Aspects of Capital Investment in Great Britain 1750-1850

A preliminary survey, report of a conference held the University of Sheffield, 5-7 January 1969

S. Pollard, J.P.P Higgins

• Publisher: Taylor & Francis
• Year: 2013
• eBook ISBN: 9781136587627
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

These six papers were originally delivered to a conference at Sheffield University in 1969 and represent an overview of a research project led by Professor Pollard, which aimed to construct a series of annual figures of capital formation for the Industrial Revolution in Britain - both in aggregate and broken down into main sectors. Each paper is accompanied by a summary of the discussion which followed.

The problems encountered in such an undertaking are examined, a major one being definition: what to include in the term 'capital', how to measure or isolate expenditure under that heading, and how to deal with changes which have made the definitions and practices of present-day national income estimates inapplicable to earlier centuries. Sources are also examined in depth as statistical information is not only uncertain and often unreliable, but of different value and completeness for different sectors of the economy.

This book was first published in 1971.

1

Modern Practices and Conventions in Measuring Capital Formation in the National Accounts

J. HIBBERT

This paper deals with capital formation in the context of the national accounts – that is, the accounts of national income and expenditure which are compiled by the Central Statistical Office and which are published in our annual Blue Book.

It may well be that the definitions which we adopt in the national accounts are not appropriate for some purposes, and wherever practicable what we attempt to do is to classify our statistics and provide supplementary data in such a way that they may be regrouped in order to meet particular users’ requirements. In deciding how capital formation should be defined in the national accounts, however, it has to be borne in mind that the aim is to construct a consistent set of accounts for the whole economy, so that the definitions we adopt ought to be consistent with those adopted for other economic aggregates in the accounts.

Once we have agreed a satisfactory set of definitions, the next step is obviously to attempt to measure capital formation. We shall see that this presents both theoretical and practical problems, some of which may be very difficult or even impossible to resolve satisfactorily. I will deal with definitions of capital formation as briefly as possible and then turn to these problems of measurement which will probably be of rather more interest.

When we speak of capital formation, then, in general we mean the additions made during a particular period of time to the stock of goods which are for use in future production. These are both fixed assets, such as buildings, items of plant and so on, and work in progress, stocks of raw materials and finished goods. A distinction is usually made between gross fixed capital formation – that is, the addition of new fixed assets to the stock during the period – and net fixed capital formation which takes into account allowances for depreciation of the existing stock of fixed assets.

Capital formation, then, comprises fixed capital formation and increases in stocks and work in progress. These two categories of capital formation are separately distinguished in the published accounts and, as we shall see, they give rise to different problems of measurement and estimation. Generally, in talking about fixed capital formation, I mean gross domestic fixed capital formation – that is, additions of new fixed assets without any allowance for depreciation to the stock of fixed assets which, apart from the exception I shall come to in a moment, lie within the boundaries of the United Kingdom. This is the meaning of the word ‘domestic’ in the definition. The exception arises in the case of ships and aircraft, which clearly cannot be regarded in quite the same way as other kinds of asset; these are treated as domestic when owned by United Kingdom residents, irrespective of where or by whom they are operated. Otherwise, however, ownership is not the criterion for determining whether or not an activity is termed domestic. With this one exception, the word ‘domestic’ is used to refer to activities which take place within the physical boundaries of the country, while ‘national’ is the word used to refer to activities within the ownership of a country’s residents. This, of course, is the distinction in the national accounts between what we call ‘domestic product’ and ‘national product’.

I described capital formation as additions to the stock of goods for use in future production. In principle, these additions should include alterations and improvements to fixed assets, but not the cost of repairs and maintenance, which are necessary simply in order to maintain an asset in normal working order. In practice it is usually possible to distinguish only between major improvements and other repairs, and the distinction rests mainly upon whether businesses capitalize their expenditure, or simply treat it as a current operating expense in their accounts. Not all countries adopt this approach to the measurement of fixed capital formation. Some treat repairs and maintenance expenditure as part of capital formation, an approach which does have the advantage of avoiding the difficulty of trying to distinguish between expenditure which adds to the normal life of an asset and that which simply enables a normal life to be fulfilled.

