14. Review of Colin Clark, Growthmanship

14. Review of Colin Clark, Growthmanship

April 4, 1961

Dr. Ivan Bierly

William Volker Fund

Dear Ivan:

To make a proper evaluation of Colin Clark’s Growthmanship,⁶⁷ it is first necessary to go into a little background on the central theme of Clark’s pamphlet: the role of capital investment in economic development. Ludwig Mises has always maintained that the one important item in raising the living standards of the undeveloped countries—the crucial item—is an increase in the quantity of per-capita capital invested, and he has attacked interventionist schemes of many sorts for interfering with the possibility of an increase in capital. In recent years, however, “right-wing” economists (e.g., Peter Bauer, and now especially Colin Clark) have pooh-poohed the role of capital investment in development, and have increasingly emphasized the point that other factors (e.g., the labor force, the laws of the country, cultural factors, and technological improvement) are more important. The reason for this change in “conservative” economic doctrine is this: within the last twenty years, socialist and interventionist economists have, themselves, adopted the idea that capital investment is the crucial desideratum for the “underdeveloped countries.”

What has happened is this: the leftist economists, in appropriating the Misesian-classical emphasis on increase of capital, have absorbed into the concept of “capital” government “investment” expenditures! The syllogism on the Left has now become something like this:

1. Yes, we agree that the reason Ruritania has not been “growing” faster is that it has not saved and invested enough;
2. Therefore, since we want more rapid growth, government must tax people and itself make the investments, thus forcing a more rapid pace of development (e.g., as in Soviet Russia).

Hence, the reaction among “conservative” economists to deprecate the roles of capital investment.

Mises, in short, left a gap, permitting an “end-run” by his opposition. The point is that Mises never dealt with the problem of government “investment,” probably because he pooh-poohs the whole idea. But this omission has left an important gap in the Misesian armor. For when Mises says “capital,” he obviously means private capital. Private capital does not neglect such “other factors” as entrepreneurial spirit, laws of the country (security of property, for example), etc.; for private capital investment is the resultant of conditions brought about by the favorable conjunction of such cultural factors. But since Mises never thought of capital as being anything but private, he put the crucial development factor as “investment” without mentioning the other points. The Left was therefore able to appropriate his and other economists’ emphasis on “investment” by applying it to government “investment,” thereby omitting these other implicit factors.

The proper reaction to this would have been to point out (a) that government expenditure is not properly “investment” at all, (b) that it is misallocation of funds that consumers and savers would have spent elsewhere, (c) that investment is only investment if it leads to its proper goal: consumption goods. Since the forced saving of socialist countries leads only to glorification of the rulers via what Clark well terms “conspicuous production” or “conspicuous investment,” this is not really investment at all; and (d) that government investment is misallocation because investment (as Lachmann pointed out in his Capital and Its Structure) is not a mere aggregate quantity, but a subtle, interrelated, fitted network of finely meshed parts. In a free market, governed by the price system, we can take, as a shorthand, the total quantity of investment, because the market sees to it that the various parts are finely meshed and harmonized. But when government “invests,” there is no such mechanism to insure harmony, and the result is gigantic malinvestments, and failure of the parts to mesh.

In short, the proper counterattack against the Left should have been to point out that government expenditure is not really “capital,” but is actually—via taxes, controls, misallocations, etc.—destructive of the potential capital of a country. But, unfortunately, the current conservatives, while pointing out some of the above factors to a limited extent, have “overreacted” by deprecating the very role of capital itself. For while it is true that entrepreneurial spirit, correct laws, etc. are vital to economic development, they exercise their influence through capital investment and not instead of, or apart from, such investment. They are ultimate factors lying behind the degree of saving and productive capital investment that is made in a country. The unfortunate error of the current conservative economists is to fail to realize this and to think of these other factors as competing with capital in importance.

Colin Clark’s pamphlet, to return to the main theme, is particularly unfortunate example of this error. For virtually the entire last half of his pamphlet is taken up with such depredation of capital. This error is considerably compounded by Clark’s unfortunate penchant for statistical measurement and econometric methods. While he has many interesting and useful things to say in the course of presenting his sheaf of statistical estimates (e.g., his deprecation of the uses made by the Left of capital-output ratios and his discussion of governmentally induced malinvestment in British electricity, coal, railroads, and agriculture), Clark’s tabulations are fundamentally either questionable or erroneous.

For example, his attempts at general, aggregate measures of “capital-output ratios” are heroically oversimplified; furthermore, and more grave, he presents statistical estimates of how much increased output was “caused by” capital and how much by other factors, such as skill, enterprise, etc. There is, of course, no way to separate these factors conceptually, let alone statistically. This grievous error, which underlies his statistical presentation, is compounded by his evident view that “capital” has a “marginal product” which he can estimate. Actually, as Fetter and Mises have shown, “capital” has no marginal-value product—only capital goods. The acme of the absurdity in Clark’s approach is seen in his favorable report of the Norwegian Dr. Aukrust:

With no additions to capital at all... “human factors,” i.e., better knowledge, organization, skill, effort, education, enterprise, etc., sufficed to raise productivity at the rate of 1.8 percent per year. A one percent addition to the labor force, all other things being equal, would only raise national product by ¾ percent; and a one percent addition to capital stock by only 0.2 percent.⁶⁸

Now this arrant nonsense has only emerged because, for Clark as for many other econometricians, statistics and mathematics (in this case, multiple correlation and variance analysis) has replaced economics.

The reason why Clark’s error here must loom so large in an analysis of his paper is that it plays so large a role there. This, as I’ve said, is his central theme, and his statistics take up a good portion of the work. Some of the other points against government investment are mentioned, and they are good ones, but many of them are simply quotes from Bauer’s booklet on India, and the interested reader can read Bauer’s American Enterprise Association pamphlet on India without the need of specially importing and distributing Clark’s pamphlet into this country.

A second grave flaw in the pamphlet is its poor organization. A brief pamphlet should be systematic, and above all clear; this one is turgid, disorganized, unsystematic, and wanders all over the lot—not only with little order, but also wandering into various digressions and crotchets of Clark’s. In a larger work, such digressions would be charming and perhaps informative; in the very narrow space of this pamphlet, it simply throws the balance of the work askew. Thus, Clark wastes precious space in a detailed statistical account of the prospects for nuclear electrical power in Britain, even though it is completely irrelevant to his discussion. And while Clark has many interesting and keen criticisms to make of the “growth theorists,” it is essentially and overall weak.

Clark, for example, omits most of the really important criticisms he might have made of Walt Rostow’s theory. He isn’t really sharp on the “capital-output ratio,” for, after all, he uses it himself. And he fails to level the most important criticisms he might have made of the neo-Keynesian “growthmen” because, after all, Clark too is a Keynesian, as he makes clear—though of the “moderate” variety. He believes that Keynes was perfectly correct for the 1930s—though not for now. But the problem here is not only that Clark is wrong on depression and unemployment problems, but that, being Keynesian himself, he doesn’t have the proper understanding of Keynesian errors to permit him to make a truly outstanding critique of the very “growthmen” that he opposes. Contrast his weak discussion, for example, with the really fundamental theoretical critique of these same “growth models” by Leland Yeager, in his “Some Questions on Growth Economics,” American Economic Review (1954), an article about which Clark makes no mention.

It is because of these important errors and flaws in the Clark pamphlet that I would, despite the numerous valid insights and points he makes, recommend against any widespread distribution by the fund of Growthmanship in this country.