To some economists, promoting capital accumulation is therefore a primary long-term aim of government economic policy. However, the Solow growth model and research in growth accounting suggest that most of economic growth is due to other factors besides capital intensity: these include improvements in technology and economic institutions, rate of population growth, investment in human capital (education and training), infrastructural investment, and the like.
The lessons of the Solow growth model were missed by the Soviet Union. Starting in the 1930s, the Stalin government attempted to force capital accumulation through state direction of the economy. Most economists now believe that while the Soviet system allowed for rapid economic development into the 1950s, as long as large surpluses of land, labor, and raw materials could be tapped by the urban and industrial leading sector, this strategy led to an unbalanced economy with stagnant or slowly-growing standards of living. With the emphasis on raising capital intensity, diminishing returns were hit; the Soviet Union's weak ability to use new technologies meant that this problem was not solved in the same way as in the rich Western countries.
Most free market economists argue that capital accumulation was best aided largely by leaving it alone to be determined by market forces. Monetary stability which increased certainty, low taxation and greater freedom for the entrepreneur would promote capital accumulation.
Once this issue has been solved, the capital controversy rears its ugly head.
This controversy points out that measure of capital intensity is not independent of the distribution of income, so that changes in the ratio of profits to wages lead to changes in measured capital intensity.
AT THE STATE CAPITAL, LABOR UNREST ; Demonstrators at a pair of rallies take issue with Gov. LePage's order to remove a mural from a state agency's headquarters
Mar 26, 2011; ANN S KIM Staff Writer Portland Press Herald (Maine) 03-26-2011 AT THE STATE CAPITAL, LABOR UNREST ; Demonstrators at a pair of...