Capital Accumulation in Accounting and Economics - Essay Example

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Capital Accumulation Drives the Economic Growth

Introduction

Capital accumulation also referred to as accumulation of capital, is the process which motivates the search for profit. It, therefore, involves the investment of fiscal assets including money with the aim of increasing the monetary value of the asset either in the form of capital gains, royalties, interest, rent, and profit (Acemoglu 1996). Capital accumulation is a major part of capitalism and is a defining feature of an economic system that is capitalist in nature. In a broader sense, capital accumulation refers to the gathering of things of value as per the view of a particular reproductive interest group. It involves both redistribution and the net addition of wealth. As a result, accumulation of wealth makes the society richer and increases the overall stock of wealth (Goodman 2014). On the other hand, economic growth is identified when the quantity of services and goods produced by each of the individuals of a given population over a given time increases. It is measured as the percentage increase in the real gross domestic product. If the increase in growth is due to a more efficient use of the inputs such as materials, energy, physical capital, or labour, it is called an intensive growth. However, if the gross domestic growth is caused by the increase in only the number of inputs available, such as new territory or increased population, it is called extensive growth.

Understanding the Link between Capital Accumulation and Economic Growth

Capital accumulation in accounting and economics can be defined as the investment of savings or profit income, more so in goods with real capital. It is caused by the centralisation and concentration of capital. Ordinarily, it might refer to; first, real investment in the tangible production means such as research and development and acquisition among others that increase the flow of capital (Acemoglu 1996). Second, financial assets investment that is indicated on paper, yielding capital gains, fees, royalties, rent, interest, or profit. Third, investment in the physical assets that is non-productive such as the artworks and residential real estate that appreciate in value. It can also entail the human capital since the skills of the labour force can increase work earnings if improved through new training and educational activities. Social capital is also a critical element of capital accumulation since it is the productive capacity and wealth that the people in the society, as opposed to corporations or individuals, hold in common.

Both the financial and non-financial capital accumulation is needed for the growth of the economy since the increase in production requires more funds to increase the production scale. However, more productive and smarter organisations can increase production minus increase capital (Garavan, Morley, Gunnigle, & Collins, 2001). Capital can be developed without the increase in investment through improved organization and inventions that will see an increase in productivity and discoveries of new assets and the property sale among others.

Capital Accumulation Often Drives Economic Growth

The accumulation of human and physical capital can determine the growth of the economy. First, the rate to which physical capital is accumulated is one of the critical factors that determine the real output per capita. However, its effects are about the level to which technological innovation is integrated to the new capital. Even though there might be a difference in the transition process from the accumulation of capital to economic growth, the major differences in the rate of an investment over a given time and across countries is based on the differences in the output per capita. In specific, the long-run averages of investment rates in the business sectors range between 10% to over 20% of gross domestic product (Bassanini & Scarpetta 2001). In addition, major fluctuations in the countries' investment rates are typical, for instance, the rapid increase in the United States investment in the late 1990s. In the empirical analysis, the physical assets accumulated by the private agents are considered. Furthermore, investment in the public sector is taken into consideration in the extended growth equations to determine it independent effects on output and its potential effect on the approximated coefficient of the investment rate of the business sector. Second, human capital can determine the growth of an economy. It entails the experience and formal skills that are entailed in the labour force. However, one can argue that human capital id dependent on some the diminishing returns such that a more highly skilled and trained workforce would enjoy higher income levels in the long-term. The higher income levels might not lead to permanent higher income growth rates. But the investment in human capital through activities such as spending on training and education can have a more permanent effect on the economic growth process if the training and high skills are comprehensively integrated with intensive development and research and an increased rate of technological improvement. It can also have a more permanent effect if the techniques used to adopt the new technologies are facilitated by an exceptionally skilled workforce. For the case of physical capital, empirical evidence can be used to give some idea on the social returns to investment in the human capital hence help in choosing the appropriate theory to explain the same.

Endogenous Growth Theory

The endogenous growth theory has further developed the thinking that capital accumulation drives economic growth. The theory argues that economic growth is mainly not the result of external forces but endogenous ones (Pack 1994). It holds that investments made on the knowledge, innovation, and human capital contributes greatly to economic growth. The endogenous growth theory argues that an economy's long-run growth rate depends primarily on the policy measures. For instance, subsidies for education or research and development increases the growth rate in a given models of endogenous growth models through increasing the innovation’s incentive (Garavan, Morley, Gunnigle, & Collins, 2001).

The endogenous growth theory was developed to address the weaknesses of the Solow- Swan neoclassical growth model. The Solow- Swan neoclassical growth model uses two exogenous determiners to determine the long-run growth rate. The two variables are population growth rate and rate of technological progress independent of the saving rate. The exogenous growth model does not only criticize the Solow- Swan neoclassical model but also introduces the technical improvement in the growth model (Swan 1956). Endogenous growth model focuses on the technical improvements that are due to the human capital stock, the size of the capital stock, and investment rate.

The endogenous new growth theory has got some assumptions. First, it assumes that the market has several firms and the technological and knowledge advance is a good that is non-rival in nature. Second, it assumes that the there is a steady increase in return to scale for all the factors and a constant return to at least one of the factors. Third, it argues that technological advancements happen as per what people do thus base on the creation of ideas that are new in the market (Swan 1956). Lastly, the theory argues that several firms and individuals have market power and earn profits based on their discoveries. The assumption is based on the increasing returns to the production scale that causes imperfect competition.