If we think of capital formation as a process of adding to a stock of assets which are to be used in some future period, it seems natural to ask why this stock of assets should be limited to goods of the kind already mentioned. Quite clearly increases in the stock of knowledge or the stock of skilled workers are factors which are available for use in future production. Such additions to the nation’s wealth are not in fact treated as capital formation in the national accounts, but changes of this kind could not really be ignored when one came to consider a period of time as long as 100 years. So, presumably, the effects of such factors ought to be examined even if not as part of the study of capital formation defined in the narrower sense.

A further question which arises in considering our definition of capital formation is – where should the boundary of production be drawn? If we say that capital formation is the process of adding to a stock of physical assets which are for use in future production, it seems clear that we need to agree upon what we mean by production. Again, the definitions which we adopt in the national accounts are not necessarily those one would wish to use for all purposes of economic analysis. One example is the treatment of a consumer durable good which typically yields a service to its user over a number of the time periods for which we are constructing accounts. It would not be illogical to regard the purchase of a washing machine, for example, as fixed capital formation, in effect treating the service provided by the asset as output within the production boundary. If we follow this line of reasoning further, however, it becomes clear that we are likely to run into serious practical difficulties. If the washing machine is said to be providing a service which is to be regarded as part of production, so also is the person using it. How should the services of that person be valued both in theory and in practice? In situations of this kind, the general principle followed in the national accounts is to include within the production boundary first of all those goods and services which are actually exchanged for money and, secondly, those goods and services which, though not in fact exchanged for money, are of a kind which frequently are so exchanged. The most important example of this kind of imputation, as we call it, is that of owner-occupied houses. Here, it is supposed that the owner in effect lets the house to himself for a rent which may be estimated on the basis of actual rents paid for similar types of house, and it follows from this definition of the boundary of production that the construction of houses, whether for letting or for owner-occupation, is regarded as fixed capital formation. Likewise, since the use of a consumer durable good is not regarded as within the boundary of production, its purchase is not regarded as fixed capital formation, but as consumers’ expenditure. So there is this very clear link between the definition of capital formation and the definition of the production boundary.

One final point which is probably worth mentioning while dealing with definitions is the treatment of work in progress – on goods with long periods of construction. This would include, for example, assets such as ships, power stations, or any type of work where it is customary to make progress payments as the work is carried out. The convention here is to regard the value of work done in any period on projects of this kind as fixed capital formation rather than an increase in work in progress. This has the advantage that the estimates of fixed capital formation approximate more closely in any period to the demands made on the economy by the production of fixed assets than if the value of such assets were included only on completion. Estimates compiled in this way, however, may not reflect changes in productive capacity so well as if fixed capital formation in such assets were measured at the time of their completion.

Having said something about the scope and definition of capital formation in the national accounts, I shall turn to problems of measurement. It is clear that, for most purposes, it is necessary to measure capital formation either in money terms or by means of some kind of index. It might be possible to measure additions to the stock of certain types of asset such as railway wagons or agricultural tractors in purely physical terms, but this is unlikely to get us very far when we actually wish to use such figures. Inevitably, we should want to aggregate capital formation in different types of asset, and would require some common unit of measurement. We usually measure fixed capital formation, at least in the first instance, in money terms by taking the value of expenditure on fixed assets, including virtually all the expenses associated with their acquisition; by this is meant expenses such as transport costs, installation costs and professional fees for architectural or legal services. We do make a distinction, however, between the expenses directly related to the acquisition of fixed assets – that is, those just mentioned – and expenses incurred in arranging the necessary finance, such as the costs of share issues and so on. These are not regarded as part of fixed capital formation, even though they might be capitalized by a business in its accounts.

There are really two methods in general use for measuring fixed capital formation. These are usually referred to as the expenditure method and the commodity flow method, and nowadays, in the national accounts of the United Kingdom, the expenditure method is mainly used.

The approach of the expenditure method is to use data from the records of those purchasing capital goods, and this has two main advantages. First of all, figures can be collected according to definitions, which are generally consistent with the definitions of other statistics for the national accounts derived from the same sources – for example, profits from business enterprises. Secondly, figures of expenditure collected in this way can far more readily be analysed by the purchasing industry and institutional sector than figures derived from the commodity flow method.

