment in order to conpensate for the cnltropi (le,,radation re-

Ii) j ect. Without tle ability to prevent suci degraa lion eventually,
wiid without the ability to prevenl the Continuo us degradation of the
.1, ir lifo system, when viewed in relation to appreciate evolutionary
time d(ur'ations, life is characterized as the strI Iie of ordered (and
there fore iml)robale) organiWnis against thme (,it rOpi degradation
of the environment.
coloica'l p.oces-ses, as concrete. observe, in nature,c
herent evolutionary principles associated with I gene mutation, itself
a rare event, which are favorable and not delet:erious to survival of
a ,i yen sI)l, i. an even rre' evlent be-ause most mutations are
deleterious to survival of individuals. In a fairly exact sense, biologi-
cal evolution over three billion years on earth, by advancing the
variety, organization, and complexity of species, is an extraordinarily
rare series of events. In nature, evolutionary processes have moved
from simple to complex life forms, from simplicity to diversity, from
few to many life forms. Driving these movements is the characteristic
of living systems to generate negative entropy within life systems, to
,0ev101) orlter noli-raiiloni1 activity which makes useful
ener gy always available. Of course, in evolution survival of species
i rare as well, in the sense that about 95 percent of species that have
existed on earth have failed to survive to the present.
The conclusion of the argument thus far can be stated simply. The
evidence both of evolution and of the growth records of the modern
economic epoch strongly suggests that economic growth represents an
irreversible process of elltural, social and economic transformation
relating from the use of knowledge to organize behavior towards
The case for the evolution of culture has been well made by the
anthropologists. Modern twentieth century science-that is, the body
of 1-nowledge generated by our culture through practice of a well-
defined method of discovery-opens to us the dawning possibility of
choosing the directions for humankind to follow in seeking to achieve
B:s potential for survival and for living. The new vision of man's
(le-s6imy, as Julian Huxley observed, which is to seek conscious evolu-
tion, merely extends the reality of biological evolution. As Huxley
(I),,'(1v5, whether mankind likes it or not, he is "the sole agent for the
whle evolutionary process on this earth. He is responsible for the
future of this planet."

The Redeflndwn of Wealth
I enmvisa(' wealth as a growing pile of self-identical objects affixed
ti1 C1onfi-ratioljs through 'pu-periods, of time and space may be

a(~lusom e 101 e SO!i H SUremIiit purposes. it IA. iii (' i:. 1:t .i
understandiir what wealth,, how w&alt}I llaz 1)eeA* at ,(, aI I(1 ow
wealth may be created in the future.
The two sources ot wealth available in I futt.re ai e 1er:rv auiK
knowledge. Wealth is incorrectly envisaged a. a pile of l)11v4'a ,
jects having value in the past. The value of an e(.onomlc cliiioditv
(whether a physical good or a human service) is the present value,
discounted, of a potential future stream of services it yields to p! ople.
All physical inputs to economic processes of production and ct I-
sumption eventuate in waste. The only input to enom p
that does not itself result in waste, in bound energy, i 1:iov, ledge. To
be sure, as earlier mentioned in this discussion, in the broade-r proc-
esses of society, some knowledge is supplanted, absorbed. qualified, or1
rejected. But in the broad sweep of cultural evolution the stock of
knowledge has grown.
Economic processes are themselves particular forms of knowled-e
t1 ~ ~ ~ ie, -f&) ;eOrcjy~ riro'tl seenl- :-te %'k* f n Il:e-
caiu.ie we have not perceived the evolutionary transormatiou of c-z oial.
ideo9g(cal, and economic processes resulting from the advent of ii-w
:, employed to pattern and configure evolutionary ecoiIOl1ic
PI',>es:-es. Therefore, ,e do not know very well -w.haf weahhlT is.
11 the two source- ol wealth in the future art +,,wv a-d knowl-
ed e, at the simplest it would seem to follow that there are two very
broad strategies for increasing wealth consistent w ,tIh evollutiota rv
choice favoring hunan survival. One is to delivery ener y to our
economic processeS more usefully. An important sub-strategy is to
substitute knowledge for physical resources in energy systems. The
second strategy is to pursue widespread dissemination of forms of
knowledge and bring to bear more useful information in social
To deliver more useful energy to our economic processes means to
improve energy-balance economic calculus to supplement other modes
of analysis. The issue ranges from full appraisals of energy-baia'ce
and cost effectiveness of energy modes to benefit-cot analysis of
human nutrition in relation to health. We do not eat as well ai+ we
know how to, in order to maintain health, despite marvelous mef;o+ io
educate and inform ourselves. But neither do we live holi.t national

To substitute knowledge for physical material ,ean> svsten):ati(,allv
learning to "get more fvoni less." House deQiun iu),'ofligate of vI-,e:,ri,1
and energy* urban design profligate of nunjeip'il facilities: was4e
disposal design profli.gate of nimnbing and w:,ter: food growi2'_a 1)1of-
ligate of fertilizer and pesticides-the list could be multiplied.
The second strategy, to bring more useful informal tion to bear on
soc:,,. and econoillc pl'ocesses, lias Avidle-ranm'inll 1* r flc't,): ioil. WY,
need to use ou1r existinL 1)owerful nwaus of v'id ,,:iimni ation I;>
educI:ate poo'le, of all a,'eS abo>t th eIe i'ebcli es- :Ii, I vii fviu iin:
aud iii-IV:lnation of 111o(1,.,11 .<'ien<.e. W e Lee(l to :fle s'cieii'e >VtIll:)
i(':tlv in social and economic affiks, just as we learned in the nine-
teenth century to Ise science systematically in industrial atair. 1 e
need to have our corporations, as assemblaires of o0!'a11ized kowledge
and sources of advancing technology, to '0o n icate effe",vev to
I u t effele 1i it tI )t ev
1,' ',e(~erhhf(< : >:POscQ. We iwed to or,:oaixe kn11)~e +


'WIT 'tI -e 111flel4 '.11jifluY
I0 fuM' t Iether. social utility and scientfi merit in designing

Impro u ing and Broadening Productivity
Identification of economic growth, a social transformation process,
with GNP. a statistical measure, creates great confusion in perceiving
the meaning of growth. Daly and others have pointed to the absurdity
of counting output without counting its costs. When output rises,
pollution also rises, but GNP goes up by the full amount of the in-
crease in output. WVhen pollution is cleaned up, GNP goes up some
more. When people harmed by pollution get medical care or die and
incur burial expenses. the spending is again added to GNP. In a
pioneering study in 1970. economists William Nordhaus and James
Tobin tried to clarify the "growth versus welfare" argument by con-
structing what they called a "measure of economic welfare," MEW.
They reclassified certain items in the GNP accounts to get a better
measure of final consumption. They added value imputed to leisure,
non-market work, and capital services of consumer durables and gov-
ernment investments. They subtracted a calculated disamenity cost
of urbanization, estimated as the income differentials needed to get
people to live in densely populated areas. MEW did increase, demon-
strating to the authors that "the progress indicated by conventional
national accounts is not just a myth." However, the growth of MEW
in the postwar period, 2 percent per annum from 1947 to 1965 by the
authors' preferred estimate, was slightly more than half that of GNP.2'
Growth is often viewed naively because of the confusion between
the statistical measure and the process. Above all. growth does not
involve the constant replication of the same products, technologies,
and patterns of consumption. Kenneth Boulding distinguishes be-
tween "printing" and "organizing" as forms of knowledge. Printing
involves replication, the ability of a structure to reproduce itself, to
make a copy of itself. Mass production of commodities is largely
three-dimensional printing. Organizing is like the ability of a blue-
print to determine a building or of an idea to create a new invention
or organization. The process of economic growth is not printing but
organizing. It is therefore incapable of being simulated by equations,
since novelty is inherent in it.
The self-generating aspect of the process of growth results in its
changing tastes and values, changing relative scarcities, changing the
mix of industries that survive in the industrial structure, changing
the physical configuration of population and markets, and changing
the relative prices of resources because of changing relative scarcities.
Technology also changes, historically in direct response to changes in
relative scarcities. Innovation, studies show, comes mainly in response
to market demand, not the availability of knowledge alone.
Continued growth does not necessarily depend on the continued
growth of the labor force or net additions to the stock of physical
capital. The growth of wealth is a growth of total human value avail-
2, William Nordhaus and James Tobin, "Is Growth Obsolete-," Economic Growth, Cot-
loqium T. National Bureau of Economic Research (New York: Columbia University Press,
172). ipp. 1-31.


able in markets. Risino factor prodlctivity can make growth possible
without any volumetric physical additions to the fixed capital stock
or additional inputs of physical bodies of labor.
Can we be assured that the shifts in output couinposition and in
technology will avoid ecological disaster? The ailiswer depends on our
ability to know and predict ecological conseq ilenles. Runing out of
resources is not a real problem, and if environmental costs are inter-
nalized, environmental damage need not halt growth.
The idea of productivity is in for change. Productivity now refers
to the ratio of "useful" output to the inputs in a market-determined
production process. Productivity bears some analogy to physical effi-
ciency, the ratio of useful work to energy input in energy processes.
Both ideas are anthropomorphic; human beings have to decide what
is "useful." Productivity may be expressed either in physical or in
value terms. Up to now, the concept of productivity has been con-
fused with its statistical proxy, labor-productivity, which is con-
venient to measure.
It goes without saying that increased well-being, however conceived,
depends upon increased productivity-upon how well all the re-
sources of society are used to produce the outputs that people value
most. The misconception of many non-economist growth critics that
economic growth derives exclusively from numerically larger inputs
of labor and amounts of physical capital emphasizes the importance
of rising factor productivity as a source of economic growth, espe-
cially because the U.S. labor force will grow more slowly in the next
two or three decades than in the recent past.
Studies by Kendrick of total factor productivity 25 show that its
chief determinants have been investments in intangible capital de-
signed to improve the tangible capital stock. They are qualitative im-
provements in the capital stock resulting from technological advance;
qualitative improvements in the labor force resulting from education.
training; similar improvements resulting from improvements in
health and safety: innovations in organization and management that
improve the way capital and labor are used in production; and the
mobility of capital and labor that allows them to be shifted from
industrial and geographic sectors of the economy where their pro-
ductivity is lower to those where it is higher.
Continued growth therefore requires increased investment of physi-
cal and human resources in both intangible and tangible capital. Even
if the physical capital stock does not grow, increased productivity
requires replacing part of the physical capital stock to embodv in it
new configurations to keep pace with advances in technology and
changes in values. tastes, and demands. The investment in physical
capital stock increasingly in the future, because of resource shortages
and environmental knowled,re, should aim to be less heavily dependent
upon energy inputs and material inputs per unit of output. This does
not mean that all processes should become low-energy and low-
material using. It means instead that full pricing of large scale pro-
duetion. say of aluminum lawn chairs or aluminum beer cans, taking
respCcti\ ('l, 50 kilowatt hours and, one-third a kilowatt hour, should
SJohn W. Kendrick, "Productivity Trends," Bu8iness Economics, Vol. S. No. 1, Janu-
ary 1979.


b~~~~~~~~~~ I~ CI I~i I i~i i )I:- ofterueldn ~ iil re-
., l i i :IS a J 1o> :-es, r'ehtive I s I )stitutes.
*r "''~ !f pa1idly tlii i~~ r iie S "l-i
: : ) I (? O a v c l ]~ re :1 ve S ( IV
1 i i if 1' i : I :' .... "U XX w'' v-, ed 1):atQId: 'l H Iv:'!l in sl~ort supply"
:)7,1 1' :n:: eri eI. if environIneI l costs are to be rightly included in
iof, Iot 1 ten C s in proiu( .zon will l)eJl I ,, ery much
on the improved health, safety, and mobility of labor and capital.
111il;tvifv trains will depend on the speed with which labor and
.ajtaI can be movet from industries in which the costs of energy.
imur(,ces, and pollution are high relative to the v alue of output to
indlustries where the ratios are lower. Shifts of capital and labor to
recyC ling to substitutes of communications foP transportation, to
mOve information. inages. and ideas with far less expenditure of
e'nergy, seem likely.
In the post-industrial epoch, the predominance of the ser-ce indus-
trie ,,nd other non-manufacturing industries over manufacturing and
' iict n ,nng and agriculture will increase. Productivity gains in the
:- v1C i MIusries do not cone primarily from increases in the ratio of
pi ysica! outputs to inputs of labor and capital. They come instead(
from. qualitative changes in the service often resulting from changes
i: the nature of "output" or substantial restructuring of the industry.
zealthe care Js a notable example in which confusion about the
nature of output, the structuring of service delivery, and the role of
0ife-s yle. includi u i nutrition. work habits. and life-stresses, has re-
sI ted in inordinate rises in, cot and an emphasis on the treatment of
iiiness rather than the maintenance of health for the entire po)uIlation.
The legal system, is likewise in drastic need of productivity ad-
vances, raring from concepts of liability to the deplorable state of
te administration of justice. At present, little if any private or public
ffrio-. are being made to restructure the system along more productive
N on-market sectors of education and government services as well as
!ome reulated sectors where excessive regulation impedes normal
lfaI!k( t incentives are in ieed of productivity gains. The principle of
-,,tizing some services traditionally provided in the ul)lic sector
(1e-rI .Niatmg certain industries, and the systematic use of market-
e incentives-such as pay-TV education-to encourage efficiency
vd innovation in education and public services may le waX-s to
,cY 0eve further productivity growth in a post-industrial eoeh,
The content and measurement of productivity should be broadeed.
As to productivity content, the present concept of "useful output"
ta>'s no account or related "useless output." That is. proponents
of technology assessment have shown cases in which economic changes
that appeared to raise productivity in the short run have eroded pro-
ductivity or built up unforseen costs and claims on resources later.
Despite the difficulties of technology assessment. of foreseeing con-
Sequences, the cost of the most careful anticipatory planning and
forecasting should be built into the total costs of major investment
projects and major national programs. For example, such analysis
of nuclear power investment should be promptly made.
I ,al -fctor pirodliiivitv. as a measure of productive gains, is far
superior as a measure than output per manhour. which becomes in-
creasinglv misleading in international and domestic comparisons. Out-

put per manhour distorts the public's understanding of what pro-
ductivity is and what causes it to rise. However, tlie role played iv
pollution and waste in economic processes m es nmnaiorv ,w inI-
clusion of costs associated with reducing them in inieaslu(- of inpits
to production processes.
If we recognize that economic growth is an irrevocable process of
cultural, social, and economic transformation resulting from ent e -
preneurial use of the advance of knowledge, what does this imply
about future growth? Growth is likely to accelerate and not slow
down, if knowledge keeps growing and entrepreneurial ability ean
be appropriately released. Such growth need not require or result
in net physical additions to the stock of capital or labor, nor need it
involve huge added amounts of energy and materials. What future
growth will require is the steady infusion into social and economic
processes of more new knowledge and understanding.
This means that what is surely required is net investment, both
public and private. Physical capital is, after all. only knowledge made
concrete; it is know-how imbedded in physical configurations. Net
new investment is needed to reshape existing physical capital, both
public and private, to conform new knowledge; that is, so as to embody
the innovations m economic processes that themselves represent a
form of new knowledge. Of paramount importance is the steady and
systematic improvement of the stock of human capital; or, to put
the point plainly, the improvement of people's knowledge, skill, and
understanding, their health and vigor.
It is knowledge, supported by people's health, safety, and mobility
(i.e., free choice), that moves us towards the advance of human effec-
tiveness-towards broadly defined productivity gains-by "getting
more from less"; that is. getting more human value from processes
using less energy and materials. Productivity, to be sure. Thvolves indi-
vidual effectiveness. But its more profound meaning lies in the volun-
tary organization of human group effort in a society to create greater
human effectiveness.
Basic economic concepts need to change in content. It is not self-
evident that our present ideas of fundamental economic inputs
capital. labor, land, and management-are much more astute than the
Greek view of the basic elements as earth. air. fire, and water. A
strong case could be made for considering these fundamentals as
knowledge, energy, materials, and organization (itself a form of
knowledge). Our concepts of wealth, income, cost. and productivity
are all in for changes in content. The need for better knowledge of
long-time demand and supply factors sul'rests that more anticipatory
planning by all public and private institutions should be done, but on
a non-centralized and non-authoritarian bases.
The nirket system-!' competitive enterprise i arhet economy 1z
more thiTan ever to be va V'',1. Tie enormous demtainb on the economyV
lre unlikely to be met without maximum and workable mobilization of
privatee int iatye. u and capital. The market tis avoids
r(,1ic P'N-e OH sintie 1nt1 tutiom- for kiowlede, wisdom, and foresic itt.
TI le systCIni lhas served anld (-an continue to serve as a survival me e-
7:-1 . 7 -....


acoi for the co cl)tit ive eval Itation of new techlnologies. Tie interests
wf society as a whole are likely 1)etter to )e served )y competition of
iill, ilfents. 1)ro(lllets. an0 tehn1lo)1gie- within a highly respon-
ive price-den Iland inforiatioi stem than by centralized judgments
a ii ilec'ison-. The imijor issue facing the ilarket system is that of
:, --I riii cOll1 petitivelss In tile face of regulation that is in many
('a 0o ltn1o( led amd in others )eifec'ti()1ist.
h(, probleti of externA lities is one of lilttilW price ta s on them
and decidin( who will 1a-y the costs. and doing so is a political (Iecision.
As externalities ll.omie miiore important. crovernnient should avoid
ex,.es ive and detailed regulation in favor of imposing costs in response
to Performance specifications. Otherwise. decisions concerning rtech-
iiologv will be made by bureaucracies through narrow technical anal-
ysI instea(d of beini-n made by the joint interaction of piroducers and
ser's in markets. Common 1)ropelty resources should where possible
e) converted to private property interests consistent with understand-
iii of Garrett Hardin's account of "the tragedy of the commons."
(bqr, /11I(N' ii i8llwc- tnl ,1(Or
Changes in the stii.ture of investment, both public and private, are,
likely to be as radical if not more so in coming, years than in the past
two centuries. Public policy, therefore. wh ich sul)Sidizes existing' or
traditional industry investment through mistaken understanding of
growth processes will inhibit productivity gains and retard the growth
of wealth.
Capital availability is perhaps the major constraint on the rate at
which the new goals of the post-industrial world can be reached. These
include achieving an adequate standard of living for people through-
out the world, providing useful and meaningful work opportunities.
1)rote'ting the earth's natural capital through a safe and clean environ-
ment, developing new and renewal)le sources of energy, and conserving'
,- Lacking the right kind of capital capacity. we have to face up now
to the need for changes in'the pattern of investment in the next decade
an1d beyond. Business capital is an example. Already. the pattern oi
(I Iumer demand is changing from the demaiind of the first post-
WollId A, ar II generation for conventional durables to more emphasis
on >pendin for travel, recreation, and experience. Much of U.S. and
fovi 1 manufacturing capacity is structured to supply conventional
ho. esu >ll)urban amenities, automobiles, air conditioners, an(l other
la2('e eh etrical appliances. Apart from the energy problem, today
y(,,(0rat1on of consumers appear less likely to use so large a part of
,i income for these durable goods.
Because of the sharp rise in energy prices, it is not clear what should
he thie pattern of busi-ness investment over the next decade. Less capital
will probably be needed in auto and related metalworking production,
llt 11ow much more investment will be needed to provide basic mate-
vials., fuel, chemical feedstocks, nuclear power, synthetic fuel plants,
,,(ale, ,.oal and metals innincr, and ofisliore oil production All
iIvol ve iiorve difficult te(hnical, environmental, and financing problems
ti an conventional oil wells. power plants, or auto as VStieiit iin thnem, and in capacity for paper, steel, and oilier materials,

involve loll pw eli-iron1mental cos-ts-. III
involves inflate ion-cost -ei lati joi plus iie w c.i iuiiei lcd.i
short, the relati\-e lp)ice of1 dliese prolcts wvill be rising.
L/J (17N( 0 of / i #'( I/';C( /,x.\

However, lrofits-wllen coi-ectd for in flat ion and Il Zet(l, foV ('-
sential reinvestient-are not i igh eilioil to atti"act clital 140 such
industries as oil and gas, electric utilities. .-tel, alhiiiillill. pIper, and
other materials. InI many countries, pu lic attitudes will not tolerate
and government wvill not permit price r-ses in basic iltistll corm-
modities adequate to attract private investment into new energy
sources, mining, large-scale chemical and metallurgical z rilitles.
Without tax subsidies to pay added costs that consuliilenr now won 't
pay, capital expenditures won't be made big enough to avoid output
shortages later in the next decade.
However, the growth process requires reflecting fully the real costs
of production in pricing policy. In general, goods and services whose
production involves heavy use of energy and materials and causes
heavy pollution will then rise. If rising real costs are fully reflected in
prices without being hidden and shifted to taxpayers by s ubsidies,
benehcial changes occur for growth. First, the rise in relative price
forces producers of these products sharply to economize their own use
of energy and materials by innovative responses in technology and to
search avidly for less polluting processes. Second, consumers are led to
demand more durability, fewer frills, and attention to basics in their
pIrchases. Third, substitute products and processes inherently more
adroit in energy and material use and less polluting will be brought
into the marketplace faster than otherwise. Already, the quintupling
of energy prices, thie rise in material prices, and environmental regu-
lation are shifting durable goods design in these directions. The struc-
tural shift in output and in industry growth will in turn imove toward
getting more human value with less energy, materials, and pollution, in
turn improving human e fectiveniess. Redesign of housing, durable
'oods, and services towards more economizing of energy, more niInia-
I urization, nlove ;1jiiral ilit y and reliability, more econoniizini of hoavv
materials is a. roue to structural chano'e that sifting capital in re-
sponse to changed relative prices will accomplish. At the same time, if
people weigh real costs of over-elaborate iise of energy against comu-
fort, convenience, or even hunzin energy, they will respond to lower
thermostats, consider heat pumps. tackle do-it-yourself projvts. and
adapt to simllictA of life-stylez that conserve materials and energy
and free financial 8t1(l meal resoulr-ces for other new or unsat isfied wants
that generate ecenioiinii, cicrowtli less profligate of non-himiian resources
1110 less tolerant of out il0wed technolo(yA.

