Agreements governing relationships among nations

Models of Development surplus and its increase were all that counted in the national income (cf. Ricardo, who called it ‘the net revenue’ of produc- tion). All this, however, is by the way; for our present interest is not in ethical questions, but in how the model works. The central problem in the theory of economic develop- ment is to understand the process by which a community which was previously saving and investing 4 or 5 per cent of its national income or less, converts itself into an economy where voluntary saving is running at about 12 to 15 per cent of national income or more. This is the central problem because the central fact of economic development is rapid capital accumulation (including knowledge and skills with capital). We cannot explain any industrial’ revolution (as the economic historians pretend to do) until we can explain why saving increased relatively to national income. It is possible that the explanation is simply that some psychological change occurs which causes people to be more thrifty. This, however, is not a plausible explanation. We are interested not in the people in general, but only say in the 10 per cent of them with the largest incomes, who in countries with surplus labour receive up to 40 per cent of the national income (nearer 30 per cent in more developed countries). The remaining 90 per cent of the people never manage to save a significant fraction of their incomes. The important question is why does the top 10 per cent save more? The reason may be because they decide to consume less, but this reason does not square with the facts. There is no evidence of a fall in personal consumption by the top 10 per cent at a time when industrial revolutions are occurring. It is also possible that, though they do not save any more, the top 10 per cent spend less of their income on durable consumer goods (tombs, coun- try houses, temples) and more on productive capital. Certainly, if one compares different civilizations this is a striking differ- ence in the disposition of income. Civilizations in which there is a rapid growth of technical knowledge or expansion of other opportunities present more profitable outlets for investment than do technologically stagnant civilizations, and tempt capital into productive channels rather than into the building of monuments. But if one takes a country only over the course Economic Development with Unlimited Supplies of Labour 417 of the hundred years during which it undergoes a revolution in the rate of capital formation, there is no noticeable change in this regard. Certainly, judging by the novels, the top 10 per cent in England were not spending noticeably less on durable consumer goods in 1800 than they were in 1700. Much the most plausible explanation is that people save more because they have more to save. This is not to say merely that the national income per head is larger, since there is no clear evidence that the proportion of the national income saved increases with national income per head-at any rate our fragmentary evidence for the United Kingdom and for the United States suggests that this is not so.

The explanation is much more likely to be that saving increases relatively to the national income because the incomes of the savers increase relatively to the national income. The central fact of economic development is that the distribution of incomes is altered in favour of the saving class. Practically all saving is done by people who receive profits or rents. Workers’ savings are very small. The middle-classes save a little, but in practically every community the savings of the middle-classes out of their salaries are of little consequence for productive investment. Most members of the middle-class are engaged in the perpetual struggle to keep up with the Jones’s; if they manage to save enough to buy the house in which they live, they are doing well. They may save to educate their children, or to subsist in their old age, but this saving is virtually offset by the savings being used up for the same purposes. Insurance is the middle-class’s favourite form of saving in modern societies, yet in the U.K., where the habit is extremely well developed, the annual net increase in insur- ance funds from all classes, rich, middle, and poor is less than It per cent of the national income. It is doubtful if the wage and salary classes ever anywhere save as much as 3 per cent of the national income, net (possible exception: Japan). If we are interested in savings, we must concentrate attention upon profits and rents. For our purpose it does not matter whether profits are distributed or undistributed; the major source of savings is profits, and if we find that savings are increasing as a propor- tion of the national income, we may take it for granted that 418 Models of Development this is because the share of profits in the national income is increasing. (As a refinement, for highly taxed communities, we should say profits net of taxes upon profits, whether per- sonal income or corporate taxes.) Our problem then becomes what are the circumstances in which the share of profits in the national income increases ? The modified classical model which we are using here has the virtue of answering the question. In the beginning, the national income consists almost entirely of subsistence income. Abstracting from population growth and assuming that the marginal product of labour is zero, this subsistence income remains constant throughout the expansion, since by definition labour can be yielded up to the expanding capitalist sector without reducing subsistence output. The process therefore increases the capitalist surplus and the income of capitalist employees, taken together, as a proportion of the national income. It is possible to imagine conditions in which the surplus nevertheless does not increase relatively to national income.

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