By the commodity flow method is meant estimates prepared from the supply side – that is, from statistics of production, exports and imports. This method has the advantage that a more detailed analysis is possible of the type of capital formation taking place – that is, of the different types of asset being installed by producers. But, of course, it suffers from the disadvantages not found in the expenditure method – the difficulties of classifying by type of purchaser and the possibility of inconsistency with other data collected from firms’ accounting records. It also presents other problems because transport costs and trade mark-ups have to be estimated in the valuation process, and changes in stocks may need to be taken into account if we are starting with production data, or if the distribution network is fairly complex. Ideally, of course, what we should like to do would be to use both approaches, together with any other supplementary data that may be available, in order to compile a fully reconciled statement of all the various economic flows involved. To a limited extent this is what happens when we construct input-output tables, as we have done for 1963, which are published in the National Income Blue Book. But the approach there in practice has been rather to take the expenditure estimates as given and produce input-output tables consistent with those given totals, which is not really the same as attempting a full reconciliation. However, where this process throws doubt on the plausibility of the existing expenditure estimates this is followed by a reappraisal of those estimates.

These are the two main approaches then – aggregation of expenditure recorded by purchasers or the sum of goods and services provided by suppliers. There are, of course, other kinds of data which might be used, particularly in estimating specific categories of fixed capital formation – for example, statistics derived from administrative records of some kind, such as those for registration or licensing, although nowadays very little use is made of sources of this kind. In attempting to construct historical series, particularly series for some considerable time past, any data of this kind could be extremely valuable.

I should now perhaps say something about the measurement of net fixed capital formation, capital consumption and capital stock, before turning to capital formation in stocks and work-in-progress. We estimate net fixed capital formation by deducting from gross fixed capital formation estimates of capital consumption. A good deal has been written about the concept of capital consumption and its measurement, and it seems to be generally agreed that there is in fact no unique way of measuring it. Most businesses provide for depreciation in their accounts, of course, but there are two main reasons why these figures are unsuitable for measuring capital consumption in the national accounts.

First of all, in general, the depreciation charges made by businesses are based on the historical cost of fixed assets, whereas for the national accounts what we require is a measure of capital consumption which is in terms of the prices of the current accounting period, or at least in terms of a defined set of prices, which can be converted to the prices of a given accounting period. Secondly, as mentioned earlier, we have defined the boundary of production in such a way as to include the construction of assets such as dwellings for owner-occupation in fixed capital formation, and the owners of these assets do not maintain accounts or records in which depreciation is charged. For these reasons, therefore, we find it necessary to make special estimates of capital consumption which in general have been arrived at by first compiling estimates of capital stock, using the so-called perpetual inventory method and assuming that the pattern of utilization of assets is uniformly distributed over their assumed lives – that is, what accountants would refer to as straight-line depreciation.

It would not be particularly helpful to say any more about the estimation of capital stock and capital consumption at this point, but if it seems worthwhile later perhaps we could return to that in discussion.

We ought next to consider the problems which arise in measuring capital formation in stocks and work-in-progress. Some of these problems are of a rather special kind and arise from the fact that the commercial profits and losses measured by accountants include what in national accounting has been termed stock appreciation, which is not regarded as part of the national income.

Stock appreciation is that part of the change in book values of stocks which reflects a change in the level of prices rather than a change in the physical level of stocks, so when prices are rising, stock appreciation is positive and when they are falling, it is negative. Essentially what we are saying is that when goods are taken from stock and used in production, the amount which should be charged to the producer’s operating account is the replacement cost of these goods. By contrast, what happens in normal commercial accounting is that the cost of maintaining intact the money value of stocks, rather than the phy...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Original Half Title page
• Original Title Page
• original Copyright Page
• Contents
• Editors’ note
• Participants of the Conference
• Introduction
• 1 Modern practices and conventions in measuring capital formation in the national accounts
• 2 The compilation of gross domestic fixed capital formation statistics, 1856–1913
• 3 Fixed capital formation in the british cotton manufacturing industry
• 4 Capital formation in transport in britain
• 5 Capital formation in agriculture
• Index