L(T!' q; [n o/ ,Sc;( ,"e and T;' il floloqy
,ime L'mess exIlple of the Qti'eat of c capital Ahovtaire jst c ai
ony uon a low2- oiiwl-c;. A ilore oeneral case can be inade that l vlile
omw nl:,t itioll todiv t 1:o. 1 me .1a)albilitv t ,an ever before in >clPce ;+ +iI
tecllliolo;rv-S ;ei tific! aii(l cclihi c +l ow-how Ihat would 0i ,l et
1i0-1h social rewar d if a1ij lied ... we are usil., it, less. Science an m d tech-
11olo'y, if Tf(llv' I' 1- ovel I, could i improve the value of our 1'eoiirees,
WI itt fiiim -til !!

2oI :i se10 ies aid create neXw work. Tii y could create new meth-
Sis and pr'es~se for inreasing sIpply ad l i costs by creating
jites for iiiterials iI s1ort supply. B11 1 have 1)ecomle slower,
I: > iiit 1, a(d less inno)vative in using "cee an eholg ra
swnee( aind tecl11mologoera
I, o' v oond oenef icia llt
1cr'e are some general p)rin1ciples to use in designing and imple-
-eI 2in 10 overnment al police that would employ our high potential
fl, i ecnoloogical advance and foster the expected transformation to a
lllie hlii anistic and developmental form of capitalism.
F) Bringing to bear more useful energy to social and economic sys-
t i '-s iians using enerzv- efficiently by matching the quality of the
A\v0(k io 1e done with the type of energy available. It is not a question
of IIIlti plving ener.n use but of using energy more adroitly. This is
a quest ion of widespread application, involving energy policy analysis
ove\ a wide range, to answer questions going to the heart of energy
11se. The question concerns systems and processes, not merely particular
products. Does it make sense to burn tons of oil to produce electricity
whose generation wastes huge amounts of heat and whose transmission
loses large amounts of electrical energy, in order to use the resultant
enerYv to heat a house ? Does it make sense to build nuclear reactors to
boil water to create steam to power generators to produce electricity so
homeowners can use the electricity to boil water on electric stoves?
How does a diesel-powered heat pump compare in energy adroitness?
M ore broadly, how can we develop a strategy of energy use aimed sys-
tematically towards eventual energy supply from renewable sources?
It is not merely that the products now designed are maladroit in
energy and materials conservation. The issue for investment policy
is more general. It concerns the structure and the evolution of our
systems for producing energy, for generating transportation, for
growing food., for moving goods and services to consumers without
provision for waste recovery and use, for communicating, for dis-
seminating knowledge. providing health and safety, and the like.
Orgav.mzblg Invyestment for Grm, M

The same general principle therefore applies to the major goals of
the post-industrial world. The problem of food and nutrition, of
shelter and basic services, for the people of the world: the problem
of world environmental observation and protection: the problem of
urban transportation: the problem of work opportunity all are affected
by energy policy and are linked to it in systematic ways. Vital to an
astute national investment policy is a clearer understanding of the
nation's and government's goals in addressing such long run and basic
considerations. We need an anticipatory process of defining and in-
volving people in the real choices facing us that fosters rather than
supplants the market system, but that does not succumb to avoiding
needed changes in industrial structure because of a mistaken and
r'iowth-inhibiting policy of protecting vested industrial, professional,
institutional, and government interests.
(2) Bringing more useful information to bear on social and eco-
11o.1c problenv means achieving a vastly better overall matching of
s1ientifle and technical advance to social needs and progress. The
problem of using science and technolo!- concerns the broad relation-

ship of know-how to the society, government, and marketplace. The
issue is one of systenmatically establishing a better process for co-
operation among society, business, and government to use science and
technology in the long-run interests of the human race.
U.S. private corporations cannot now risk investment in systematic
activity ailmed at major domestic social problems amenable to ad-
vance through science and technology. Technological businesses are
not now earning enough on average to provide funds for scientific
research and new technology. Major new projects involve risks and
start-uip costs beyond their capability, including political risks that
are unforeseeable, sudden, and arbitrary. Government has to play the
leadership role of specifying performance, serving as regulator, part-
ner, or insurer.
In many of these basic fields, the U.S. is a world leader in know-
how. In food, the U.S. is close to unique in research. technology, soil,
weather, topography, and size; in mechanization; in know-how of
growing, processing, storing, and distributing food; in the cultural
flexibility of our farmers and food processors in their responsiveness
to change. Yet, we lack answers to basic research questions about nu-
trition, the food requirements of humans, the entire process from
food to mouth: our food processing industry is poorly adapted to
supplying nutrition as such; and our medical schools have scarcely
begun to study nutrition.
We are neglecting any oranized attack on probleiws of eiiviron-
mental monitoring or control in the country or the world. We have the
mixture of creativity and common sense to undertake massive i lt
selective study and selective depolluting of waterways, with resilting
calculable benefits in health. quality of life. and long-term economic
gain. We need far more sy stea(tic research to understand pollution in
detail, to relate it to technology used. Doing something systematic also
m eans learning by doing. However, despite advancing tech nologn" In
environmental control, nothing like the decree of cooperation is evi-
dent between the private sector, the academic community. and the
In still another area, electronic information technolo'v. we have
capabilities that far outstrip our ability to us the technoloav to uneet
national needs. Electronic data systems can now absorb. store. catego-
rize, process, ponder, move. and present information in vastly greater
quantities, yet greater speed. radically reduced cost. and increased
reliability and a curacy, than has ever before been ,oiiceivedl. The ITS.
Is almost unique in possessino- the know-how. the market, the need, and
ti e opportunity of high return on investment. Althouo'h growth lere
is already steady and strong, it is nowhere near what it coild be. Ftll
use would radic'ally change the way we coinniunwate. Not'ini, blit
organization stops us front havin- nationwide TV univer-It s. cm-
Hiter-based nationwide reference libraries, electronic noney x
and many other advances. The issue auain is not the technoloa- but
the complexity of the organization problem. Ouir capacity to ie a corn-
i)ination of earth resources satellites and a network of computers. COM-
ninications equipment, and data analyzers on earth would yeld el -
h'anced world weather !redictiou, better prospecting for W1'ater :,n1l
minerals, improved world agricultual plaimin,(, and other vall aile

iiirin8t(' lIIIt w ca a private enitity i11ilcrtiia-e St(ich iInv-etIIIeIt
Wit hlli ,enle ts n,, o
ti .c" 1 f s research and
lI~ *2,iinlh ',Iei".V waste, lnt1il lnhiar( te(hlnology applica-
r1 s. aI :1 ho-t ()f (ot her vital sul)Plets foi. st Idy ai1d action represent
I iieet od tie ,st -in(l11 al I I (-l t' i. veIt0 Hent poil icy, that is
701lr (d l relv iifil1l. Maiwlile. breastss ol slowdowns in long run
.f,1. onH ic tcTw 1I as .oliventi(,nall y de(diie clloe 1i oni ly from critics
01 2IO\vNI t1111 oi-))servatiV blsiiess anlksts. A fundamental
reis(, ) ,~ nc('ed is (teclinin cal)ital 1)roduetivitv, along with a market
sov' loIn in the 2-r(owth 01 i-)O resolr'es. olie-(e t fa()cetOrS suggest
t, ,, 0)pportiiltav available in great savil coitibl Id with the need
for liakii! huan effort 1(olre prodluctive lherev an( elsewhere in the
world in orerit o increase our own ',ea lthi l tle wealth of the vorld
o)n 1 (,hal of 4hmnn welfare.

Appropriate Ini estment Policy

The U.S. lags in investment in human capital blt has the means to
improve. Idealogy stands in the way of realizing that the basic source
of future wealth is a people who are healthy, vigorous, safe, able to
choose, and both broadly and technically edicate(i. A key part of an
appropi.-rate investment )olicy is one that reqi'ies rapid advancement
ill educational productivity through use of science and technology
fully where human benefit results. Education and training of all our
1,)eople should be continuous.
Education needs, particularly of low-income urban people both
young and old, are being egregiously neglected. Reorganized aid to
education is called for. Also, welfare and unemployment compensa-
tion systems ridiculously pay people to be idle when they need and
want both genuine education and genuine jobs. Public investment in
already existing effective voluntary efforts to teach )eople and get
them to work at useful jobs is a sounder human approach than mas-
sive government operated programs, beset by red tape and bureauc-
racy, that mainly subsidize idleness or generate unimaginative and
temporary make-work programs.
Continuing education deserves more than lip-service. It deserves to
be developed systematically through government substitution of
learning and working for the current policy of indifference to human
welfare and self-esteem reflected in current welfare programs that
create (lependency in the name of beneficence.

The last twenty years of growtblsmanship has produced an overcon-
sininll society We have assumed that, to increase capital investment,
all it takes is saving and investing a fairly constant share of a grow-
imug national product. The gap between gross national product (GNP)
and national economic welfare (NEWT) reminds us that life-quality
0 L'opall C. Anderson, "The Outlook for Long-Run Economic Growth," Business Eco-
floW ieR, September 1976. pp. 32-39.

has grown slower than t~c outpUt of (o()(L-S-plus-l)ads. iN ow. it iiav be
that the old approach is too inflationary" too denlanding of resources,
too hard on the environment, and too indifferent to the national -ecu-
rity that would be gained by spreading the fruits of know-how more
widely than in the past around the world. It may be tuie to take a
serious look at relative incentives to consume and save that current
policy provides.
A major bias of incentives toward consumption follow from taxing
ilIP:he. Both savin' its-elf aiil tHit, income froini salv-11m are tlIeeb)V
taxed; both capital outlays and the net return generated by capital
over its lifetime are taxed. We can either remove saving from the tax
base entirely or allow deductions for capital outlays in the year made
(including increases in inventories). In the middle of inflation and
threatened resource shortages, when much social and industrial capi-
tal needs replacing and improving, it may be time to tax people for
what they take out of the economy instead of what they put in. Taxes
on consumption can be made progressive, and the time seems right to
reward people better for saving. Inflation, otherwise, makes oovern-
lnent transfer payments due in the future a shaky source of security
for recipient dependents.

Ve need. as part of an appropriate investment policy, to make
major improvements in our processes of economic intelligence. Are
our national income and product accounts adequate for the post-
industrial world? Our productivity measures? Our reflection in sta-
tistics of the output of the new environmental enhancement industry ?
Our measures of energy-related aspects of economic processes ? These.
and many other questions of economic iitellio'ence. are vital to reach-
inc sound] investment conclusion.

Ve need to re-think government investment policy, using the in-
Siolts of a new concept of growth. when seen as irreversible social
and economic transformation process. The ensuing policy would not
merely avoid subsidizing conventional and wasteful economic proc-
esses and the industries using them. It would positively promote the
two strategies of bringing more useful energy to social and economic
processes and of bringing more information to bear. It would directly
address the serious issue that in the U.S. we are falling behind in u-
ing to its fullest the very advances in science and technology that
mark the new epoch we are entering". And it would change 17.;.
attitudes toward work and welfare by m aking concrete the lip serv-
ice now paid to the doctrine of full human levelopmnent.

A strong case can be made that throuhout nature tbi% m1andat. of
life is. grow or die. The tflesis heye is that if we understand o'rov,ftli
rightly, our concern is with the o'rowth of human value, a expressed
in social and economic systems underaoin r irreversil e tran toforlla-
tion. The growth in value can come only fu.ml 'rowt}U '11 l-l,'qla

knowledrc, as applied to energy and material configurations, and
prcferabntv through voluntary organization of effort. If we can imn-
prove in cooperatively organizing the use of knowledge throughout
society, we can and will grow faster, for we are nowhere near the
limits to the advance of knowledge or the curiosity of the human
mind. Nor are we anywhere near the limits of human potential for
Sff(,t i venesso individual growth, or accomplishment.



(1) The core of the present economic difficulties-unacceptably
high rates of unemployment and inflation and low rates of growth-
is of a structural rather than cyclical character. This is due partly
to a newly developed recalcitrance of the physical environment,
namely, lesser availability of raw materials, limits to the natural
absorption of effluents, and partly to changing popular needs and
wants, namely, decreasing tolerance of low-quality jobs, pollution,
noise, dislocation.
(2) The frontier of economic growth has shifted from natural re-
sources to human resources. While growth in the production and
processing of primary materials and production of "throughput"
intensive goods for the time being encounters increasing barriers,
manpower has become more abundant, both quantitatively and quali-
tatively, due to high and rising rates of labor force participation
characteristic of the United States, as well as increasing educational
attainment and job experience. In order to achieve growth we must
change our factor input and utilization so as to make more intensive
use of amply available (human) resources while husbanding scarce
(physical) resources.
(3) Considering the close links between productivity, and the state
of technology, it is hardly possible to produce the currently produced
set of material goods with a greatly different factor mix containing
more labor. We, therefore, need a differently composed basket of goods
and services. The main obstacle to growth facing the American
economy then is rooted in the existing composition of final production
and demand.
(4) Conventional fiscal and monetary policies are geared to aggre-
gate demand management and, for both ideological and technical rea-
sons, are hardly able to handle the task of influencing the composition
of final demand.
(5) There are vociferous and powerful advocates of preserving the
old structure of production and demand by way of a massive capital
Paper commissioned by Senator Hubert H. Humphrey, Chairman of the Joint Eco-
nomic Committee of the U.S. Congress, for the study series, U.S. Economic Growth From
1976-1986: Prospects, Problems, and Patterns. Work on this paper was supported by
National Science Foundation Grant GS-36832. The author is indebted to Richard T.
Curtain, Robert D. Hamrin, George Katona, James N. Morgan. and F. Thomas Juster for
their helpful comments. They do not necessarily share the views expressed here.
**Program Director, Institute for Social- Research, The University of Michigan (on
leave) ; Senior fellow, International Institute for Environment and Society. Science Center,
Berlin: and Panel member, Committee on Mineral Resources and the Environment, Na-
tional Reesarch Council, National Academy of Sciences, 1973-1975.



infusion into the private manufacturing, mining, construction and
utility sectors. This strategy, rather than adapting to the natural and
environmental limitations, attempts to overcome them. It most likely
Entail rising marginal costs, more inflation, and less economic
Forego the chances for full employment; and
Lnore current trends in changing needs and tastes as well as
the longer-term market signals (decilng profits, capacity utili-
zation and investment in the manufacturing sector).
(6) This paper recommends government programs and initiatives
that bring together underutilized human resources with unfulfilled
human needs for public and private services. This strategy would ailn
Directly achieving high employment by job creation;
Maximizing the utilization of abundant rather than scarce
factors of production, of labor rather than "nature" or raw
Satisfying unfulfilled needs that cannot now be fulfilled by the
market or the public economy;
Reducing the public and private costs, both economic and non-
economic, of prolonged unemployment, under-employment, obso-
lescence of skills; and
Channelling economic expansion in a direction that would place
less burden on the environment than growth has done in the past.
(7) The extent of public support for an ambitious, innovative and
expensive government program for reducing unemployment would
largely depend on the specifics of such a program. Survey data reveal
that the pervasive decline in trust in government and other institu-
tions is not accompanied by indifference toward government services
and employment programs. Quite to the contrary, there has been rising
demand over the last seven years for government, activism in the areas
of employment, health, education, and housing, and a commensurate
expressed willingness to pay additional taxes for the desired services.
It is the purpose of this paper to stimulate a reorientation of think-
ing rather than to present a fully detailed and documented blueprint
for action. New approaches to structural economic reform can only
emerge from fresh concepts and paradigms with which to interpret
the world around us, and its changes. It is important to keep in mind
the middle-range perspective of this view. While looking beyond the
business cycle, we are not dealing with the 21st century about which
we know very little. We are on much safer grounds in characterizing
the differences in economic structure and trends between the 1970's
and the 1950's, and thus in judging the prospects for the 1980's. While
solar energy, for instance, may have solved the energy problem by
the year 2000, no "technological fix" will permit the continuation of
past growth rates in energy production for the next 10-15 years. And
one more clarification: while the emphasis is placed on structural
reorientation, it is not suggested that the traditional instruments of
fiscal and monetary policies should not be important or in need of
improvement, and, if used properly, cannot help us to reach our goals.


