5 years, the economy needs an assist. For this reason the board believes that growth in output and the creation of new employment opportunities through market expansion, which includes creation of new and improved products, processes, and services, should be the principal criteria by which economic policies are evaluated during the remainder of this decade. Without adequate levels of such growth, the legitimate high expectations that Americans have for their economic well-being cannot be achieved or sustained.

There are two fundamental sources of economic growth—productivity improvement and market expansion. Productivity improvement is the result of technological advances and investments in physical and human capital. International comparisons of productivity growth suggest that there is a strong association between a nation’s rate of investment in new equipment and its rate of productivity growth. For example, according to economists Lawrence Lau and Jong Il Kim, roughly one-quarter of the productivity growth of the United States is directly traceable to physical investment in plant and equipment (Lau and Kim, 1992). An additional one-third is traceable to investments in technology that are accompanied by and embodied in tangible capital, and roughly one-sixth is attributable to improvements in technology that are not connected to investments in tangible assets. Thus, according to Lau and Kim, between two-thirds and three-quarters of U.S. productivity growth is attributable to investment in tangible assets and in more advanced technology.3 These findings are largely consistent with other recent work underscoring the importance of investment in machinery and equipment for growth (Boskin and Lau, 1992; Delong and Summers, 1991; Jorgenson, Gollop, and Fraumeni, 1987; Lau and Kim, 1992). Although recognizing that national investments in public education and infrastructure are important contributors to growth, the board believes that an adequate level of private business investment is essential for sustained economic growth.

The changes in management practice and the redesign of organizational structures and processes that characterize the current restructuring of industry are producing encouraging productivity improvements with infusions of capital that are below historical levels. It may be that for

3

The estimates are additive in the Lau and Kim model, but part of the improvement in the quality of labor may also be captured in what Lau calls technical progress. Lau’s work continues and is being extended, for example, to Asian countries and more recent years. His findings on embodied technical change are empirical, and there are scant data on the distribution between embodied and disembodied technical change, but the 1965 estimates of Intrilligator are roughly consistent with these more recent findings.



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