Unit 4: Development and capital investment

Thank you to Tom White for this excellent article on capital accumulation. It is a must read for students looking at ways to help developing economies grow........

The problem with both free-market and Keynesian economics is that they misunderstand the nature of modern investment. Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model).

In Sachs’ alternative view, private-sector investment today depends on investment by the public sector. But investment into what? What types of capital should we be accumulating?

Sachs argues that unless the public sector invests, and invests wisely, the private sector will continue to save profits or return them to shareholders in the forms of dividends.

Sachs believes that government investment needs to complement private sector investment for the best results. He describes six types of capital:

1. Business capital includes private companies’ factories, machines, transport equipment, and information systems.
2. Infrastructure includes roads, railways, power and water systems, fibre optics, pipelines, and airports and seaports.
3. Human capital is the education, skills, and health of the workforce.
4. Intellectual capital includes society’s core scientific and technological know-how.
5. Natural capital is the ecosystems and primary resources that support agriculture, health, and cities.
6. Social capital is the communal trust that makes efficient trade, finance, and governance possible.

Sachs’ point is that the different forms of capital work in a complementary way. Business investment without infrastructure and human capital cannot be profitable. Nor can financial markets work if social capital (trust) is depleted. 

Without natural capital (including a safe climate, productive soils, available water, and protection against flooding), the other kinds of capital are easily lost. And without universal access to public investments in human capital, societies will succumb to extreme inequalities of income and wealth.

Sachs says that the key to development was basic education, a network of roads and power, a functioning port, and access to world markets. 

Today, however, basic public education is no longer enough; workers need highly specialised skills that come through vocational training, advanced degrees, and apprenticeship programs that combine public and private funding. 

Transport must be smarter than mere government road building; power grids must reflect the urgent need for low-carbon electricity; and governments everywhere must invest in new kinds of intellectual capital to solve unprecedented problems of public health, climate change, environmental degradation, information systems management, and more.

Sachs goes on to worry that this just isn’t happening on the required scale. Like most observers, he is concerned that there is too much focus on the short term, and excessive cutbacks in public sector investment – which he sees as a false economy.