To state that our economy is in deep trouble is to belabor the ob-
vious. Unemployment and inflation are on historically very nli
levels. Both are remarkably inimuie to the culres, that one decadle ago
were praised as a "new economic policy" capable of keeping the ecoli-
omy straight on the course of full eiiployient an(I (row th. A me.re
slowdown in the increase of prodution and nass incoillies has .,fl-
erated widespread disenchantitient with ti ecnolin y, fear of crisis,
distrust in the government's economic policies, in short: a nialaise
that reinforces the actual diticulties. In spite of contintoisly high
levels of production, the economy fails to live up to people's exI)eeta-
tions and in particular to satisfy their needs for cont nikitv, eqiiit y,
and self-actualization throuh nmaninofuil work. O)r e,"(lolnv is
highly productive and yet fails according to 11any or nost of the cri-
teria that are used to judge its performance. Conventional econonfics
has not been helpful to the public and decision makers in understand-
ing and mastering the unfolding turbulence. There was nmuch more
than the usual disagreement between practitioners of the art, leading
to confusing analysis and conflicting advice.
This then is a time for stock-taking and rethinking. The miiserable
welfare performance of our economy under conditions of fairly higTh
levels of output suggests that it may be less the quantity of the prod-
uct and more its composition or distribution that determines whether
the economy fulfills its objectives. Joan Robinson, in a paper entitled
"The second crisis of economic theory," says:
The first crisis arose from the breakdown of a theory which could not account
for the level of employment. The second crisis arises from a theory that cannot
account for the content of employment.... Now that we all agree that govern-
inent expenditure can maintain employment we should agree about what the
expenditure should be for.'
Joan Robinson calls for nothing less than an alternative vision of
the contemporary economy, a vision that can guide our understanding
of employment policies quite like the Keynesian system had provided
guidance in the past. While a similarly comprehensive, system atic,
and persuasive paradigm for our time is not now in sight, it is worth-
while to examine the highly resilient remnants of the old beliefs in
the light of new realities and to draw some lessons for present-day
full-employment policies.
In the past, growth had relied mainly on perfecting the mastery
of man over nature. The utilization of natural resources was the fron-
tier during the period of industrialization. Human ingenuity, exten-
sivelv combined with natural resources, made possible exponential
growth in production. Recently, the mastery of man over nature has
started to yield fewer additional benefits, due to declining accessibility
of raw materials. approaching limits of absorption of pollutants by the
environment, and decreasing public tolerance of ecoloo'ical damage.
There are some who feel challenged to overcome, the new barriers to
growth stemming from the recalcitrance of the natural environment
Since some goods have become more difficult to produce, so they say.
we must try harder to create the conditions that make further growth
I J. Robinson, "The Second Crisis of Economic Theory," American Economic Rczeie,
Vol. 62, 1972, p. 6. -


in tle production of those goods possible. To this end, we most ur-
gilently need a boost in capital investment, mainly for increasing our
pro(l,,tion of energy and processing of raw materials. Once resources
ave alan(It again, high employment will return. Already before that
ti11e, the investment program itself will absorb labor. Employment in
t}ii srenaio is a by-product of investment in plants and machinery
which in turn is induced through capital infusion. Rather than the
composition of final product, it is the intermediate product that is the
subject of intervention.
To sum up, the latter position holds that an additional rapid in-
crease in the production of goods making heavy demands on the envi-
rmiment is both possible and desirable. The counter-position taken in
this paper advocates a change in the composition of final product.
Fui re GN P increments would go less to materials-intensive and more
to labor-intensive production which also involves a relative shift from
private to public or at least publicly financed services. As is well
known, a shift of employment from the agricultural and industrial
sectors o the service, sector has been under way for several decades in
the United Stfites and other industrial countries. It must be noted,
however, that this trend has not been accompanied by a stationary or
slowly gorowinc materials consumption. E.g. in the United States,
energy use per 7I/7t of GNP not only has been considerably larger
ihan in West Germany and France but has also been growing over the
last 1 5-20 years. Furthermore, the service sector has not been fully
able1 to absorb the declining share of the labor force of the other sectors.
The latter position. while not out of line with the Zeitgeist, is at
odds with the beliefs and implicit theories that are with us as a heritage
of classical and Keynesian thought and policies. It is in particular
Keynes' call for induced capital investment-often heard at present-
that must be carefully examined as to its underlying assumption. Part
of the popularity of capital infusion is due to its success as a "pump
primer" in counteracting the exceptional unemployment of the 1930's.
Later Harrod and Domar pointed out that capital investment beyond
its importance for employment, had the effect of increasing production
and promoting economic growth. These writings set the stage for the
predominance of capital in the non-empirical theory of economic
growth which emerged after World War II. It is no wonder then that
capital-oriented strategies play a large role in the current debate deal-
inr with the persisting deficiencies of the American economy.
This set of views may be represented by resent statements of several
leading spokesmen of the U.S. government. Treasury Secretary Wil-
liam E. Simon writes:
We must achieve a basic shift in our domestic policies away from personal
consumption and enormous government spending and toward greater savings and
capital formation.2
Arthur F. Burns singles out "improvements in productivity through
larger investment in modern plants and equipment" as the first "line of
attack on the dual problem of underemployment and inflation." This
objective, he says-
2 The Conference Board Record, August 1975.

Would be promoted by overhauling the structure of federal taxation, as t()
incre: i e inu t'ves for I,!siiness capital spending ind f" r equity inve stIi',en1 :11
Am~erican (irpriss.
Other. strategries sorrLeeted by Burns~ j l ii tret(iiillg)( filth- al)s
for On ioll (, le -,I ; 4-; f ie
for ~ 1tt enioIna and safety goalc, (~CUa~lL ~~ col)i tip..IC

to s I* (It iA tei ior:' Iv for JI 8 ,_ iing de Iii all (I for l Libor of tOle 1) ii a te
And Henry C. AVallich 4 foresees higher demands for capital,
mainly as a result of prospectiv-e increase iI -! nvironmental, energy,
health and safety, and mass transit investment.* Referring to various
studies of capital requirements. he advocates an increase in tie fraction
of GNP spent for nonresidential investment f rora the historic 10.5 per-
cent to 11.5 percent. In order to facilitate capital accumulation to meet
that goal he suggests a gradual shift from taxes on profits toward taxes
on interest income as well as a reduction of the government budget
There are three beliefs implied in these statement;, referring respec-
tively to the criteria a) resource utilization or employment. b) eOi-
ciency of technical progress, and c) utility of output.

Resource UtilLatio
Induced investment is assumed to create additional employment
mainly by virtue of its income effect. Those who supply the services
needed for producing investment goods receive (additional) income.
And their (added) demand reverberatez through the economy by
creating further employment and income (multiplier effect).

Induced investment, so it is held, leads to productivity increase and
"embodied technical progress." Mechanization substitutes machine
power for manpower and thus increases labor productivity. Moreover,
replacing old machines by new machines typically has been accom-
panied by technical improvements.

Utility of Output
It is believed that additional productive capacities created by in-
duced capital investment will encounter receptive markets and that
the ensuing production can be sold. The emphasis on investment in
the private sector rather than the public sector is due to the belief that
the former is more productive and enjoys a higher priority for society
and the people.
These beliefs clearly have been reinforced by the success story of
postwar growth which still shapes our understanding of economic
processes. Consequently, a review of economic trends in the Inited
States in the perspective of recent history is required as a fir-t ste1p
toward examining the role of induced investment. The two decade
following World War IT brought inpreoedented growth to W i, n
Chnlieqf, the Mazazine of Feonromie A affairs. J.: naarv 7ehrul ry 1976. T). 10,
4 s There a Capital Shortage : in (Thallenqe, SeI 1oer r ,p :W


industrial nations. due tc, a constellation of circumstances that may
be dese]rld as follows:
Ready availability of most raw materials, the relative prices
of which declined over time;
Availability of mobile labor from a shrinking agricultural
sector, the closing of small an(d inefficient enterprises, an increase
in female labor force participation. anid mmilration:
Increasing availability of skills due to the rapid expansion
of educational attainment:
Private households that readily absorbed an increasing pro-
duction of goods and services. Consumers were optimistic. un-
saturated. "in g-minded." There was rapid population growth.
There was the growth of suburbia accelerated by government sub-
sidies to homeowners and Federal highway construction. Sub-
urbanization, in turn, led to the strong expansion of the housing
and automobile industries, but also to the demise of the inner
cities; and
Availability of capital: There was a fairly constant rate of
saving, high enough to provide for the needs of investors at
reasonably low rates of interest.
Economic activity is generated by a complex interaction of demand
conditions with a variety of productive factors: resources, labor.
capital, management. A particular factor becomes the more important
or central- the scarcer it is in comparison with other factors. The
phenomenal success of the Marshall Plan in stimulating the economic
resurgence of Western Europe was due precisely to the fact that
capital. along with superior technology, was infused into economies
that were well eoqiipped with labor, resources. management skills. and
were full of people hungry for goods.
For the United States, in contrast, there is little reason to identify
investment as the single strategic factor. To the extent the sequence
of events during business cycles can serve as a clue, business invest-
ment tended to lac behind consumer expenditures for durable goods
over the past thirty years5 Yet high growth rates of private invest-
ment in pIant and equipment, necessitated by an expansion of goods
production in the 1950's and 1960's. undoubtedly contributed to a high
degree of r,'ontJ. za on. as well as to rapidly rising prodwtive
cffi~e, f, much of it consisting in a transfer of resources from places
with lower to places with higher productivity. Human labor was made
more efficient by energy operation c through machines while investment
'otb in human know-how and materials was required to make mechan-
ization possible. Reasonably high levels of employment were main-
tained through the expansion in overall production, particularly
Ibroutgh the rapid growth of the capital goods industries. Turning to
the criterion of uifit y of otput, Americans readily adapted to the
viability of more roods. They were thing-minded, willing to invest
in consumer durables and incur debt.
Most of the basic coordinates governing the present situation differ
in important respects from those prevailing in the postwar period:
Raw material prices are sharply up after a lonfr period of
relative decrease:
P oor j 7 a7nrna nnd Burkhard Strumnel. "Consumer Inre.stment vs;. Business Invest-
i,,1't" 1n (Th"lrenqi. .T'niirv/ ebruary 1971, p. 1,.


Flie proportion of the labor force einployed by goods producing
sectors (manu factniring. mining. construction) has decreased :
Pollution control standards and other environmtentalist con-
straints have raised the operatingr costs for industry; and
Population (rrowli Ila-s slowe(l (]own consilerablv. lRates of
labor force participation have increased mainly (Iue to a laro'e1
number of workin L wives.
Several of the changes listed above and documented in Table I are

the outgrowth of exogenousv imposed contraints: diminished re-
source availability and al)ilitv of the environment to absorb waste and
Pollution, coupled with reduced tolerance levels on the part of the
people. Since they are central for the subsequent argument. thev will
be discussed in more detail.

1974 (3
1967 1968 1969 1970 1971 1972 1973 fers)

A. Annual percentage increase in the dollar
price of minerals and metal ores: 1
Minerals -...- -1 -1 +2 +6 +14 +11 +35 +165
Metal ores----------...... .. +4 -1 +6 +6 +3 +7 +20 +27

1955 1960 1965 1970 1974

B. Proportion of emp!oyment by the goods and energy producing sectors 2
out of total employment (percent) ---------------------------- 48.6 45.0 42.5 39.6 37.6

1972 1973 1976

C. Pollution control expenditures as a percentage of capital spending: 3
D u ra b le m a n u fa c tu rin g ... . . . . . . . . . . . . . . . . . . . . . .. . . . . 6 6 8 3 8 4
Nondurable manufacturing_ 9.8 12.2 13.8
Electric utilities . 7.9 6.8 5.9
All business--------- 5.1 5.9 5.9

1955 1960 1965 1970 1974

D. Labor force participation: 4
Civilian labor force as a percentage of total population -_ 37.4 36. 4 35. 5 38.3 40.6
Female labor force participation rates 5---------------------- 35.7 37.8 39.3 43. 1 45.7

I The index for minerals, while including metal ores, is dominated by fossil fuels.
2 Includes mining, construction, manufacturing, public utilities, and transportation. Source: "MVn'power Report of the
President," 1975, p. 278.
2 McGraw-Hill, "Sixth Annual Survey of Pollution Control Expenditures" (McGraw-Hill, 1973; processed).
4 Manpower Report of the President, 1975, pp. 203 and 205.
5 Calculated from "Manpower Report of the President," 1975, p. 203, and census reports. Percentages refer to the
universe of noninstitutionalized women 16 yr and over. -

Throuzli tle past centtlrV, in particular the )eriold after IVorld War
IT. the relative lrices of physical goods have decreased. Einer',v. (,ars.
e fri rerators, furniture. food products-raw oi- processld- have ibeen
rising less tlan doctor's bills, education, domestic erlvi,. T is trend
has been brought abot wainlv i) the specta''lar inre:we in tlh pro-
ductivity in the primary ,ind .secondary sectors as observed by Clark
and Foiurasti&. There are indications that this trend is s1owinmi down.
coning to an end. or may actually reverse itself, for two reason'
(a) Physical production isincreasinzly heinr b-l:inI ed for ex-
ternal or social cost S comneeted with I ollIIti,)n. ,,il ol ertt ion
and even social disruption. The internalization of tlese cost in
p1)Iodul(f prices by wvay of lezislatiol i- u lnervav.


() Productivity increases in the production of physical goods
lpI)ear to be mrie difficult to achieve i1 tle futurIn
-icli inireases were largely a result of aritificially low prices for
new materija]s epecially enery. For example, la)or productivitv
in agriciiltire increased at the expense of proflgate use of energy,
la todrasticallv reduced energy productivity." Further-
mol re. ra' mlt,, rials have bcome moro 1 e1) ist ant to further expan-
~1O11 i~ Ct P1n. It is natural to work the richest and most acces-
sible ores firsi before inovig on to the leaner and less accessible
ones. But as this move is forced to take place, the energy, capital,
:nd labor requirements needed to produce the same quantity of in-
IIItr ial material increases, an increase that must be superimposed
oi] tle lisinf worWldwide demand for material.'
( 'orreslondingly. the owners of natural resources have become more
Iu re o thTeir finite wealth and set the price accordingly in order to
pi event dlepletion. The events of the last few years have reminded us
of an elementary fact first pointed out by Ricardo but all but forgotten
iiirin- the long era of resource-extensive growth : there are three fac-
tors of production, namely labor, capital, and laitd. In the past, work-
ers and capital owners, supported by a congenial power constellation,
larl divided up almost the whole product between themselves. Yet
recently the third factor of production has reasserted itself forcefully.
both as a constraint to production and expansion and a cost compo-
nent. It is here to stay.
Does this scenario ignore the potential of hmnan ingenuity in over-
.oming emerging scarcities and environmental resistance? Cannot sub-
stitute materials and processes be found that are amply available and
harmless to the environment? At a given state of technology, substi-
tutes are more expensive than the material or items for which they are
substituting, otherwise they would probably have been used in the first
place. The substitute may be a costly material or have inferior per-
formance, incurring more frequent repair costs. Human ingenuity
indeed will help us to overcome scarcities. but overall growth is likely
to be lower if technical.procriess must be employed defensively to
counteract, diminishing resource availability, as opposed to a situation
when mnan can combine his inventiveness with the opportunities of an
expandng frontier. Extensive growth, based on both innovation and
more resources, is faster than intensive growth, based solely on the
Wh ar the implications of these changes for the role of invest-
ment? The strategic role of private investment has declined; there
are no indications for underinvestment due to "capital shortage In-
vestment in plans and equipment, in constant dollars, while claiming a
fairly constant proportion of GNP, has been increasing at a slower
paceover the average of the last five years than in the preceding pe-
riods. If we exclude that (growing) part of the costs that is needed
for meet ing environmental regulations, the proportion of investment
in prinary productive capacity out of GNP may even have declined
orewhat. The case for induced investment rests crucially on the pre-
mntiov that the market does not offer capital at favorable or accept-
al Io interest rates. Furthermore, there should be evidence to the effect
1 Alan G. Chynoweth. Materials Conservation-A Tee'hnologist's Viewpoint. in Challeni.e,
.Tanuarv/'ehruary 1976. p. .35. A comprehensive inventory of resource availability is con-
tained T) the report b- the CommisSIon on Natural Pesoiirce- and the Environment of
tlo Y' tionl T Pearch Council, Nationnl Academy of S *nce-,. Washington. 1975.

that the existing capital to( k earns a, satisfaetorv rate of retihrn or.

faillng th hat, that increments to the stock of capital would be able to
lo ? o. tial ly, there should be an a pprolVia iv high ,,,, of calaity
Jo "40 Fialy "he j') aal ty

utilization. Let us now look at all t!hre varizIbles capital a '"aila litV
as expressed by an approxinmation of fl-ie rate of interest in real lerms,
profitability, and capa -ity ntilizafion in a ]on108er tine perspective.
Table 2 lea(l; to tHe following conclusions:
(I) The real rate of interest for long-ter i capital as approxi-

Mated by a simple difference between the nonminal rate and the
GNP-deflator both for one piLrticiilar year has at least not risen
since the late fifties.
(2) Net rates of profit on invested capital moved downward in
spite of reduced profit taxation.
(3) Capacity utilization has declined as well over the decade.
It is apparent from these data that the decline of both profit-
ability and capacity utilization is not due exclusively to cylical

[In percent]

Real rate of Capacity
return for utilization
nonfinancial (manufacturing,
Real interest corporations mining,
rate 1 (after tax)2 construction)

1 9 5 1 - - - - - - - - - - - - - - - --
19 5 2 --- -- -- - -- -- - -- -- -- - -- - -- -- -
19 5 5 - - - - - - - - - - - - - - - --

A v e rag e __.. .... .. .. .. .. .__.__.__.__._.__... .. .. .
1956 .
1960 .............

-- -- -- -- -- -- -- -- -- -- -- -- -- -- 6 .0 9 1
5.5 9(
1.4 6.2 8!
1.7 7.9 91

_ 1.6 6.4 94
- 0 6.5
_ .2 6.1 8!
1.3 5.4 7;
2.7 6.8 8
3.6 6.3 8(

Average- 1.6
1961 ---------------------------------------------3. 1
1962 ---------------------------------------------- 3.2
1963 ---------------------------------------------- 3.0
1964 -------------------------------------------------- 2.8
1965------------------------------------- 2.7

9. 1

A ve rage ---------- -------------------------- ----------
1967 .. . . . . . . . . . . . .
1968 -------------------------------------
1969 . . . . . . . . . . . . .
1 9 7 2 - - - - - - - - - - - - - - - - - - - - - - - - - -
1 9 7 3 - - - - - - - - - - - - - - - - - - - - - - - - - -



7.7 87
5.7 76
5.6 80
5.4 83
. 78

Average --------------------------------------------- 1.7 5.6 77
1975 ---. ..----------------- ---

1 Aaa corporate bond rate (Federal Reserve bulletin) minus GNP price deflator (Economic [eprt of the President).
2 The data are firon William D. Nordaus, "The Falling SI-are of Profits," "6(cckings Fa s or [c omIActvitv, I,"
1974, p. 180. The real rate of return is defined as the capital income (excluding capital pains) n i ed y the net sttck of
3 From Business Conditions Digest.

Tle behavior of American manufacturing industry, seen in an
aggregate perspective, may appropriately be descrihcd as oveinves-
ing." 1yman P. Minsky has shown that there is a serious increase in
indebtedness by private )Prorat ions. The calculat ion of the ratio of
lialhilities to liquid funds showed that the financial situation of non-
fin ancial corporations turned from "robust' to "fragile" during the
last live years. Minsky concludes:
In the face of excess supplies of housing, commercial properties, and industrial
capacity, as measured by their ability to validate debt, we now have a national
policy to induce private investment and construction. . The market signals
are clear: a rapid pace of investment will be an inefficient use of resources. It
is now time to manage our affairs so that we achieve a closer proximation to
full employment in the context of a low investment economy."
According to Minsky, any artificial, induced infusion of investment
capital into an industry would only endanger the financial balance
of that sector b invalidating part of the capital already fixed there.
For instance, more capital into housing construction would eliminate
umarjginal housing from use and thereby drastically depress its value.
Slenrv C. Wallich, as may be recalled, bases his plea for induced
investIIolnt oil a. projection of capital "needs." le relies on a number
of recent studies on investment requirements and saving, notably the
influential Brookings study by Bosworth. Duesenberry and Carron.
published in 1975. This study "projects" gross private domestic capi-
tal formation for 1980 at 15.8 percent of (iNP, about the same as the
average for the 1950*s.8 The projections are made under the assump-
tion of an economy "having returned to a full employment growth
path"' of 4 percent unemployment. At the time of this writing (Spring
197() the figures as well as the assumptions on which they are based
must be considered obsolete. Unemployment, seasonally adjusted,
hovers between 7 and 8 percent. Let us have a closer look at the fir-
ures for energy in the Brookings study. Energy consumption is pro-
jected to grow at 4 2 percent a year-in line with historical trends and
,potential GNP growth. Capital investment by electric utilities is pro-
jected to rise in real terms.at a rate of 8 percent for the remainder of
this decade. The investigators failed to notice that the electric utility
industry has drastically cut back its expansion plans.9 These cutbacks
have I wn ui.tivated by I ,rowtli rates of output under conditions of i(lustrial and household
conservation, burgeoning costs of capacity expansion. and by diffi-
culties in attracting capital, gen the precarious profit position of
Tie most recent estimates by the Edison Is11titlte list an annual
Lrrowth rate ili (onstriction expenditures of naboiit 4 percent in real
tel2nis rather than the S percent projected bV the Brookinms stl(dy.1
Chllenae. July/Auiiust. 1975, p. 13.
B;irrx Bosworth. James S. Duesenlerry, and Andrew S. Carron, Capital Needs in the
7 tiv. The B~r(okin Zs Institution. D.C.. 1975, p. 3.
.ready in February 1975, cutbacks amounted to 214.000 megawatts. of which 133.000
w-' iiiwlear. most of which are Rue to be completed in 1980 or later. To put this in per-
sleclive. private utilities now have a total generating capacity of some 375,000 megawatts,
xf w h about 20.000 are nuclear.
-e7 icu1 Week. February 17. 1975.
The proe1hc.u has not been one of findingt adequate capital sources. "It is a question of
oin adequarr earnings to attract capital." (An investment banker quoted in Murray L.
WAinb; ,im "Finana iu the Electric Utility Industry-A Report prepared for Edison
'Th('trIe Institute." Now York. 1974. p. 92).
(,mmuniTcation by the Edison Institute to the author. January 1976.