Endogenous growth three identifies the factors that affect economic growth to which capital accumulation is captured. As a result, the theory supports the idea that capital accumulation determines economic growth. The theory argues that investment in knowledge, innovation, and human capital are critical for economic growth. The three variables help in the development of new technologies and ensure that production is more efficient (Pack 1994). Human capital can be invested in through activities such as training and education. Through the two means of capacity building, there will be an increase in economic growth as workers become more productive. Endogenous growth theory also argues that spill over benefits when investment is made in the human capital. The theory also focuses on the innovation and knowledge as it calls for the investment in research and development by the private sector. Consequently, innovation will lead to the production of between goods and production process that will see an increase in productivity thus driving the economic growth.

Endogenous growth theory has several implications in the economy. In explanation, the theorists’ calls for the private and government sector to provide additional incentives so as to promote innovation (Pack 1994). As a result, the government has been forced to develop policies that will encourage innovation and promote economic growth. Such policies include subsidies for research and development and protecting the intellectual property. The property rights that can be put in place to encourage innovation include using trademarks, copyrights, and patents. The theory also argues that the poor countries that have little human capital cannot manage to become rich through simply adding additional physical capital. Investment in human capital through processes such as training and education is important in achieving the growth.

The endogenous growth theory, therefore, supports the argument that capital accumulation drives economic growth. In explanation, it argues that accumulation of capital can increase the economic growth of a particular country in the long run (Swan 1956). However, capital accumulation can only be achieved with the increase in savings ratios.

Measurement of Capital Accumulation

Accumulation can be measured in three ways. In explanation, it can be measured through determining the monetary value of investments, change in the values of owned assets that can be described as the increase in capital stock’s value, or the amount of income reinvested. Te government statisticians are usually the ones with the mandate of determining the total assets and investments of a country. They use the company’s direct surveys, tax data, and balance sheet to estimate the national accounts, the flow of funds, and national balance of payments statistics. In normal scenarios, it is the role of the Treasury and Reserve Banks to provide analysis and interpretations of the data. The standard indicators for the accumulated capital include foreign direct investment, household asset wealthy, fixed capital; Gross fixed capital formation, and capital formation (Stockhammer 2011). Organisation like Bank for International Settlements, the World Bank Group, International Monetary Fund, Organisation for Economic Co-operation and Development, and United Nations Conference on Trade and Development estimate the world trends using the national investment data. For instance, the Japan Statistical Office, Eurostat, and the Bureau of Economic Analysis provide data in the Japan, Europe, and the United States respectively. Other sources of useful information relating to investments can be found in the business magazines such as Business Week, The Economist, Forbes, and Fortune. In addition, the information can be found in several of the publication by the non-governmental organisations and ‘watchdog’ organisations (Orhangazi 2008).

Conclusion

Capital accumulation is the process that enhances acquiring of additional capital stock to hasten the production rate. Capital entails the man-made equipment that can be used to make additional goods such as factories and machines. In turn, the development of the additional capital ensures that the economic growth is hastened. However, capital accumulation should exceed the amount of capital needed so as to overcome depreciation. In explanation, since some of the capital go through wear and tear, it is necessary to engage in capital accumulation which includes the additional capital purchase. Capital accumulation can also be linked to the diminishing returns. In explanation, the growth models that are based on the Solow's model holds that a continuous increase in the capital stock can lead to returns that are diminishing. In other words, the models argue that the economic growth is determined by the technological innovation and population growth. The endogenous growth theory has further developed the thinking that capital accumulation drives economic growth. The theory argues that economic growth is mainly not the result of external forces but endogenous ones. It holds that investments made on the knowledge, innovation, and human capital contributes greatly to economic growth. The theory, therefore, supports the statement that "the concept of capital accumulation is often said to drive economic growth of the economy." Accumulated capital can be increased through increasing of the ratio of savings, maintaining a good banking system and loan system, avoidance of corruption, and development of good infrastructure that makes an investment of more value.

Reference List

Acemoglu, D 1996, ‘A microfoundation for social increasing returns in human capital accumulation’, The Quarterly Journal of Economics, vol. 111, no. 3, pp. 779-804.

Bassanini, A & Scarpetta, S 2001, The driving forces of economic growth: Panel data evidence for the OECD countries. Available from https://www.oecd.org/eco/growth/18450995.pdf . [6 July 2016].

Garavan, TN, Morley, M, Gunnigle, P, & Collins, E 2001, ‘Human capital accumulation: the role of human resource development’, Journal of European Industrial Training, vol. 25, no. 2/3/4, pp. 48-68.

Goodman, J 2014, ‘The wages of sinistrality: Handedness, brain structure, and human capital accumulation’, The Journal of Economic Perspectives, vol. 28, no. 4, pp. 193-212.

Orhangazi, Ö 2008, ‘Financialisation and capital accumulation in the non-financial corporate sector: A theoretical and empirical investigation on the US economy: 1973–2003’, Cambridge Journal of Economics, vol. 32, no. 6, pp. 863-886.

Pack, H 1994, ‘Endogenous growth theory: intellectual appeal and empirical shortcomings’, The Journal of Economic Perspectives, vol. 8, no. 1, pp. 55-72.

Stockhammer, E 2011, ‘Wage norms, capital accumulation, and unemployment: a post-Keynesian view’, Oxford Review of Economic Policy, vol. 27, no. 2, pp. 295-311.

Swan, TW 1956, ‘Economic growth and capital accumulation’, Economic record, vol. 32, no. 2, pp. 334-361.