The c timates for the ciierigy sector, bing Qy far Iargest ,1I1l)Oielt
of nonresidential ilivestmcllt, are only ill 11uA tlati tNo the ii :i.qlary
of most of the cUrrellt -ca)ital nee(s a llilat ill ii a Of rapid
structural change. Underlying tHe I. t y, release(l in 175,
are assumptions derived froni a world that has faded away at the
latest with the Arab oil embargo of 197: Low relative prices for
primary and secondary energy, low relative (osts for capital goods,
sizeable economic growth and full employument. Ex en the recesioll is
assumed away. By ignoring tte profound structural clanges and
readily available data on recent facts. these ( cinates perpetuate the
myth of the capital shortage and inflate th~e case for a government
induced reallocation of resoiirces toward investinent in plant and
n machinery.
Our evaluation of the capital-oriented interventionist strategy this
time starts with the last of our tree criteria "dtlity of oiitpt. Would
induced investment conform to people's needs or market deinand ? This
position. by a large margin, fails the market test. crucial for invest-
ment in private industry. There is no scarcity of capital investment.
A certain sluggishness of the American investment performance is
explained by the decline in growth rates of agregate demand. and i>
matched by slow growth of investment in other Western economies.
e.g., Western Germany and Japan. It is a simple consequen(,e of the
declining attractiveness of material-intensive )roduction clara ctei-
istie of the present stage in industrial development. Any 1ar ,-5eale
capital injection into the manufacturing sector would have to be made
against the votum of the consumer.

Much of the additional employment generated by induced invoSt-
irent in plant and equipment in the private sector would benefit skilled
unionized workers with relatively hiah incomes and low 1,Ates of striu-
tural unemployment. Most or much of it woilld never trickle down to
the structurally unemployed but would go into overtime pay. (in-
creased) rent payments to resource owners. and. iven the highili extent
of regional and occupational segmentation of the labor I,!arket. into
increased wacres for those already employed.12 The stratec-v then would
have dubious effectiveness in absorbing unemplo yment.

Tbe productivity ('rovtb generated d by incivi'eental inv, 4!a';u in
the scoanufcerr sco isikel to ,e an
age of rapid economic growth. There is 11onW (,-i+eflCC thai ,t : !,-il
costs of capacity expansion haave dra 4ieal v ri~en in relation o 0 8,-, Ifl W
costs" The reoit! -'e frontio oro oi, dei1',v
materials and energy with which to sul ,sti n for labor) is la._. v
closed, and the increasingly ConIprehenSive ':ifterl'al ization (f ext 'r-
According to crudo calculations by the Conre.s.iona1 BuOzer Ofie, .i hiliu in :i i
tional federal bwdl'_'r outla-s annullv "hiiys" about 200.000 p n hi i erv eo i 1) 0j
150.000 jobs through acceoeri tvd public wors or uh terevrlica revn io s 1 0(1 1, a,
40 000-70,000 j1b through inerT1 ed ovr rneit pnr'h:ise oQ d s. (St V J OH T of
Alice C Rivlin I et o1' the Joint Eonomic Committo. Mareh 19. 1 97(.

,v !it w +." : well zu- n ~v vonmental resistance and reaulations, affect
newly built plants iuch more than older existilng pant.13
In :, more funda nial vein,. it is not implausible to think that in-
novation goes together with investment. Yet thew almost exclusive
pion inve t in )I)-\ apital isleading. In a modern
I 1l,('ogical QQonoIIV',V, ,novation m ore than anything else requires
liiiiiaii calpit al- peft i e. t raIniIg, schooling, reeeh. For instance,
lie Ipectamlar prOgreg of medical knowledge and quality of treat-
ient, unrflete in t .,." productivityy statistics, has been brought about
to a larger extent by human capital and only to a small extent by phys-
ical capital. Given the -omplex and sensitive processes that make up
research an(d development, invention and innovation there is little
reason to expect a -tlr()li bOOSt in productive efficiency from a whole-
sale rdire'tio o>f n1t1i1:. resources to investment in private manu-
fact ,i+Ii. This i> t+rule particularly if the opportunity costs in terms of
alhc" +ative uses of the respective funds are being considered.

The precedingr discussion sugrgests that mastery over the physical
environment no loniier is the frontier that readily provides economic
o'rowtlh and absorbs the employable labor force. After the accumula-
tion of hardware ceases to be an effective guiding principle, what else
is there to move toward? Or must we do without growth altogether?
Oulr vision includes the possibility of continuous growth in what is
cistomlarilv measurc(1 as GNP. Whether or not we will succeed in
maintaining growt11 depends only partly on our technological in-
genuity in meeting the challenge from an increasingly recalcitrant
physical environment. It lare'ely depends on our ability to identify
idle resources that can be used to produce output that conforms to
people's evolving tastes and aspirations in a similar way as the com-
bination of technical progress, ready availability of natural resources
a md "thing-mindedness" of the increasingly non '-eau-riche consumer
led to the mass coii-umIption society of the past quarter-century. We
must bring together new frontiers of production with new frontiers
of consumption.
At present, two kinds of underutilized resources meet the eye: plant
and equipment, as measured by idle capacities, and people, as measured
by unemployment. The overcapacity in physical capital will be only
tenpoary. givei appropiate market responses an l considering the
depreciation of the existing stock. Things are different with respect to
the underutilization of people as most evident in the unemployment
statistics. ActNally. unemployment is only the tip of the iceberg. Less
Visible ,,r, the detrilnental effects of an underutilization of skills,
dearth of alternative job opportunities and career advancement, in-
volntarily short working hours, job insecurity. It is widely accepted
t lat a ,lar,(re proportion of our underemployment is of a structural
rather than cyclical nature. This is indicated by-
The well-knon trend of rising unemployment that has super-
se(ted cyclical changes.
For irnstanee, the average oriinl cot of all electric generating units In operation at
lp end 1974 was about $17) per kilowatt. For plants inaugurated in 1975 It has about
doih11 1- $30 per kilowatt. and for plants going into service later this decade, the in-
di is rv ::,ntiv1 ates $500 p r kilowatt. (Speech by Robert F. Gilkeson. Chairman. Edison
lPtrie: 1usti'ute, before the Security Analysts of San Francisco, Thursday, March 6,
1 -75.

4 ;
"I ,1I1 Yi : ,, ::'! {or )Is h t )' ( ,,v eli {, I:a : I:,V r ,in-

-VdamG U' ne I- 94.1i W'il!e ~(;8 t"w 1el fo~c pa I-, I 969 ol
l)( O'' 8P1' :"01" 2 0 ,{e' fQX\ } e 'r 1)a 1(1 job)s (}tf hexxl~e o((.wl! md by

o i lie I I, I
N dramnatie (d01 51ncI -8'ni al.,frc ar~ie
(4 n{n}tehi{ u'u ...l..: "lli <.? .' D1Ae i2;VI i U
35- to 44-year ols( ad from 94.7 pei(,mit to 8';.!' :I''e(i, 21. m 1u
45- to 54-year olds. Aiioiig white i-.,]h nls ti C', ,,, -- aij
changes were extremely small" froni 9S !ercelt to 97 iel 1 l
from 95.9 percent to 94.7 percent. Note t]batz n)enployeJ1 mi11-
viduals who are ,lot looking for work do not et(r into tlh(, ,",
lations of the rate of unemployment.
..:t,- 2 unlike Western Europeans, have chosen nt
to revap t]le f'uits 0; A!Iuen' ili the -form of more leisure 2-nd less paid
,or,. W W ;, hs"2._ .a trn,nd toward early retirement, ever higher
j )'o0, n )ts: ,( 8, e i"oc-n" inlt( tTie labor f2 rcce, maid ,.l,. rrie1
2 . {3i 12ltvcl:I~ :T! ( n r I
11,if-, e) i S,,,"V0 i'O ,1, ,",:u onal attainme..t. It is not i7 1,a-
eontinuincy (i r11:;}1,i jV1 l iell, will ie hese r ''ep]d i,-e
,O) w 04 1, 11-t! : i.tv amel 1ialitv. In s11. .underemploved labor
1.l E. 1'.iIZ ,.
I, is 1 '$(,I0 ,'e1 for A bSorling }ost of the now idle lah r in
,, I eo,.. (Ib s01 .11s 1 I'' I ift our t, stes from buying more goods toward
1uvint,. c :e:'c-s, nv re exactly, toward consuming final pr, ducts
tlt IMe.orN',o'..to, 11or-e lator and less materials. The rule that odav's
c'onsumption level of the rich will be the mass consumption tomorrow
us no lo:,rer valid. In 1940, refriveratos. washing machines. automo-
biles were owned b the wealthy only. Today they are in most Louse-
holds. Y let t e secol-d t.orne in Florida, the snowmoblio, the private
1)law. theV:,,- pool. the vacation trip around the world
cannot be for everybody Spac', am] e-eIrv :onstre i,"" i
i il ic 1 2 j~~f i N'," will 1't, alble to firnd ulteS fod' -,orC (I w e-s'-
r >,p .:': i,' :ra nst the :'esstaneeof flhu, adljoin ihw: coin-
m :::,,, ii u- :',. :< <->,--i we should ineed succeed in dividintc up mOS-
of o,' Iai :a0 a:;!ts, hii'hv'ays. l)a1rl.:in(y lots. Ofmdl trash dispo a!
sitec. the , ,,,o;oL,.i< would hae to veto a fvRthn" eXi'zanson of
ene:',,,-m; 'v2 lon r-ditance travel and other mass pursuits that
ss e o beyond re" nt levels of resou1rce 1,tilization.
Growth then depends on our ability to shift cur tastes to what
we can ,Produle in increasing y utitv anld ,i! .... :2ild to stop (lillcf "l_
stubbornly to the consumption ald,, p- t 'v-utor,.ts winc'h v:0
have learned to adopt in a different era. u,1r dffrent ec'molmuc
4 "College placo mtent Wtia 4l ow a le-1lin, of 281 tol,(' ..t iii o real sta rtin L ')r ir I r
with social science and hunmanilies de-rees between 19if1 and 1975. a fall of 21 percent in
the real pay for bea!nning BS mathematics majors; and of 17 percent for beginning elec-
trical engineers with doctorates.... .New college graduates are having severe problems
obtaninc desirable work. (This aialysi views college g-raduates in aggregate. . In
enzineoring, for example, for very special reasons, ,tarting salaries have not fallen iT(e
1968 in real terms.) Over .10 percent of the graduating men and 25 Tercent of the women
in the class of 1972 were holdin- nonprofessional, nonmanagertal jobs in the early seven-
ties, compared with jwst over 10 percent of graduates In a ron-hlv similar st-ifu- in 11-t,
class of 1958. Bptween 1969 and 1974. the relative number of male college graduates work-
ing as salesmen and the Proportion of female zraduatesz employed In clerical positions both
increased by 10 percent." (Richard Freeman and J. Herbert Hollomon, The Decllnn z Value,
of ('lie1e (0iTZ. in ( r77tf(it eptember 1975. p. 25.)


conditions. Products (!oods oi services) differ in the extent to which
their sup1y ca Ie l a letL(. more exact l: ill their marginal pro-
duction costs, or in the price elasticity of supply. For a commodity
the supply of which lacks price elasticity entirely, the price serves
only as a distribution device the hilhest bidder prevails. For the
pice-elastic commodity. the price also serves an allocation function:
Depending on the demand, fewer or more resources will be mobilized
to expand production, or more sellers will be stimulated to enter the
market. It can be shown easily that consumers are better off collec-
tivelv if they manage to shift demand from price inelastic commod-
ities. Demand for the former imposes heavier costs on other consumers
and often increases the rent of the producer or owner.
Tastes have conventionally been accepted as exogenously given by
economists. Yet consumer choices must not only be seen as individual
or psychological attributes but rather as characteristics that have been
generated by specific cultural and institutional conditions. The ecu-
liar expansion of wants for physical, throughput-intensive products,
mainly suburban housing, automobiles, consumer durables, was stimu-
lated by declining relative prices for these goods. It was facilitated by
a variety of government interventions and non-interventions such as
the Interstate Highway Program and the deductibility of interest
payments for home mortgages as well as the failure to legislate the
internalization of external and social costs such as environmental dam-
age and resource depletion. Yet it would be erroneous to assume that
a reversal of these economic conditions and a mere elimination of
explicit or implicit public subsidies to the exploitation of raw ma-
terials and the processing and consumption of physical goods would
be s.fient to assr-e smooth and fast adaptation to fundamental
changes of the type described above. Tastes and consumption styles
are shaped during childhood and early adult socialization. Their
modification requires cultural change that tends to unfold only
slowly-instance, by way of generational change. It can also result,
froni major disruptions (wars, catastrophies) or be brought about by
social engineering which 'in turn presupposes a change in beliefs by
elites and mass publics. It is the latter avenue that appears most
promising in our present context.
An ambitious public employment program might qualify as the
"pump-primer" for the economy of the next decade quite like induced
investment served as an effective stimulus in bygone times. Consumer
demand on the market cannot be expected to shift vigorously enough
from goods to services to make a real dent in unemployment. Gov-
ernment demand, subject to the constraints of public approval, can
take the initiative to introduce services for the people that may
become popular only after rendered. One example for such an initia-
tive is the Social Security Program, or the establishment of state
universities and community colleges. Here is a unique chance for a
Joint engineering of the two necessary changes outlined above: shift-
ing the composition of tastes and creating employment.
Conventional employment programs are based on the unrealistic
assumption that workers have an unlimited ability and willingness
to adjust to any opportunities on the labor market. Yet, the average
unemployed or underemployed worker, supported by a more generous


system of income maintenance, is more choosy now. Acordiiiv'" to
Martin S. Feldstein-
The picture of a hard core of unemployed persons unable to Iind jobs is ,II
inaccurate description of our economy and a misleading basis for policy. A
more accurate description is an active labor market in which almost everyone
who is out of work can find his usual type of job in a relatively short tirne. The
problem is not that these jobs are unavailable but that they are unattractive.
Much of the unemployment and even more of the lost manpower occurs among
individuals who find that the available jobs are neither appealing in them-
selves nor rewarding as pathways to better jobs in the future.1
l-neilnploynletit i no longer tantamount to poverty. TIlhe tin-
employed are hardl, 1ore likely to fall below the officially stipulated
poverty line than the rest of the population."6 Conversely, employment
is not completely effective in guaranteeing a decent level of consullp-
tion. The full-time equivalent wages for no less than 19 percent of
wage earners 18-60 years of age fail to lift a family of four beyond
the poverty level."7 It is not surprising, then, that even in times of
high unemployment, there are numerous job vacancies. Many jobs are
badly paid and do not offer much higher wages than the income main-
tenance foregone. Furthermore, income maintenance permits un-
employed workers to hold out for an attractive job opportunity rather
than forcing them to accept the first offer. This inflexibility makes it
impossible for employers in a depression to hire unemployed workers
at lower wages and thereby thwarts both employment and anti-
inflationary policies. A similar effect results from the market insensi-
tivity of the "non-eutrepreneurial" sector of the economy-govern-
ment, non-I)rofit institutions, a id regulated industry. Robert E. Hall
A drop in demand and a rise in unemployment tend to lower wage offers 1 v
the entrepreneurial but do not alter those of the rigid-wage nonentrer'eneurial
sector, thus widening the wage differential between the two. This widening, in
turn, is perceived by the unemployed and encourages then to wait for nin-
entrepreneurial jobs rather than accept jobs offered by the entrepreneurial
sector. At the same time, firms in the entrepreneurial sector are discouraged
from offering lower wages than they do for fear of not attracting and keeping
the workers they need, even in periods of considerable unemp)loyllieit.
In this situation, intervention designed to push the many unein-
ployed back into employment, must either (a) weaken the income
security of the employed, or prevailing levels of income maintenance
and individual rights to choose of the unemployed, or (b) offer jobs
that are, attractive in terms of pay, location, and utilize available skills
of idle workers. The crucial difference is whether workers must go
full distance to adjust to demand or would employment programs go
toward meeting the worker's needs and preferences? The former
strategy, while advocated by some (see e.g., Arthur F. Burns' call
for relieving the federal minimum wage laws), is unrealistic as a
15 Martin S. Feldstein, "Lowering the Permanent Rate of Unemployment," a study for
the use of the Joint Economic Committee of the Congress of the United States, Waishing-
ton, D.C. : U.S. Government Printing Oflice, 1973, p. 11.
16 In 1974, 11 percent of unemployed household heads, and 4 percent of aInemploved
wives belonged to households receiving incomes below the poverty line stipulated by 1w
U.S. government, as compared to 10 percent of all individuals. Source: Longitudinal
Survey of Income Dynamics, Survey Research Center, University of Michigan.
17 Source: Ibid.
1s Robert E. Hall, The Rigidity of Wages and the Persistence of Unemployment. Brook-
ings Papers on Economic Activity, 2, 1975, p. 3:31.

I ,l: ic ,.ioin. ful is oliter to the values of this ant hor, and will
10t W i: ptr I (') ere.
T' !)1 : i ir. w ,, )l(I 1 '-e to attract the ivype of labor that
is :: ",b~e. focu ed on1 specific skills and locations where uneniploy-
lxits, d pay waIeS comparable to those
:f 11 l 4lovd workers with similar skills and performance. Yet workers
nst only fe hired if the' services rend( red can be sold or fulfill clearly
l)u()lv('edneeds. Public support for an employment program that
ii4ld be' eoi+:idered "lea f-rak~ii" make- V(er. work that does not create a (clearly perceptible and appreciated
o)ut ut could hardly be satisfying to those who engage in it. Actually,
hlere is little indication of saturation. Perceived needs for social and
( uvin qit y services, entertainment, health care, no conventional types
of education, care for the sick and aged, municipal services such as
fire "rotection, police, sanitation, home services, are immense.
"I, preceding considlerations define the principles on W1hich ms-
iv- } e enplovmnent program would have to be based:
TIhe prgravl would be highly disaggregated: it would offer
l, ,nr markets specific in skill and location.
Th e 1,:rrarn would try to produce services that are labor-
im :,isive. It w(uld refrain from capital-intensive production.
1tl~er thin (op~r, ifg itself to offering low paid jobs, it would
reri at all levels. There is no need to avoid attracting some of
tho!'e employed at present in the private sector as long as the
manber of jobs there is not reduced. Therefore, the services
crested ought not to compete with services provided by the private
The program would not be planned as a stopgap measure, it
would be there in order to stay and yield valuable continuous
services. In effect, it would have to serve two goals of equal
importance: full employment and the provision of badly needed
services. mostly public services.
1T would aim n)t at the elimination but more realistically, at the
,Ira ,:i' redi e4 i of irvolintarv nonfrictioinal irnenip)oyment. It
I:ely fail to enipl(ov niinn narzirnal wo'krs as well
as those wbo cannot or (1c not want to be ir tefrated into the pro-
d t ol sexic( fes that are considered valuable or needed.
It would be highly ,ndo-rmatic withi regard to w lo runs a par-
t} i,,1.i: p reieet the Federal government. local governments, pri-
,ate fanizations, or comb)a ions of these. Creating private sec-
t or jol;, oW -ervice that are beiii (irectiv paid for by their
re< ipiets is aupea lingr from the viewoints of both revealed
D)1 efCTOfCe andI red!II -il'dretarv costs. For i 1t9nee theri coulld
be government seed money for setting up an oranizafion, attrac-
tivo to potential workers' in terms of social status, that delivers
iioi'ersonali zed (domest ic services such as cleaning or g ardening.
Or there could be new incentives for hiring certain problem
groups of unemployed, such as workers at both ends of the age
spectrum, as proposed for the young by Robert Eisner." Yet it
must be recognized that, while government services can be en-
lar.ed. withot competiiig with Irivate services, it is more diffi-
"' Robert Eisner, A Way to Create Jobs : Cut Payroll Taxes, New York TiMes, August 17,


(.t, to creao! 5si J l ih rix ;r e S(Wi or 8 h* 's'': aveit l
of existing jobs.
C~o iing l)acki ht) the la.t, two of tl i rvee ,r,' r, 115i' .( to eV-ll8~it e IlIP
iIIV S' l l~le!,-or i 1i (1 str atenyT, we in;I (leal v.itlh t1 e1 o lt ( a r -
scale eMployment progr'ma on ut lity of ouput and oi (',,Y.,y, Both
are controvorsi I -since the bulk of the ,eo, ,'ee a I l!'cai, 1') (,r de, I
l)ThW2Xia wo1ldl tlv to kakel outside of li 1". ,* it,,' t
II iins ,i ttI onal1l1y -i i((1 e a c !,)i;a ('11,, I : i .
iiii{U directlI ]I<.e.li't' e oftec .....~ c:i I( .0
direc s It as Iate( witt ihe t nav,, .."
Ut I*1 ;

One basic tenet. of neoclassical economics is the rioi.+ o .o -*lUe
soverei nty. According to tle model the consumer (a-,- Co10:' bCeI
consumption and saving, between goo(Is and services. 'I odd o. ',
programs as outlined tam'per w ith preferences :T "r e"Cl" "4rW10fl
the market "Consiumer sovereignty'" stands for freedAn of CAloice.
Choice depends on opportunity, which iimist be establish or ai-
tained on the labor market, as well as on the commodity market. There
is little inherent reason why the opportunity of the worker to sell iii
labor under conditions similar to the next. fellow (who has a job)
should command loss authority than the right of the consumer to get
fair treatment on the commodity markets. To the extent the two pri-
ciples conflict, a compromise must be found. Mass unemployment is a
solution that one-sidedly accommodates consumer choice at the expense
of workers' opportunity. Moreover, while upholding consumer choice
it sacrifices GNP size. We may be better off accepting a slightly differ-
ent product mix in return for a larger national product and more and
Letter work.
lo b :.are, in a dei ocracy which largely relies on mrk. alloca-
tion, consumer preferences or tastes, once and "a-s long as tiey 5
should be accomnmodated, if possible. Yet if must be recognized (at
tastes are not inimutable. They are tlie preduit Lo' tbl(e c u.,ral a: I
economic environment, the latter heavily shaped by governnIent lurer -
vention. At times, tastes change as soon as people try out alterni ves.
Tastes can be, and continuously are, simultaneously respected and
influenced. For inst ance, tobacco and -lcoliol ,)re available on mar-
ket place even while their consumption is being discouraged tiirough
taa.tion and pu blc, information campaigns. The experi iet8a 1)rovi-
sion of certain public services may open up a new "intarket," a process
well-known from industrial mmirketing camp'aig. s. The chal-re was
first, made by John Kenneth Galbraith that the practices of insist ial
nirptno V-1(s fidisra
i a rketinghaving no -ounterpart in the real of 4overnnient services.
has resulted in the biased composition of demand in favor of the
vate at-, the expend se of I he oovernmct sect(o'r. 111, fl/lnt of needs fo'
jiubli( services >iff s roin another handicap: Tle inloni lentity o 1 "
l)aycr ai d beneficiarv. F'or ,stance, the, xi- eiice o ohfs: i r-
iuctantl, fired ',it J_: citlv wci mi(njltal ei:I~ovees cv'.. ,. i
public pre frenmc, 2oj tl e sevlices t d nil1,,er of, i1C: P)'. ,-
iiemployed. Tlie i',8t A hat tihese- needs a1r 1,)t 1 ranslated into ct1oei 0
def)il.d hias to) Jo Xith the 1)eclili ar r i- ina o f~vri~' t1
ices across ,ll,,,licl)8li.e: a(1d sIatc; in, the I iiit''d ,I i es. e'ei all',
slpl)lorte(I .Iic ei i)i(y,,)i11( t votilI 1),B a ,love to(r\',.~i 1ie L"8 "


conlsidered ledgitimate. of equal provision of government Services to all
I,o1 )le r'ardles of their lotion and economic status.
As to allocative efficiency, are we not advocating a misallocation of
resources, diverted from those sectors with higher efficiency to those
with lower efficiency, thus thwart in economic growth ?
Fir- t, zta generous pul)licly supported employment program, rather
than reallocating resources: from one use to another, would focus onl
utilizing unused resources. Underemployment is the pinnacle of mis-
allocation. Second. there are highly innovative labor-intensive lines of
production within the manufacturing sector that would be able to
profit from strategies favoring the use of labor. For instance, infor-
1mnation technolo ry, communications, computers, and control based on
solid state electronics. These technologies are not material or energy
intensive. Their breathtaking progress can be attributed to human
father than physical capital.
Yet the program as outlined here would have to face the issue of
alleged or actual low efficiency of government operations. Given the
experience of the war economy, the space program, and the social
security administration, as well as the increasing supply of well-
trained managerial talent, there is little a priori reason to negate the
possibility of efficiently run public or publicly financed enterprises.
The preceding examples, not accidentally, name programs that have
well-defined and often measurable criteria for success. There are more
severe organizational, managerial and political obstacles in the way
of efficiently running decentralized services, particularly personal
services. It would be hazardous in our context to chart any specific
strategies toward improving the efficiency of these services, given the
dimensions of the problem and the dearth of applicable knowledge in
this area. Yet it seems inappropriate to assume the existing state of
affairs as unchangeable. The very backwardness of part of the service
sector makes possible substantial economies through the application of
advanced technologies and economies of scale. In addition, the con-
tinuously tight budget situation of the public economy creates built-in
political pressure for higher productivity and "accountability."
The most general point to be made in defense of a favorable alloca-
tive effect of an employment program as outlined has to do with "ex-
ternalities"-costs and benefits accruing to others than the partici-
pants in a market transaction, be it third persons of society as a whole.
To the extent a buyer of throughput-intensive goods places demands
on commodities in rigidly limited supply, he bids up the price and
hurts other (potential) buyers; he also contributes to inflation. For
instance, it has correctly been observed that the rising meat consump-
tion of industrial nations leads to rising world market prices for grain
and places a heavy burden on countries dependent on food imports.
Conversely, final demand incorporating added amounts of underem-
ployed labor relieves the community of the burden of income mainte-
nance, not to mention less easily quantifiable individual and social
benefits of reduced unemployment such as preventing the obsolescence
of skills, loss of self-esteem, and alienation. Even after the conven-
tionally recognized externalities (pollution. noise) have been fully
"internalized" in the price of the product. there remains a strong
rationale for intervention designed to favor the utilization of (un-

employed) labor over those materials to vhi('lk tfle above assunIAIti01S
Wh ilo the Iiuii be1 of tl) eose who believe ttl v i. -Vt Itna(le-)1ff1 1et',Ww('l
inflation alii uIlnemlpW oynielt is ajpidl ( il, there an, 4111
manv who hold(1 that -a 'l 15"1 ye publ) i tient program would be
ilflationary. In te ic llmicit inodel issued Ilei tll( a(,l(JiiiAlal Ila t ill-
xohle In. OoIIS_ Of rqllslerl p-1ynwlelt',- ;y le< 'll: l~
ploVed, woti1,, inh1ed ilicrease :,i-h2gregate (ht81 11afl iIQ 85 ti
demand will be, directed toward full-employed markets or Indultries,
demand-pull infIlation can only be avoided by reducing aggregate tiu-
chasing power, possibly through increased taxat iO).
Increased rates of taxation must be seen in the perspective of the
additional availability of government serviceF. provided free of charge
outside of the market; and the moderate difference between unemploy-
ment/welfare benefits and net incomes of those rehired.
The presented alternative vision of the American economy and
economic policy cannot be complete without assessing the potential
public acceptance of more ambitious government strategies toward
full employment. Can a policy be popular that defies what are con-
sidered by many the technological imperatives of an economy that
bases its expansion on materials? It is neither within the purpose nor
the possibilities of this paper to predict the popular support of con-
crete pieces of legislation. Yet survey data collected over several years
on economic expectations and orientations toward government inter-
vention indicate that along with disenchantment with govern ii ient
policies, even grave fears with regard to all matters economic, there
is growing ferment favoring a reorientation from a laissez-faire to an
activist government stance. Let us briefly review these data.



Trhe index is hi ,cd on answers to the following five questionss"
1. "We are iiiteresl4od in how people are getting along linan-
cially these days. Would you say that you and your family
are better off or worse off financially than you were a year
ago( v',
2. 'Now looking ahead---do you think that a year froin now
you people will he better off financially, or worse off, or just
about the same as now ?"
3. "Now turning to business conditions in the country as a
whole-do you think that during the next twelve months we'll
have good times financially, or bad times, or what?"
4. "Looking ahead, which would you say is more likely-
that in the country as a whole we'll have continuous good

times during thte next five years o)r so, ,r thtI I we will lv,
periods of widespread uneinployuiicii ()r dorrc'si', or wht ?
5. "About the big things people buy for their h,,nies such as
furniture, house furnishings, refrigerator. st ov ', 1 ,hevisi4n an1d
things like that. For people in general, do you think now is a
good time to buy major household iteae;?"
To construct the Index, a relative score is calculated for each
question, separately, by taking the percentage giin favorable or
optimistic answers, subtracting the percentage giving unfavorable
answers, and adding 100. (It will be noted that this procedure is
eluivalent to assigning a value of 2 to favorable responses, of 1 t1
"same"' or "don't know" responses, and of 0 to unfavorable an-
swers.) An average is then taken over the five relative scores, and
the result is adjusted to the base (February 1966--100).

" I

-- 1 O



Annual percent averages of
unfavorable orientations
Will have periods
Government is of widespread
doing a poor job unemployment

1969------------------------------------------------------..........(1) 30
190_(1) 30
1970-------------------------------------------------------------- (1) 44
1971 ----------------------------------------------------------- 24 37
1972----------------------------------------------------------21 37
1973------------------------------------------------ 37 48
1974 ------------------------------------------------------------------ 43 57
1975 39 55

1 Not ascertained.

The wording of the questions:
"As to the economic policy of the government-I mean steps taken i.n rear" d
to inflation and unemployment-would you say the governlinit is doing a -_, )d
job, only fair, or a poor job ?"
"Looking ahead, which would you say is more likely-that in the country ; -a
whole we'll have continuous good times during the next 5 years or s, or tiat wAe
will have periods of widespread unemployment or depression, or what?
(Source: Survey Research Center, The University of Michigan, Suro ,f
Consumer Attitudes.)
Percentages are based on the answers of 3000 to Wi00 raiidomiy selected :111f!
respondents representing the United States population.


Powerlessness and preferences for Govcrn'imi t i 'cren l ion

Question: "There are differences in opinion about how much control a pe-rs(o
has today over what happens to him during his lifetime. This card list.s so*lie
of the more cooninii jrobiems and needs that people may 'ave one tie (o,
"For cach one, tell ie whether you as an individual, feel you have ,i g e; i Ieal
of control over whaq hapIvens, some control, or very little control.
"Now let's go through the list once again. This time, fPr caeh problem u: iiei.
tell me which you yourself feel the government should do more about than it now
does, which you think the government should not get in rolvd i at aill, aud wllieh
you think the government is now doing jvst about enough.'

Percent feeling a great Percent feeling govern-
deal of individual control ment should do more
1968 1973 1975 1963 1973 1975

Improving the availability and quality of medical care ----------- 17 10 13 49 62 65
Providing for your children's college education ----------------- 63 52 51 35 30 43
Accumulating funds for your retirement-....- 58 44 46 52 64 71
Improving the neighborhood you live in-....- 38 23 22 28 42 36
Buying your own home -------------------------------- 69 NA 52 20 NA 21
Getting a better paying job ----------------------------- 44 37 34 54 6, 72

Note: Sample-The data are based on nationwide attitude surveys of people aged 18 and over, conducted in 1968,
1973, and 1975, sponsored by the Institute of Life Insurance. Sample size was 3,023 in 1968, 2,007 in 1973, and i,,04
in 1975. The area probability sampling method was used in all 3 surveys.
Source: Demands on Institutions and Perceived Personal Control. A Working Draft for Conference Discussion presented
at the Institute of Life Insurance Family Economic Behavior Conference, January 1976; Mathew Greenwalid and Ha: i.
Schrank. In 1968 and 1973 the data were collected by Daniel Yankelovich, Ir.c,, and in 197> by Reseaich 100.

Chart I presents the chiangeS over mo', {la year> in tle IndeX
of Consulner Sentinment, developed by (,eor*,e hItonta. his lic to'


(T'-Q1r the evaluation of the personal econoInic situation as well as of
ilie eco101v as a ,t: changes are dominated by short-term ex-
iectations about the future, and therefore it can be viewed as a proxy
for the confidence/uncertainty dimension. Table 3 deals with long-
terni expectations for the economy and satisfaction with government
economic policies. The first three columns of Table 4 follow up the
sense of individual control or powerlessness in a number of economic
and welfare concerns between 1968 and 1975.
One conclusion emerges clearly: In the United States, several years
of slow or negative ecoioiiuIc growth have brought a severe decline in
the sense of well-being, fate control, optimism, and approval of gov-
erimient economic policies. The situation in 1973/75 differed from
earlier recessions by the depth of the decline in sentiment. In the past,
the public had considered deterioration a temporary cyclical phe-
nomenon. Expectations about the future of the economy and society
had not been affected strongly. This time, a sense of gloom is pre-
valent. For instance, between 1946 and 1970 an economic crisis during
the next 5 years was never anticipated by more than 28 percent of
the respondents. This time, crisis expectations soared up to 57 percent.
Even the sense of individual fate control has decreased. Society
and/or anonymous forces are now seen as more powerful than before,
as wielding increasing influence over the individual's situation, as
shown in Table 4.
These same data suggest that, contrary to journalistic impressions
disseminated by some mass media, malaise and declining trust in
government are not being translated into apathy or preferences for
"small government." Rather, the demands for government involve-
ment or government spending (Table 4) have increased. We know
froimi other evidence 20 that these demands by and large are accom-
panied by an expression of personal willingness to pay more taxes
for purposes that people approve of. Four areas of public wants stand
out: (1) Reduced inflation, (2) income maintenance, (3) education,
health care, and community services, and (4) employment. The first
two areas are traditional- and undisputed preoccupations of govern-
ment. The latter two complement each other in supporting the case
for a combined employment/public service program.
In sum. an increasing proportion of Americans is longing for a
credible comiinitment by government to deal actively and effectively
with trouble spots, be they unemployment, health care, or municipal
services. Refusing to act on ideological grounds, or waiting for the
,self-heahlig forces" of the economy while dispensing explicit or im-
plicit subsidies to private business, would undoubtedly reinforce the
still prevailing mood of pessimism, even cynicism. The majority of
Americans are aware thit there are urgent needs for both additional
emlovrIent and public services. They could be convinced that the
government should take the initiative in servicing these needs and
finance tliose programs provided this is done efficiently, the needs for
!rvic( are, convincingly revealed through market or other mecha-
nisms, and very many people demonstrably profit from the services.
20 (Teorg- Katona, Psycho] 'gcal Economics, New York: Elsevier 1975, Chapter 22 ; and
Riehard T. Curtin and Chnrles D. Cowan, Public Attitudes Towards Fiscal Programs, In:
Burkliard Strumnpel and others. Surveys of Consumers 1972-73: Contributions to Be-
h ioral EonJ oiomics, Ann Arbor: Tnstitute for Social Research. 1975, p. C,9.

Iie~ I)oillal' 1i'iil'-l'e at(, easy I 1, rSl( ii V, 1t h lil, I
ourselves th.at our so, iety is (a!J)e 'iitl villi lIo p[OV ]V a o, tIliiIH 01
le(1ts satisfaction to any ini(ividua) realrles- of' 1li- i)Io[r ti.( ,o
,'blltton. In the teas t d .~hS, welfilre l-)olicies tiatve liwell (1l ie(Itii
inarilv in tells of sa feiiarfuing mininiln levels of el lcatioli 1iealtlk.
and constumiption. They xvei concerned vitli corretil- tl.r (ld tV'il 1l-
tion of outcoIes. IS ra ye agI,!e(1 atar ve, -! htve! p v-
vented any catastrol)til, effc(rt of iihb HlIelllloIit oil ((1l1!1141011.
Rising iinenlployinc!t has. htowe vei', heateded and(ilO e!I 2t'i .. iii-
equalities of opportun it is: ait)(r force onti'alt -. I'lIli l II'wlt
colle'ae (r aduates. NVoInien1 who I)L l to IIPP1l t til l I i I 1t .
peoplee in the middle of tliel ....,. 'velojI lt l<1(' to lwa:' tiie
brunt of the costs tlirough sharply reducedl wac'e ol'trd atind u i-
favorable career and employient opportunities. In co)tt-,,t. i ost
workers who have held Jobs for a long period, ffint tteir status mailn-
tained. Prevailing informal job arrangements- usually safeguard 1e
status quo and immunize them against the market. This makes it
inevitable, however, that the market hits with full force those har(e-t
who most want to change their arrangements. This is in contrast to
the strong expansion of the postwar years that has provided opor-
tiunities to almost everyone and career advancement to many. There
is now a generation gap in opportunities as indicated for instance
in the dramatic decline of salaries of recent college graduates. The
latter tend to take the jobs that could have been filled by hig'h school
2lnaduatefs: Underenplovment trickles down. This strangulation of
opportunities nmust weigh heavily on Americans who, unlike Euro-
peans, are entering the labor forcz in growing prol)ortioils. in spite
of adverse market conditions. It is then for considerations related to
both economic growth and distributional justice that reestablishing
a reasonable level of job opportunities and career chances rather than
induced investment deserves highest priority on the agenda of ztru'-
tural economic reform.

By Aks()x .+ r-+

This1, stdy beC'ins with a postulate that there is imenployed aIld
underemployed labor. "Growth" is a desirable goal because there are
inople seeking more and better work. There is no question that we
hare an untapped labor potential. There is a question about whether
the supplies of capital and natural resources are adequate. The thrust
of the study is that we solve this problem by lowering the capital and
resource coefficients per worker and consumer. There are six lNisie
points in the argument.
1. The resource and capital coefficients of labor are not fixed. They
vary in response to relative costs.
.. Relative costs are much affected by institutional bias. They are
the products of public policy as well as the market, and may be
changed by changing public policy.
3. It is clear what it mean, to use less resources per worker: fewer
acres. less energy, water. timber. sand and gravel, iron ore. and Fo on.
But there is an uncertainty about the meaningL of using less capital
per man. This is because labor helps produce capital. which is stored-
ip labor. To resolve the uncertainty we view the production process
s vertically inte(rrated, and the relationship of capital to the labor
that produces it. rather than just the labor it complements or displaces
"in parallel" (as opposed to "in series").
Capital finances payroll. The share of capital in the final service
flrw )- fl e n)roduct varies with the time financing continues, i.e.. how
hIr capital is tied up before being recovered. The way, therefore. to
uqe less canifal per worker is to produce things that pay out faster.
Thon eanif,1l i+ tied ,m a shorter time with each dose of labor, and re-
t o finnce another payroll. "Pay out". in the overall economy,
}v,,-ans 1f 0oorse delivery to consumers, not to other capitalists who
1-11- 9lso finance the unfinished or intermediate product. Faster so-
oil (avout results from moving labor downstream nearer to final
('nsqmners, shorteninfr the steps between hand arid mouth. Using field
l!-,or in lim of more farm meohines. for example, does more than re-
p,+irc {aeffrv workers with field workers: it obviates financing the
lu,;4flIpe md ribleases capital for other uses.
Croe ti-,- basic idea is clear, there nre many dimensions to speeding
,+-,,*. +]nd no end of example+. Shifting consumer demand toward
l,!,w ji- +-ive products is a dimension. Another is shifting input
119 p ron cnrtal-hnrv materials like heavy lv'mber from
lioor Ti Ne'rdinrr 100 vers to mature. Another dimension is substitut-
+Profwzqnr. Graduate School of Administration. University of CallfornTh at Riverside.

in o)eratioi !eatir id lamintewlance o ings ,nd nae'hilles.
.Oi, tiu ,ea(ts t o the insight that the capital reqrenient 1 growth
is not a fnid of capital but a flow of gross investment derive! rout
flie fund. Vie nation's capital is a Great Revolving Fund. It finances
production and payroll each I ime it irevolves or turns over. 11e flow of
gross investment is the fund multiplied by its turnover. I'i(' fuiii
grows only slowly by net capital formation. Turnover, however, is
vani'ble quickly and over a wide range, amply wie enough to adjust
to soak up the linemployed. Here is the point of leverage for public
The microecon1i(c sul stitution of labor for capital is also a, macroc-
eCCM ol,. mic process, creating investment flows to soak up idle albor.
4. Orthodox macro-economies stresses a need for investment oiltlet-
to Keep; the, wheels turning. This remise, if true, would argue against
any reduction of capital needs. The study demonstrates that gros, in
vestment consisting largely of reinvestment creates payrolls, and in-
creasing reinvestment is the key to sustaining needed gross investment
flows. Orthodox rita cro-econonics is criticized for overemphasizing
Ilmoney flows and neglectincr real flows of goods and services.
.. Inflation need not accompany high employment, either as cause
or' effect. A high flow of reinvestment corresponds to an equally high
mcatThing flow of ripe goods delivered to consumers.
6. There is a misplaced presumption that high capital turnover
implies increased materials flows., residuals generation, and waste.
li,-h f'".nover of capital value is different from flow of concrete ma-
terial. Moving labor downstream entails reduced materials flows. This
isiv- is a red herring that should not divert us.
The study indicates where may be found the institutional biases that
want ('orrectin, and goes into some detail on tax policy, which cur-
ivently tends to encouprae the substitution of capital and lan(d for labor.
To i'"v,,, ve the bifs' calls essentially for reducing taxes on pa yrolls, and
ine'easing the tax costs of holding land and capital. It also calls for
rei 'oving the capital-intensive bias from federal spending programs.
and reguilatory policies.

This paper addresses the problem of how much capital is needed
to assure full employment for the present and future labor forces. The
coefficients of capital, materials and land used per worker and per
consumer have risen in our times to very high levels. Are these high
coefficients necessary? If so, future growth and employment depend
on uncommonly high future capital formation, and appalling future
drafts on nature. These assumptions, indeed, are commonly made and
are implicit in most policy debates today. Vf not, let us learn how to
lower the coefficients so the supplies of capital and materials will go
around to match the number of workers, and employ the unemployed.
Then jobs and GNP can grow without necessarily using more land.
and without l)eing limited by the growth of capital.
With !a'Ior suffering from h'irih unemployment rates, and capital
a-lid I~iK beil. (early priced ;+m ill too short supply for full em-
pl<: ent, lie need adjustment is evident: lower tlie uve of land

and capital per person. But is that possible? There are several alleged
I v h ich I will 1ist, and then t reat in turn
.Th, obstacle Ihat capital and land coefhicients are fixed or
Ir i, ined to grow for I ecn1morical aId efhcien(y reasons.
'2. ile obstacle that laeor is overpriced by unions and politics.
h. e obstacle that labor produces capital.
4. The obstacle that miore investment, outlets are required to
prime the flow of spending.
,. Ihe obstacle of inflation associated with high employment.
6. The obstacle of a resource ceiling on throughput.
l. T j: ( )i si'.\'IAi: Ti [iN CAPITALL ANI) LAND) ( i-FICIiENTrS A1RE FIXED.
P -NE To E o, oi TxcvI-

The possibilities for reducing resource coefficients of work and con-
sumption are far greater than most people have any idea. We know
that change is possible, for change is what got us here from there and
what man hath wrought, man can unwork. But we need not go back-
ward. We only iieed look to realize that the man/land ratio varies
over a wide range all around us today.
i fcre. i'(I, IXIl1iQ, l re iJe daia (All fallI land 1se on the east
side of the San Joaquin Valley, California. The data refer to neigh-
boring lands, generally of comparable quality and in the same markets.
The differences therefore display that factor mix is sensitive to shad-
ings of input prices so slight that. they are not equalized by the
market-differences internal to families and firms such as result from
credit ratings, tax positions, political connections and other institu-
tional biases. For example, an immigrant with many children goes
heavier on labor, a speculator with friends in the banks and the Capitol
favors lands, with a doctor with income to shelter might invest heavily
in depreciable capital.
In the San Joaquin Valley, east side, land is versatile among many
competing uses. These range from dryland grazing up to citrus, fresh
toinat(,, 411(l berries. Dryland grazing might gross $15 per acre per
year: berries might gross $1,500 a year, 100 times as much. The specific
prices lare subject to secular and cyclical and inflationary change, but
the basic principle is not: the same land yields a little or a lot, depend-
ing on what you do with it. Table 1 is a crop report gathered by the
United States Bureau of Reclamation from its Friant-Kern Canal
Service Area. Not all the land is versatile among all the options, but a
close study of the area has shown that the margins between the uses
are ragged.' Almost every area has several options, and many of them
are choices between the highest and the lowest gross. To get high
yields, of course, requires more labor per acre.
Labor's share of gross rises with intensity, defined here simply as
nonland inputs output. For grazing, this is on the order of
$6/$15=40 percent. Grazing is land-intensive. For berries it is more
like $1,400/$1,500=93 percent. Berries are labor-intensive. (Grazing
IMason Gaffney, "Diseconomies Inherent in Western Water Laws", in Economic Analysis
of Multiple Use, Proceedings of Western Agricultural Economics Research Council, Range
and Water Section, 1961, pp. 55-82, 77ff. See also Irvin H. Althouse, "Water Requirements
of Tnlare County," Report to Tulare County Board of Supervisors, January, 1942, (mimeo)
map In back pocket.

and other unirriu,(ated itse, an, IoI ,ll T:j jlle
high variation of yields on iri4''ated flid only.)


A,,es VJe per acie


Barley ---------------------------------------------------
Corn -----------------------------------------------------
Rice ---------------------------------------------
Sorghums ------------------------------------------------
W heat ---------------------------------------------------
Alfalfa hay ----------------------------------------------
Irrigated pasture .............................- - ----
Beans, dry and edible ------------------------ ----------
Cotton, lint (Upland) -------------------------------------
A s p a ra g u s ----- -- - - - -- - - - - -- -- -- - - - - - - - - --
Beans (processing) -------------------------------------
Beans (fresh m arket) ----------------------------------------
Corn, sweet (fresh market) ---- --................
Lettuce --------------------------------------------------
Cantaloupes, etc ----------------------------.. .. . .. .. ..
Onions, dry ----------------------------------- ---------
P otatoes, ea rly ........... ...... --------- ---------------- -
Tom atoes (fresh m arket) ............. .......... ........
Alfalfa ------------------------------------------------------
Berries (all kinds) ---------------------------------------
O ranges and tangerines ------------ -------------------------
Grapes, table -----------------------------------------------
O l iv e s . . . . . . . . . . . . . . . . . . . .. . . .. . .
P e a c h e s . . . . . . . . . .. . .. . . . . . .. . . .. . . .
P ru nes and pium s -------------------........... -- .-
W a ln u ts --- --- - - -- -- ------ --

15, 69c
12, 711
24 952
4.3, 795
7 772
3, 28("
1, 37

Source: Sacramento Oifice, U.S. Bureau of Reclamation, 1958. Minor crops jrnitie. Data role. to ri

9(. 68
107. 14
336. 51
495. 70
;0 04
881. 16
1,2i5 60

44. 38
674. 00
'). 14

I! : only.

Of course the retirni to lad crots like i)evries or tomatoes is 4 ]dilv
leveragred and volatile. as q sPortrun o-ain1le, bi.t that is not our oiiceril
!Iely'. Averaging o~t the good years and the bad. the return to lind fromn
truck crops is very sens e to wage rates and other costs of hi :ino like
payroll taxes. _A_ slight, rise of 7 percent nearly wipes out the rent: a
drop of 7 percent nearly doubles it. But the same wage changes would
change the returns to land from grazing very little. Thus a slight
drop of labor costs applies great pressure to shift land to berries and
tomatoes and other high-v field, labor-intensive crol;s, making 11 very
elastic demand for labor.
T.e scope Wv this kind of hang'e is manifest in the fact that most
of California's prodigious farm output comes from a fraction of her
good farm land, that which is used intensively. For exalnple, of the
several million acres of irrigable land in California very little is used
intensivelv there ae oilv aboiit 21.000 ,,el, in plluns. ,(,1)0 i t -t -
stones, ana 65,000 in nael oranges." Most California farii land is used
at lower intensities, using little labor to yield barley, alfalfa, forao-e
pasture, hay, sorghum, safflower, rice or cotton.
In irrigated farining water is an indirect land input, since a water
right is the right to the water yield of a vast watershed. One miight
then think the truck crops really use a lot of land in the form of irri-
gation water. But in fact the high-grossing crops such as tomatoes.
citrus, peaches and berries are modest users of water. Pasture, alfalfa,
and rice are the heavy drinkers, and they yield only $50-$200 per acre.
not one-tenth of the high yielders.

2 G. W. Dean and Chester 0. McCorkle, Trends for Major California Fruit Crops, Cali-
fornia A.E.S., Extension Service Circular 488, 1960. The source has extensive data on other
crop averages.

!. VN-hicll flie


--------------- -


e!' -, hijb -s'i. (cops use more labor pc" acore not just in the fields,
tlt in th, D}ar,:in ]uses. the railroads, the stores and the kitchens.
A :1'')(I rry crop will use more labor at every step to the consumer
thian a S1* ei.jIt gain 0n a ealf, do it sooner, and much more often.
4i'I a 1 i)her use of labor in the field, raising yields, increases demand
flhi Thbor Vvond the field.L3 Reciprocally, lower costs between consumer
a{ far:.er, ailingg field prices by sav 7 percent, would (in our ex-
ain!I) double land returns from berries and increase demand for
i:il)Or on the favi!i.
V ~:' ;'o ther and briefer example in Iowa, a more uniform state,
Sr and Landgreil have calculated that if all farmers followed
the K ,fldards already practiced by the most advanced farmers, Iowa
a lone could supply the nation's output of feed grain.4
Turning to other industries (sectors), we find even greater disper-
sion of resource coefficients. Table 2 shows value added per kilowatt-
hour (or equivalent energy) in various industries. The numbers speak
for themselves.

TABLE 2.-The production multiplier of energy measured by dollars of value-
added per kilowatt-hour (VA/KWH)'2 for selected industrial groups

Cookies and crackers ----------------------------------------------.91
Book printing ----------------------------------------------------.50
Millwork plants --------------------------------------------------.36
Wood furniture --------------------------------------------------. 28
Fluid milk -------------------------------------------------------.13
Frozen fruits, vegetables -------------------------------------------. 12
Yarn mills -------------------------------------------------------.12
Sawmills --------------------------------------------------------.083
Wool weaving mills ------------------------------------------------.048
Aluminum rolling and drawing --------------------------------------.048
Blast furnaces and steel mills ---------------------------------------.033
Primary copper --------------------------------------------------.020
Pavimg mixtures --------------------------------------------------.018
Paper mills ------------------------------------------------------.016
Pulp mills --------------------------------------------------------.015
Petroleum refining ------------------------------------------------.012
Beet sugar -------------- ------------------------------------------.010
Brick ----------------------------------------------------------- 08
Primary aluminum ------------------------------------------------.007
Cement, hydraulic -------------------------------------------------. 006
Lime ------------------------------------------------------------.004
1 KWH equivalents are used where relevant.
2 .. 5~Census of Manufacturers. 1967, (cited in letter from Dr. John Wilson to Dwayne
Chapman, Jan. 16, 1974). Invented by writer.

It only re0111s. a little inmagiiation to se, what these facts impVly
t t substitution. We can change the consumption mix.
u-insz W of ;: r o,,rce" and capital-intensive things, and modifying
all p1- t 1. In ,dition we can modify the processes we use to produce
any given thing. Among other evidence. years of research at Resources
for the FutLure, Inc., has demonstrated the high elasticity of factor
substitution wlen the process and the product are both treated as

s Field labor may also be used to su stitute for offsite labor, as when field labor reduces
needs for buying mlacbinery or pesticides, herbicides, chemical fertilizers, water, etc., with
constant yields The pin heire is that higher yields are the raw material for further labor
in packing, sorting, storing, moving, distributing, exchanging, retailing, preparing, serving,
and disposing of residuals.
William Shrader and N. Landgren, "Land Use Implications of Agricultural Production
Potential," in L. Fischer, ed., Shifts in Land Use. Nebraska Agricultural Economics Service
1 '4.


variables.' But most of us need only review our own consmipltioll his-
tory to have all the evidence we iwed of ]liow we cani an (1o ijio(lifv
resource demands in response to relative inmut costs and to income and
wealth. Some housing is land-intensive Beverly tills makes a crood
example. Some is capital-intensive. like a new liash-rise. Mostold 1ous-
ing becomes labor-intensive as costs of operation and upkeep rise to
eat up most of the cash flow or service flow. So even in the, prodIuction
of something as universal and basic as shelter there are no fixed re-
source coefficients but a wide range of choices.
Another important variable is size of firm. .F. S'}iunacher has
struck a responsive chord with "Small is Beautiful." Schumacher's
theme is that smaller firms are more labor-intensive. Although size is
only one factor involved, the data ear him out. The use of labor per
unit of property tends to decline with increasingr size of firm. For ex-
ample, the U.S. Census of AQriculture, ranks farms by gross sales.
"Class I" farms, those grossing' 9 825,000 or more per year., had 2.2 per-
cent of the land in farms but only 7 percent of the labor in 19.50. The
application of labor to property on this pattern may be styled "regres-
sive," a term I will use.
Turning to "industrial' corporations. the regressive use of labor on
property may be inferred from data in Fortune magazine's yearly
report on the largest 300. I tested the thesis by ranking them by "net
Profit after
Net worth 2 taxes Employees Profits per
Group (millions) (millions) (thousands) employee
Top 10-------------------------- $40,090 $5,470 1,662 $3,291
All 500-133, 660 14, 839 9, 966 1,489
Lowest 10 ---------------------------------- 116 8.826 29.687 297
1 See appendix.
2 Capital stock, surplus, and retained earnings. "Fortune" uses net worth and invested capital interchangeably. Their
data on gross worth are labelled "assets".
Source: Calculated from data in "The Fortune Directory", (New York: August 1964).
Turning to "industrial" corporations, the recressiv e use of labor on
property may be inferred from data in Fortune magazine's yearly
report on the largest 500. I tested the thesis by ranking them by "net
worth," and calculating profits (after taxes) per employee. Table 3
shows the broad results. The choice of profits/employee to test the case
is premised on the proposition that profits in general are the realized
earnings of and some index of the owned assets of a firm. In fact., if the
larger firms use their property less intensively (as this and other evi-
dence suggest) then their realized profits as an index understate the
assets of larger firms compared to smaller ones.
It seems likely from this that smaller business characteristically
combines property with more labor than big business, whether by its
choice of products or processes (and in fact both). As we modify con-
sumption mixes and products and processes we can also modify finll
sizes. For increasing labor-intensity, small is beautiful indeed.
5 Allen V. Knease and Blair Bower, Managing Water Quality (Baltimore: The Johns
Hopkins Press. 1968) ; Allen V. Kneese, Robert U. Ayres, and Ralph C. D'Arge, Economics
and the Environment (Baltimore: The Johns Hopkins Press, 1970).


Blut how about prodluctivitv and eficienc v.? Is not maxinmm output
r worke, tile go1 1 of ( oltoeC organ izatloll and the index of suc-
No. it is lot. Ma iv ('t)nolists have for decades now seriously
l i-led( theiiselsees al(d othlers 1 v speaking loosely of "prodluctivity" as
(mtl lt p 1er worker, even t ioHgh their own elementary theory text-
I k',,l< t :1 iifit 1)ettPV. I )et~iini effieien'Y as output per worker is a p
A'e k,*1<1, (1pt with i a 1)lilt-ili 11)ias aoaillst employment. ( )nly recently
wvitIl ,lf'w s tillis of eIlergy-eficielv amid more sophisticated ones of
"tot:ll fattor p)I(tllV.tivith" is most economic discourse (in my obsera-
tion ) teginninz to e -cape this single-ininded pre)cculpation with econ-
Otl~~li n labor-."
sill)titiii itti iiiallh.1n a il 1,,t I exeessi "el v for labor raises "eficiency"
only. 1bv. wntilr ('alital ani land aid employed labor, and only
seems efficient in unrealistic ilvodels where land and capital are under-
pliced and ulneilllplol low land-eiciency anld low cal)ital-effi('iency, either directly or at one
r',Iove iin the rot-ii of low energv-efficiency, low water-efficiency, low
feed-grrain eflieeuiy, etc. Capital is not free-saving is a sacific,
to(). L, 'Ol is (ot free to a naztion-past anld present military outlaws
attest to that. An(d iunemployment is not to he confused with voluntary
leis,1re. rie time nwil talent of the unhappy idle is wasted and worse,
use(1l to make trouble for others.
Misled by tle goal of labor "productivity" we have exalted high
outl)lit ler ,lall elipl,)yed as a syltII)l and ineaure of economic per-
foriainee. am]d accepted an extreme substitution of capital and
re. oIrcIVs for labor. The well-kiown displacement of farm labor is not
anl exceptio but more like ti e rule. John Kendrick calculated that
thie ratio of (al)ittal to lal}r for a large group of industries in the
'llited States rose at an average, annual rate of 1.3 percent from
1899-1.5:3. That means a 100 percent increase over that 54-year period.
AMore recently. thle lVnited States I)epartment of Commerce studied
nolfiihanciial] corloratiolls. 19-18-1971. It found capital inputs grow-
ing at 4 percent yearly compo ded and labor at 1.2 percent. That
nieal~lS there \vIs 2.. tines aIs niudheallital in 1971, with 1.3 times as
1-111 1i labor, oir 1.9 tinies as mucil capital p1er worker in 1971. Thus the
rate of substitutioil secivis to be increasing.
And that's not really the half of it. These studies omitted the public
seetol, the infrastructure into which we have poured( so much public
treasure at low interest rates. They omitted housing, which soaks up
so mulch capital per. job created. They omitted the recreation boom
which requires so n(ch more land and equipment per consumer hour,
and per iieas,-e ot personal joy, than the quiet pleasures of yester-
year. And tley omit flhe swing of consumers toward goods and serv-
ices like electric power and natural gas whose production is capital-
intensive, and whose prices fall relative to labor-intensive products
wihen the capital input is subsidized. Producers as well as consumers
use much more of these as inputs. A primary metal like aluminm will
Predictably, the energy (,rlsis produced a crop of energy fundamentalists who would
measure all values in energy and economize only on energy. Their work is not worth citing
here. There is some sophisticated work by E. R. Berndt and D. 0. Wood. "Technology.
Prices. and the Derived Demand for Energy." Rev. of Ecs. and Stat., August, 1975. 259-65.
See ilso the JorgeMsoII-Hudson Report cited In Busincss Week, June 1. 1974. 69-70.
7 John Kendrick. Productivity Trends in the U.S. (Princeton : Princeton University Press,
19611 pp. 14.-149. Tible 39.
f Cited in "The Push to get More from Men and Machines" Business Week, Sept. 9, 1972,
pp. S0)-S1.


(4mi15llil1 1,3.5 !{xv per (4la ol jjj-a~(d coI *-il'eI (IiImrih 14) 10-2 11 Iti
rlor-m111 1-lanllifact'(lii) Opl'ztio,). It is and '- 'ii'~ l 1111. 1 r ves
oly oil underipliced( ,ll(eigy, thanks to XVhichi it rl,'8, i'elalie bi)
eiw, rvy feel l.b1)r)A 1!(1 !'"
4Th111einuz materialls. Fol. vear- we havd})1el sll)4t II 118( fa it'I,
eI1R'T"V to 41 labor anid (cal i !1 it pr)Io 1Th--: 1(fI (ilit-wlciv. ()Ill\- to lijid
that cal)ital andlhl e .l1i A!0 :1 r >l -('.. 8*11(1 al-l)wIiL. IThe ioile of
true ovfieienvv ()Vi) I to> w-(, ivJ il-I x\ i 1 -,we 8(1 (i ire of
what is 5i1Pl)l.
Tlire is f 1011:r. it inte1r1iiitltei. tia, lil if)I. wit )i v.iV iw overtolw-.
that has su)er-maclIiiies pi'& V4 ned to crowd out people an! make
haboi) obsolete. Karl \larUx 1) llmher-eofl5u1111)ti()niSl)l oi IoeVf'e all a,,81 th i' vY'llVs after i) tei
beat generation of tie ixtics. In tl i sct-lj8i riti a'ilti-Puri(a etlic
c lledci for- which dio wn gradeIs W( )Vk w id apollwo. ) '01I li) 41
and le isurye. IRobert I'lleo)ha8i, I) )laJ(1 Ii c i e'l a 11 W. If. I",',-'v wer,(e
among tile sp)kesmen. "'( Vlernitio 1: 118? Silent Conquest 10 '81
compellingly to s1cience-fiction buti s. The itnsidious Sulei'*- aill(s
have already taken us from witiit ; better relax am I elljoy it.
While formal statl,'i Ilent s of this |msitiol lave not fared ve il well.
the undercurrents are everywhere and keel) breaking throtio and
affecting" the thinking" of imiiv. It seethns to take sonitetlhiiu" st11 ki.r
like the energy ci)isis. the calt)ial si oitao'e. or wi(lesl)ead 1ami)c- to
drive this vision, away. TLe cieine-fi,,tion w( vld of su!)er-c VI)e)' ( ati,
is eer.'v-intels V. ca)i fal- inteii- ive. 8 id colI iter-ecoioaica1. >%,w
that these shocks of resoi i'Ve -8 r'it V have o({-11'ri',,d it is o1)viw0,' vet
sH I wortl underscorin(, that there as ) ie('!n ob )iu.a i lj)e1nit'ive
Compelli ug pi-ogre.-ozs alwaYs to 4111)4titute capital and )'(,sources ,,r
1al)or. It depends on relative firwtor (,)bl(lan(e anl costs nmow as 1
always has land will. IP)'oper c'z-1i e an(d coniServatio)n of thl, ea Ptl :ii (i
of our treasure of cal)ital will awy call for the Ili]] of
human effort.

I ( whole 1))lro)lef. iP o)1e view. is thbat ulio1-: ove'plrice thielr lalm)O
and minimi Iii) wage laws o(veI'i('i, Io)l-unio1 laIbjol. Welfare c'he(qiie
silbsidize the holdout of lalcr. imtng milloeij iO eit half volni ut v.
The muarktt soluitionu is n iee labor. rhet wIIre Avle atev, ilro0)
to an equililrii ) int)irket-il(a)'ngr level. Ili. woil(I cause enp~ove,-
to suilptitute lal)or !Fo' ('a)ifi8 an d land. (1kin" i1l) tHie ll)w1l')loVel.
Ihere is ('nol0) tri1tl i inl tlaIt oiie-4iil( view of thillo'S so we ("anin )t
lamyh it off. So 11amy eV ono ists arv constnti v llakinl tllii par ticuWlar
ease however, t11at I will not Suil)el-en )' ate. Whiat i*.. nee(ded i's raflt 1er
to temliper and h)alan(ce. ,le evils of hi,i. ratclietin. wa'e r-ates are
ConveltionialIv ()vestevsse(d r'el;tive to (4lie, kinds of instit litiolial
bias that blo(:k t]te use of more labor. If we list took out tlwe!e (ther
bia sis we c.o)ild l)p'(w)'eed wit(811 1iai(.- at 'ail ,t union n!1 s)s. Vedi (l
with no(re rigliteoiisis, ,11"(1 e withi 1110,0 (.W-I4l>(,)u1cv tliaii 10(lay.
If we ,oiulil (.'et e !I stVongZ ('elinlle fIol.1,8 i'(I )l l!)(Or.'lIl)or woil',!
enjoy ne(le( s,'d))'i\v without ]havii' I) ,)slbfljit Ow)(IIe Itliwelc())l1e Vt,-
strain ts alltl (] l l ltei)r()llct ive mule' i ) -edt l)v ))1(i\- ulion1- .
TIh tax sstei add.s, to the cozf of liil'il1' labor m'l:tive to the (coit
of usi)1" la. 1:d a'1i u l. H 1>S. >orwial secii'ity payroll tax in' 1975


a,$ billion, a sixfold increase since 1960. and 25 percent of all
federal receipts. The personal ineonle tax raised S128 billion, or
44 percent of receipts. But the personal income tax has become pri-
1-n ai ly another payroll tax. thanks to generous loopholes for property
income and mggtardlv ones for wage income. To the large federal
exactions we niust add substantial sums taken by state income taxes.
These taxes are a big factor, obviously, in overpricing labor. This
part of the price is not exacted by labor but by the Treasury. It is hard
to study the tax code without inferring that legislators regard giving
and receiving work to be some kind of public nuisance, to be penalized
and suppressed by all means not inconsistent with the rights of
The employee finally gets his take-home pay in cash. To convert
cash to real values, however, he is taxed again on retail sales. Many
kinds of property income, on the other hand, avoid or defer sales
taxes-a good example is the imputed income from residential and
recreational property.
When it comes to holding land, the tax system presents a smiling
and sympathetic face. The income tax code is geared to share the
costs and ma mify the rewards. I have treated this matter in an earlier
submission to this Committee. The basic preferences for land may be
summarized as follows:
1. Covert write-off of undepreciated and appreciated land value
(as by allocating part of it to an old building) ;
2. Exemptions of imputed income of homes and resorts, coupled
with deduction of interest and property taxes; exemptions of
unrealized appreciation; of gain at death; of bequests; of gain
realized by "non-profit" owners;
3. Deferral of tax on gain until realized by sale, coupled with
expensing of carryin( costs;
4. Ca ital gains exemption for realized gains, coupled with
ordin ry offset of holding costs and (some) losses;
5. Possible further deferral of tax beyond date of sale; and
6. Deferral of land-use income where there is intertemporal
interdependence of income.
The result of all that is a highly inflated incentive to buy more land
than under a neutral tax system, sooner, and to hang onto it longer.
This in turn results in spreading people and capital out thin over much
more land than otherwise needed. And the last, finally, necessitates
pumping billions of dollars of capital into stretched-out roads, pipes,
lines, wires, and other linkages that tie the fragile web of society and
economy together. Localities attract large capital resources to sink
into extensions of low productivity, high risk, and deferred or imag-
ined benefits by mortgaging the tax power to general obligation bonds.
State and federal governments pour in additional capital, as by the
highway trust fund. None of this public capital is subject to any
property tax, and he would be an eccentric public accountant who
added a shadow tax to the capital to show its real social cost. Thus the
substitution of land for labor converts itself into an inflated demand
for roads and utilities, all of which are highly capital-intensive. Net
result: substituting land for labor on private land causes substitution
of capital for labor as well.
9 Economic Analysis and the Efficiency of Government, 1970, pp. 405-15.


Tliirning to the tax treatment of capital. it, too colles off well com-
pared to labor. A major exception to this i liut seell to b til1 roj''rt yV
tax. but the appearance is deceivin.. To begin, half or lore of all cap-
ital is either exempt or else underassessed and undertaxed. Iublic capi-
tal is exempt. Timber is preferentially underassessed. Most cattle and
nmbile capital are exempt ; many juri'sdictions exempt inachincery and
equipment; and so on.
Buildings bear most of the property tax. This would seen to con-
stitute a bias against use of capital, and it certainly is a bias against
improving land. But the effect on the individual biulding is Ve:r (l
because the property tax is levied locally and local goveneinent s use
zoning and other controls to protect anl fortify their tax }ase5. Tle
thrust of local zoning, buildin- codes, subdivision controls, 0ccillancy
limits, condemnation power. and "sewer power" is to raise tho capital
requirements of residing ia town. The net result is doubly bad. We
gVet more sprawl. raising infrastructure capital needs, and more cap-
ital per dwelling unit on the land that is used.
Turning to the income tax. it contains many loopholes and abate-
ments for capital, and these generally are geared to favor capital of
longer life. (We will be seeing that longer life is identical with greater
capital-intensiveness.) I have treated this matter at length elsewhere,'
and will merely summarize my position here. It is useful to distin-
guish growing capital like cattle, which yield a lump of value at end of
life. from "flowing" capital like machines which yield a flow of cash
or service over life.
Flowing capital receives the following preferences:
Fast write-off and expensing of outlays for durable capital:
Double-depreciation of capital when resold, inadequately offset
by capital gains treatment of recapture;
Exemption of imputed income of consumer capital;
Expensing of interest and property tax; and
Investment tax credit.
In addition the abatements are biased among forms of capital, favor-
inig" the longer-lived. Capital turning over in less than a year is treated
harshly. Cost and recovery are reported on the same tax return-
there is no interest-free loan from the Treasury, as durable capital en-
joys when it gets a fast write-off. There is no gain in straddling the
yearends, either, deducting costs in one year and declarincr income a
year later. The I.R.S. guards against this by ruling that the cost of
goods not sold is not deductible at all.
Growing capital is treated even better. The basic prefereuce is de-
ferral of tax to date of sale. Congress couples this with a igh pro-
pensity to grant the expensing privilege to outlays for growing capi-
tal. A farmer for example may expense outlays that actually go into
or are part of a final salable product : feed, seed., stud fees, costs of rais-
ing livestock, and starting orchards and vineyards. I[e may not expense
machinery and 1)uildiing il+iapovenents. In either case he writes wif
interest and any property taxes in the year paid, regardless of deferral
of tax liability.
The result of this sort of tax bias is a set of false price signals I,,-
cast in the factor markets. The siuipals overprice labor and underprice
10 M. Gaffney, "Toward Full Employment with Limited Land and Capital" In Arthur
Lynn, Jr. (ed.). Property Taxation, Land Use and Public Policy (Madison: Univ. of Wis-
consin Press, 1975), pp. 99-166, at pp. 128-136. These pages are submitted as App. 1.

0 6

l r' 'pev~ty. lle si 'n~l~ i i e respond to a shor age of labor when in
fart 't tie~re, is ailt. and Cn-t t' (apital and land when we should be

I i* t iX Were t wlle e'/1 ii/t itllti()li to) fav or wea1h over labor we
coli1 say it II" o'fet )tler 1 ias. Blit ill lart there are reinfore "iff
1 )ia~e>, wii h will nlerely list: sill)s(ties which take the form of
loali at Ilow laIt es of interest. uchli u-t ati 1il-1in loans wade or insured by
the Ianlolly of I4'ederail ll(i0silO ageliCleS the capital-intensive bias
thIat is inhlierent ill allowing re, ulated in(llisft'ies a rate of return based
on their total ilivested capital regar( of low narinal produtiv-
ity (this is called t]le Ave'vh-Johnsoii Eil'ert) licensing laws for the
disposal of natillra1 re oiirces which impose heavy cap tal or front-
!)i(iUVl" ?'00lti; (enieO)l fo I exainjule. wcSiI water laws which often in
ell'cud divide te il proportion to the diversionn capacity of rival
aI)l)ropriators, and fisli r bag limits which are in proportion to num-
hers of boats: use of low interest rates in planning public works; ig-
1ni'0 oplportinity costs of public land; loirolling., overcommitIent,
an1d reslltinc stretchout, of public works: the Flighway Trust Fund;
t lh,, fiiiire to 1 ro)vie a lnv ie or ) Pii t ii r-eniforeed al)atenent
of pollut ion, leaving the citizen no recourse but the larger lot, farther
outt: and the l)riee-unmlrella effect that builds excess capacity into car-
tels. There are niore, and I know of no comparable set of biases favor-
in,, inputs of labor.
All riht, so efficiency as well as f ill employment call for increasing
Sll(l ]!)orCOO ,efticien.1 of Land and capital. How do we do that? Anyone
(%i 1-41e XWat it ols ) s ol-e workers per (acre-no problem there.
AII ()0I1( ('11r' CmiO, too. wllt it ineanis to lise more men. per crew. or use
1i,() 11, i .lil 'i oNvel ltaut, Il adhll"Iy ,l equil)nent. Ah, it should
be B pii. wo flil lni th IV(td!.('> ( til tIt, niiachillerv and equip-
lel; ...... "il i i 'i( ';'w Ti ere is f he problein. Capital is stored-u p
1 l I) 1. I fwI e 1i1',e 0P(' i) I a! 1' c)'r t wiworker, are we ntot jitst sub-
st iltiti" lab2ror fr ,I! oi ("IV I is t!l'c di feren(ce -Nwlhere the net gain of
j o!bs
Shop A may equip each of its workers with a smaller or less sophis-
ticated machine, and use more workers. Then Shop B, which produces
the maclmes, needs fewer workers. And Shop A itself may produce
(eilerit Ilttie (al)ital for Shops C, D, . Z, capital whose obviation
would close Shop A. It is tempting to gloss over all that by saying
if every shop and farm, mn~ill and mine, office and store, firn and
agency, ganc and crew, squad and corps, family and kitchen. all up
and down the line from the earth to the mouth just used less capital
per worker it would all work out. Maybe it would, but maybe is not
good enough. If we hadn't enough doubts of our own, modern macro-
economics which dominates this field would force us to analyze how
capital formation makes jobs.
Modern macro-economics has made much of the fact that labor finds
work producing capital, only with the emphasis on the obverse: invest-
ment employs labor (to produce capital, of course). Indeed it goes
much farther. Investment not only makes sonie jobs, it is a prime
mover, a First Cause that moves independently and exerts enormous
leveragre over other inconie-creating flows, which respond dependently.


There is a mechanical relation such that aggregate incoilie rises all
falls by multiples of changes in in'Vest, mlit. iic1li is tihe S 1ill of which
macro-econIonie models are built. Ilivest iiient is i, iore iiiportalita Ian
other flows of e(pial value lbecae it is aiitolloiiiis aill (t(etelili~ l,
they are reactive and deterniinate. it is fickle alld mu11st b'e wo(woi,
they tag' along and may be sliglited. The key to fill eliiploylielit is
finding investment opp)ort11ities andol omit1cs to absol', ilie flw of
savings. In such a model, reducing cal)lal ('-etcieitst itiake jo)ns
is dangerous and self-defeating.
Right or wrong, the orthodox iiac ro-econoiiic ll(alel all1 par (1ii1, ,
in whose grooves and patterns iiiost thiotiught ba> 1ecoj.-e cli1 ai l.d,
is vertically integrated. The emphasis is oil iiivestiiient eiiilI, )iii
labor, not on the capital coefficient at a g-iven tiiie. It >e( lie relati (1
of capital and labor in sequience, rather than in pa ral lel : I .lo ro' -
ducing capital, rather than using it or completing against it. Thlis
perception is far too dominant to lie inonored or b)ruI'lied aside. I' we
would give and receive signals in ilacro-e(oioi1(,s we ,iiisf make Ithe
same switch, and think vertically. Whiat is the relatioIslip 1 between
labor and the capital which it produces? What (oes it iitean to ,,ve
less capital per worker? How do we accomplish it?
The quantity of labor input, worker-tours. is a prodi('t of workers
and time. Similarly the capital input is a product of capital and tilie,
say "dollar-fears." Although capital takes amany forms as IrA Ina.
the basic idea or transcendental essence is simple enogl': capital is
something of value produced but not yet fully consumed by uIser-s
and recovered by investors. The nore years elapse between proIdiieti m
and recovery the more dollar-Vears of service are reiidered by capital.
Unrecovered capital is said to be "tied-p" or in service."
How to use less dollar-years of capital per worker is now evi(Jnt :
recr(r it fa,, ef. We cant cut (Iown on the dollars: they have I) c(,(ver
the payroll. We can cut down the dollar-years of cal)ital combined
with payroll by cutting down the years. We acconi)lislh tile coal of
reducing capital coefficients by inodif ing the capital steck s) capital
returns home faster to the investorr1 11w capii.l inancu n e: roll is tied up a shorter time with it. The short phr,'ase for it i V. jiihe
capital that turns over faster.
At the same time we can use Ia roer crews to ope-rate anol iwaii(a i(i
each plant of given value, wbich is tile horizontally inelitaied 'e -
ception of substituting labor for capital. In pucre l10-ic tis 'QW)Hd
idea is implied by the first. but there is no harm In ta1110. 1- p I)a-
rately (so long as we don't later lead ourselves into .ouble coin i COM '
The idea is to shorten the pipeline between world. a, ,d se.It i: iove
labor downstream closer to the contuimer. That iinl)lies, at ,'very step.
using more warm labor with the frozen labor in iachlines, 1ma :,r" .
plant and equipment.
Take as an example farm machinery. A farner su)stitiites l-l or
for capital when he invests in a lighter che]aper utae'meth:t ieftrus
its cost to him in fewer years. Ie is reducini" the (oll(ar-vea, rs of his
In addition, often capital Income goes inumid. Then it Is plowed lNck an( 1e
additional capital which claims compound interest. In this case the caplial inp ,riw
more than in proportion to time. All the newled mathematics has been worked out for Oeii-
turies and may be found In any ItP-80.
12 Fast tax write-off Is a travesty of this principle that does not aecomplitq the social end.
Fast write-off lets the private investor recover hi. ca pital faster only by his gettin_ an id-
vance from the Treasury. i.e. from other taxpayers. True capital recovery only occurs when
ripe goods are delivered to consumers. thus unlocking the value stored up in the goods.


capital which he combined with the factory labor in the machine.
In addition lie can use more field labor, and fewer, smaller machines,
Now hie is substituting field labor for factory labor. But the field
labor is a step nearer the consumer, obviating the investment of capital
in farm machines (and all the capital required to produce steel, fuel,
rubber, paint and other machine inputs and components). Moving
labor downstream reduces capital needs.
Lowering the capital coefficient per worker is, to many people, a
structural or allocative question, in a box called "micro economics."
But when we understand it from the vertically integrated viewpoint
it becomes a macro-economic effect of the most central kind. Turn-
over means sale and reinvestment. Sale means supply to consumers;
reinvestment means payrolls and incomes. Added supply prevents
inflation, added payrolls mean more jobs.
"Capital is kept in existence from age to age not by preservation
but by perpetual reproduction" (J. S. Mill). tabor consumes capital
in return for reproducing capital. The flow of payback from capital
sold as goods and services is reinvested continually in payrolls in a
steady ongoing process, to create new capital. Investment makes pay-
rolls, but most investment is reinvestment, the recycling of past ac-
cumulations. The faster capital recycles, the greater is the flow of
labor putting value into the pool of capital, and volume of goods and
services flowing out. Faster recycling is capital "quickening." The
quicker the capital, the higher rises the flow-to-fund ratio. That means
the more employment and production are financed with any given
fund of capital, so long as there is idle labor to soak up.
That leads to a major proposition: "Turnover limits national in-
come." Otherwise put, "Paybacks deferred are payrolls denied."
Capital that investors recover quickly is "quick capital." Quicker
capital flows through and delivers value to consumers sooner. Sales
mean payback. Payback means money recovered to finance new pay-
rolls. Payrolls mean aggregate demand to match the added sales. It
all balances out, but at a higher volume.
Some examples of slow capital are the following. Timber may tie
up capital for over 100 years before there is any payout (although
tHe cuttini cycle is highly variable and can be greatly shortened).
Subeconomic highway extensions never pay out, either in cash or any
other way-non-recovery is the slowest of all, of course. Housing may
not pay out completely for fifty years, varying with particulars, (but
unlike timber it begins to pay out from an early date). Minerals' pros-
pecting gets years ahead of payout. And so on.
To quicken a nation's capital we need reduce such uses and put
more into other goods and services like the following: retail inven-
tories and well-trained clerks: monitoring, measuring and schedul-
irg equipment to get more use out of heavy capital items-, swing and
.raveyarl shifts ; maintenance, operating and repair personnel ; grow-
ing crops: bus service; retraining programs; craftsmanship: personal
service: home delivery; cleanup, collection and recycling; rehabilitat-
inr and romodelinq sound old buildings; conserving water and energy
in lieu of developing more; and so on.
Investment employs labor, yes. But almost all of gross investment
is reinvestment of funds recovered from turnover and amortization
of existing capital, (including inventories). There is no imperative
that says we must accelerate the growth of capital coefficients in


order to sustain the flow of incoine-creating investment. Reilve4't-
ment does just as well, and is much more weighty overall.
Net investment and savings each year are a small fraction of tot:il
income-creating spending, well under 10 percent (and not really
known precisely when you look at the (l a, sources). The liI:as-i e
bulk of income-creating spendin,, has to 1be reinvestment of t bind
recaptured from sales to consumers. A terribly careless and mni.lea !-
ing convention obtains of treating short investments of under one
year as non-investment, and limiting the word to long er lI,,e' assets,
but this convention has no intellectual substance -Md is not used lieie.
The nation's total capital stock is a Great Rkev solving Fun(. la Im(l
whose value is variously (and imperf'ectly) estimated to be around
three times national output. A slig-ht percentage increase in the ro-
tation of this enormous mass of real value will have major effects.
XWe need not make an issue whether capital turnover or caliial for-
mation is preferable, for they are not alternatives: we can raise I)otis,
so long as there is more labor to employ. But raising turnover is ]".1l(cl
the more potent.
The upshot is that the process of substituting labor for capital
creates the very macro-economic flows required to employ the extra
labor. Micro- and macro- are unified. Solve the probleni one way and
we solve it the other way in the same stroke. Circulate capital faster,
thus matching the given fund of capital with more labor, and g)en-
erating added investment flows to hire it. One wants to shout such
goods news in the forum.
Macro-economics is a quest for the bottlenecks of the economy-
what keeps us from employing everyone? Turnover is clearly a po-
tential bottleneck. One firm can invest in excess of capital recover.
but only by tapping others. An economy cannot tap others. It is a
closed system with a zero sum of capital transfers. The only source
of investment funds other than capital recovery is net savio,, but
net saving is very small next to capital recovery. Essentially labor
finds work pouring value into the pool of capital, and sustenance
taking it out again. The flow through the pool is virtually the na-
tional income (less a few fringes small enough to leave as secondary
matters). The flow is capital (K) times its turnover (T) or K X T.
Dominant macro-economists have not much inquired into the role
of restricted turnover as a bottleneck. Tleir focus has been on an-
other possible bottleneck which is the recycling of money. Capital was
pictured (if one thought of it at all) as a pile of finished goods seek-
ing buyers, always ready for delivery, only wanting the tri-,,ger of
consumer spending to release the flow. Spen{ding controlled tiniiiover.
so much so that one need never think it had other Controls. miuch
less be a prime mover, as it is, which itself control spending. The
prevailing tendency is to bury the question by inmplicitly assuiinicr
automatic replacement of goods and service flows coiisumed, so in
macro-economic models "Consumltion' Creates income.
The question rarely arises explicitly because if it does the answer
is built hito the assumptions and would run like this. The cycle of
spending has a fatal tendency to run down because e of an excessive
propensity to save from income, higher than there are investmeiit out-


jets to absorb. 11he ploblenl is al ways to find outlets which are scarce
:tli(l to be trear-ired. 'Tihe goal of policy is to increase investment op-
P)n, initics (a b) tyax loopholes for investors. oP l)Ul)liC works). lie-
co',veli ii fundI fron sale of goo(ls a(IS to gross savig1 lit saving,
11"I or j41Os. is not a limit oil ant olnomouls invest etiltit. There is always
a C co1- iIIes cornuco)ia of funds available to IIIvest3 Soss saving
j11t als to the probleil-Iore leakae froil tle spenling streamn
t!It li:is to lbe offset by using tihe I rThUio a rae investment outlets.
()n the positive side, il the Keynesian picture. sale of goods leaves
an emnpty slot to refill, and tis is all investment outlet. To the pes-
sillit, however. this is uncertain, since there is an exess of goods
a'vwav n. On11 ie ro sain is certain. It is pIreferal)le to seIuester
ii very lhld, heavy. remote (roods from which the i)ayback is
stow. 1)eliverv to (0oibllners is also slow, but there is an excess of
groo(1s seekiw sale anyway so that is no Ilroblein. On tite contrary,
deferring deliveries helps offset the basic depressing imperative of
011' "int econo(nmy to sink into iiilolbi(l deflation land choke on its
own sll Plus of final goods wanting buyers.
Ialppily, we can now discard the idea that spending or recycling
follnev is a )ottlelieel, lmit inty national income. It does not at all
square with the facts today, if it ever did. Instead of running down,
t1w turnover of demand deposits has risen rapidly for many years
,ow, even as tle money supply does. and l)anks press on their re-
Serve r equireiiints to meet the demand for loans. Instead of a fatal
dePat ioiarv ipnl)erative, there have ben years of violent inflation
which failed to solve the fatal unenplovment problem. New Econ-
oinists have mastered all too well the arts of creating and spend-
inor money. Delivering the goods is- where they fail, and it is real
goods ready to consume that turn play money into real money.
Instead of a glut of loanable funds and a shortage of investment
outlets there is a capital shortage. Instead of a glut of goods there
are shortages, an energy crisis, materials scarcities, limited selections
in inventory, delivery delays, islands of famine and fears of world
hunger. Labor may be in long supply. Money undoubtedly is. It is
land, materials, commodities and investment funds that are short.
There is no need to trump tip investment outlets. The true benefit
of fast turnover is not the decay of capital. not the drawing down of
stocks, not the creation of enl)ty niches for new investment to refill.
Planned obsolescence is not a macro-economic benefit. The true benefit
of fast turnover is the (lelivery of value to consumers and the recovery
and rec el~inr of capital by investors. The gain is not from wasting,
as implied in Keyiesian models; the gain is in saving capital, by
iintying it quicker.
I7nhappily, the concerns that prevailed when the twig of the New
Economics was bent are built into its axioms, laws, models, circuitry
and conditioned reflexes. In addition they drew upon deep springs
in the cultural sllbconscious. "New" Econonics was always a mislead-
in! name. It was mo e of a rression. . "There is not an opinion
more general ahllong mankind than this, that the unproductive ex-
1)en(liture of the rich is necessary to the employment of the poor.
Before Adam S~niith the doctrine had hardly been questioned; . if
'13There Is a backing away from the infinite liquidity trap In current neo-Keynestan ortho-
doxy, but primarily at the textbook level. In my observation it is the operating assumption
in practice.

C(onsillnels's wele to save . tle ext r: acct11iill Poii xvoild be merely
so Inlch waste. sifoe 1 here' w(li be 1)0 141:J1ket for the ,orm-
niodities . ( J. S. Mill). Now evervt iII)) is (1it11er-ent b11t tills nmde
of thinking which pivaiXiils at tile tt)> oil' le e.oilonlics profession anl
leads us ever deeper iit o error am! 1I iib)e. 01)1 IV imow it is the unp)o-
ductive consliiiiition of tile InilitaIv aml lte wti lfare (epeiliteuits Oil
which we rely. "Every cit-)ack of a 010lia iII (lefelse will (lit two
dollar-s fr-om overall (TP :"I ad (Iur8 (1,MW)) a lot ()1 jobs ." is the
statement of Lawrence Kleiii.'+ Heporter Ernest \oIknian quotes oneO
Pentagon budget expei't, .. at least 2) p)ercIjit of this budget
aInioints to a federal w()Ik-l ief t )v'5( ailli to st iiliiilate tie ecoi1oillv.
I)efen.se (oltracts, especially tle bi; s O1II- I't ye alle, i, ilninense ripple ef-
fect." Ironic, is it, not, tthat the study of economics, that iligardly art
of seriluping with 1iimited reso~itrees inverts so easily into an exaltation
of the God of Waste. Military waste is tlie last refit e of a bankrupt
philosophy. We must (to bet er--almn we can. We can (to it I) I-hliziif
it is the real circitlation of real cal)ital, not t.le regulation n of play
money that makes the big wheel turn.
New Economists have sharply attacked, rejected and eveii ridiculed
the optimistic J. B. Stay for p)roclailiniig( that there can be no generala l
overproduction because "Supp ly creates its own deniand." Yet today
supply seems to do that and then sone. Today one often hears a con-
cern lest increased payrolls iist cause inflation. -hether they do
depends on where the money.NV colites from. If it, is new money wh yes,
of course. But when the added flow of Dix estible f nds has its source
in deliverv of finished aoods to buyers thlii no. of course not. There
is a matching added flow of spl)Iy to aliswer tile adde(l enland.
Supply and demand still meet bill at hi/fief voim'luge. Added flows are
synchronized at both e ids of tle )ipeline. Tie pipeline itself in this
iietaplor is shiortene(l to spevI till th roi iJllit and wvi(leIed to carry
niore volume.
Keynesian pessinismni sees sulp)ly overwheihniii" deiniand. Infla-
tionary pessimism sees deniand overwhelm supply. A confirmed
pessinist sees both calamities at oewe, iid flie 'e are those who do. Yet
each calamity is the counterpart to an s( ution of the other. Calainitv
results from neither, but fronl iestri(t ive and t)rakcjl1 piolieies of other
kinds adopted or tolerated by pessimists who l)clievX or proclaim tliat
they must forestall these imiiained problems>. liese are the real niacro-
economic bottlenecks, the real limits to growth.

There is a fatalistic notion alroa(l that Ii idI el1lnplovyllent has to go
with inflation, either as cause o' etVect. Ihie notion receives hii'h-level
aid and comfort from the doinin'nnt Phillips (urve school of inIarlO-
economists. The foeoing analysis refutes tle idea, but I will re-
capitulate briefly.
iThe idea lm(erlyini (y iiiost iii0delii'i analysis is that s iIendillg
gra duallv leaks out of tlie system int o sax in -s. ( ve1n 1(lelt can raise
elliploymlenit y spendti mi to offset this, injection neQw spend in/ by
borrmino, usually coiple \ witi soiiie nationn of new henand de-
posits. or nmney. Biut wage rates rise before everyone has a job. To
U""The Impacts of cuts In defense spending," Business Week, Jan. 19, 1976, pp. 51-52.


beat this, government must kee) a step aheal by injecting more new
spend ing than expected. Result : inflation.
Now it is true, if government seeks to initiate a real increase of
demand by printing money, inflation results. The present proposal is
dillerent. Increase the flow of investment spending by quickening the
recover of funds from existing capital. The funds are recovered
quicker because the value in the capital is delivered quicker to con-
sumers. Thus the flow of real goods to consumers rises just so as to
match and meet the rise of payrolls. The flow of capital to consumers
is what backs the higher payrolls and prevents inflation.
Nothing is more common than public works spending to make jobs.
This indeed creates payrolls without goods and invites inflation. Public
works soak up a maximum of capital per job created, and yield a
minimum of subsistence to advance to labor for the next job. Public
works to make jobs are one of history's great self-defeating self-
deluding tragic ironies. There is only a one-shot payroll, after which
the capital stops recycling for a long time, often forever. One of the
reat stupidities of all time, surely, was the English effort to relieve
the Irish potato famine of 18415-49 by hiring Irishmen to build roads.
570,000 men, a large fraction of the working population, toiled for the
Board of Works while food prices took off like a bird and while half
the people died of starvation.15 The people needed subsistence for
tomorrow morning, while public policy directed their effort to the
next century.
The potato famine fallacy has never died. Governments still build
monuments and sub-economic works of slow or negative return while
the basic necessities of life rise in price. But a policy of directing
investment into quick capital of fast results would make jobs and hold
down prices at the same time.
Some writers regard materials flow as a limit on growth. They
regard durability very .highly, and fast replacement as inherently
wasteful of materials and of our limited capacity to dispose of wastes.
The proposal to quicken capital is not a proposal to waste materials.
The idea is to shorten investment cycles, so value is shorter in transit
from maker to user. And then must the residuals return to foul the
earth? It is false to presume so. An "investment cycle" is a different
animal from a materials cycle. "Dust Thou art to dust returnest" was
not spoken of the soul. and value is the soul of capital.
There is a world of difference between economic flows snd materials
flows: between economic service life and carcass life. Maintenance,
recycle ing, rehabilitating, remodeling, rebuilding, timber stand im-
provement, retrofitting, veterinary medicine, salvaging, renewing, re-
claiming, scavenging, reassembling, repair, and the like are all invest-
ments that extend the useful lives of old carcasses and slow down
materials thromzhput. But they are investments of fairly short payoff
and economic life, as a rule, that tie up capital and value a short, time
and speed up value throughput. It is possible and indeed normal and
common to anpend many short investment cycles in repairs onto the
tail end of a longer carcass cycle.
Coo1 Woodham-Smnth, The Great Hunger (N ew York: A Signet ook, 1964) pp. I. 7-
1C0. et passim.


I have already noted that the shelter afforded by old houses is labor-
intensive. When you think about it, that says a lot about materials
flows. The old carcass dates 'way back, but the economically valuable
services are more current. Each little outlay for repair, upkeep,
maintenance, cleaning and remodeling is an investment of short life
and fast payback. The advanced age of the old carcass is irrelevant.
Again and again people wrongly assume that shortening investment
cycles means tearing down old buildings and scrapping old cars. It is
the other way around.
Even outright demolition. scrapping and replacement of a sub-
system often extends the usefulness of the whole, like pulling a sick
tooth. Replace the battery and save the car; replace old buildings and
save a neighborhood and a city. Thus short investment cycles in no
way imply short materials cycles.
There are other examples where the two kinds of cycles do vary
together. But the shorter investment cycle may be less'taxing to the
environment. Many cities short of water have to choose between water
meters to save water, or new dams to develop virgin water. The dams
will outlast the meters, but who now would think the dams were the en-
vironmentally sounder choice? Again, beef takes longer to grow than
turnips, but turnips certainly return vastly more food value per
acre than beef while improving instead of exploiting the soil. And
acain, 12.." by 12" timbers outlast 1" by 1" lumber and particle board
and cardboard and veneer, but should we then high-grade the forests,
leave all the smaller logs on the ground. and burn all the chips? The
more you look at examples, the less tenable is any generalization that
short investment cycles must always increase materials flow and gen-
erate residuals.
Examples may disprove one rule without proving another. It is
clear, though, that as we move labor downstream nearer the consumer,
we need less material overall. Indeed a good deal of labor gets all the
way downstream into service industry requiring no materials at all.
At the other extreme producing raw materials from the earth, espe-
cially heavy ones, is as far from the consumer as you can get, and the
net thrust of policies pushing labor downstream is probably to reduce
materials' use. People have difficulty with abstract ideas and seek
concrete counterparts.
That is understandable enough, but the search must be guided by a
correct grasp of the concept. Equating materials flow and economic
flow is a misapprehension of the concept, a materialistic fallacy. Value
is not just material, it is labor imprinted on material, with labor add-
ing the larger share of value, as a rule. To shorten investment cycles
we must lock and unlock the labor with material quicker by moving
labor downstream. In the work of Mishan, Kneese, Boulding, et al.,
materials flow has been elevated to a major issue; correlated, if not
identified, with economic flows; and made into a limit on growth and
an argument against turnover. It is none of those, and should not
divert us.
The capital requirement of economic growth is not a fund of capital
but a flow of gross investment, a flow that grows with the national
payroll which it finances. The flow is the product of the fund times
its turnover rate. Faced as we are today with massive capital needs


beyond our means, and surplus labor, the way to go is obvious:.speed
up turnover. The price system will do it for us if we stop Jamming its
signals with faulty institutions like bias in taxation.
Fle laud requirement of economic growth is the land we already
have, or less if need be. After we've made two blades of grass grow
where one grew before, we switch over to corn, then vines, then per-
haps food markets. Beware of endless lateral expansion-the world
is round.
Subsidies to tap frontiers make land artificially abundant. This is
supposed to help make outlets for labor, and in some ways does. But
fr ontiering taps new land at the cost of sequestering capital. Frontiers
soak up scarce capital and hold it so it stops cycling and creating pay-
rolls. Abundant land can still be badly used, and centuries of Cau-
casiaii expansion in the new world in a futile flight from unemploy-
mnent have shown frontiers are not enough. Labor doesn't need great
reservoirs of underused land so much as pressure to use the land we
already have, and working capital to help labor use it.
Is itnot retrogressive to reduce the capital used per man? We have
seen that tbat is what quicker turnover implies and" accomplishes. But
we have also seen that progress in technology is to save what is most
scarce, and today this is energy, land and capital. And there is more.
Saving capital has the beautiful by-product of quickening the appli-
cation of progress, because each reinvestment presents a chance to em-
body new ideas in new things. We would not be so far ahead if the
first generations of computers lasted sixty years. In all the furor over
planned obsolescence (a travesty which I do not condone) it is too
easy to forget the fundamental rule that real obsolescence occurs as
fast as people think. I am sure that people think faster, too, when their
thoughts are used.
Finally, what about the distribution of wealth and income? Must
a labor-intensive economy be a coolie economy? Not if we create it the
right way. We can make labor cheaper, not by beating down wages
but by lightening the tax burden on labor. We can make capital dearer
not by raising the income.of capital but by taxing it as heavily as we do
labor. The same holds for land, only that the case is much stronger.
Since labor income is distributed much more evenly than property, the
resiilt is not. a coolie economy but a more egalitarian one than America
has known for a long time. Longfellow dreamed of Acadia:
Neither locks had they to their doors,
nor bars to their windows:
But their dwellings were open as day
and the hearts of the owners;
There the richest was poor, and the
poorest lived in abundance.
The rich need not be poor, we are far beyond this. But it is quite feas-
ible for most of the poor to become working poor, and for the working
poor to live in abundance. We have the capital we need, if we have
the compassion, the vision, and the good sense.
Like any data, these might be massaged a good deal more. In particular I sur-
mise that adding unrealized appreciation to profits would raise the profits per
employee more for the top ten than for the others, since six of the top ten are

oil companies, and all ten are major mineral owners. But this information is
not available.
The lowest ten include one net loser, without which the profts per employee
would be $690 instead of $297. However, negative profts are also relevant, and
there are twelve firms in the 500 with net losses. Most of these are in the lowest
100, so it is representative to find one loser among any group of ten. Therefore
$297 seems more accurate than $690.
Net worth was used for ranking in order to reduce the bias of regression fal-
lacy. (Had I ranked by profits, the top ten would not have changed much but
the lowest ten would have been firms with negative profits.) Although it is only
partly successful in that, the trends shown are strong enough to survive further
Future researchers will want to rank also by gross wealth; by current ap-
praised value of assets; and other suitable measures that add more dimeiisions
to what this line of inquiry reveals. The present data, however, show a relation-
ship so strong and unambiguous it is unlikely to be reversed by modifying details.


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