According to classical economists. tile main factor which helped capital formation as the accumulation of capital. Profits made by the business Community constituted tile major part of the savings of the community and what was saved was assumed to be invested. Llama Smith too emphasized the virtues of savings. He said Capitals are increased by parsimony and diminished by prodigality and misconduct Keynes also ascribed the economic development of Europe to the accumulation of capital. He said Europe was so organised socially and economically s to secure the maximum accumulation of capital Later, Schumpeter show ell that increased investment made possible a rise in gross output in Thus, he tuxedo of the problem of economic development in an under-developed economy lies in a ‘rapid expansion of the rate of its capital investment so that it attains a rate of growth of output which exceeds the rate or growth of population by significant margin. Only with such 01 rate of capital investment will the living standards begin to improve in a developing country.
no doubt that productive capacity of an economy economy can be increased only by increasing the quantity and improving the quality of its capital equipment. Thus in any programmer of planned economic development capital formation must be assigned a significant role on account of very close connection between economic growth and capital growth.
It enables the adoption of more productive methods of production. capital widening makes the economy diversified and broad based. It exerts an interacting and cumulative effect on the whole economy. It militates technical progress. In all these and several other ways capital formation promotes economic growth. It could of course be argued hat without the price of other factors favorable to development. or creation of capital alone would not be of a ail. indeed as pointed out above. it has often argued that economic development is a matter of social attitudes and economic institutions simple process of increasing capital per of economic development shows hangs in attitudes values and in the very process of economic on or to development. Pr formation.
The process of building up of capital equipment require huge financing it. Either a part of national corner m ed f the production of capital goods or the fund for the purpose must be b fro The various methods of financing Leo e J meant will be discussed in detail in a Here we may only emphasize that dome Iii I me qua non of capital formation. In fa I Proles Arthur Lewis has defined the process of growth as one of transforming a country from a 5 per cent to a 15 per cent saver But savings though necessary are not sufficient for the purpose of capital formation, which involves the following three independent activities Al an increase in the volume of real savings so that resources that would have been used for consumption purposes may be released for the purpose of capital formation. a finance and credit mechanism. so that the available resources may be availed of by private in or government for capital formation anti fd the act of investment itself so that source arc used for the production of capital goods Although chump show cd that investment can and docs exceed voluntary savings through credit creation b the banking system. yet the requirements of capital accumulation cannot be simply mct by monetary expansion. Without additional real savings
The basic point is that the cost of development must e measured in real terms and not in monetary terms. Tile real costs are those of the resources that must be mobilized to carry out the development programmer the foreign and domestic services. materials, and equipment directly required for its execution and the additional goods and services for which more demand will indirectly be created through envelopment expenditures. Can capital accumulation take place without technological pro A community could just go on building more ran port Militia . more sources of power. more factories of thc e. isti This process of duplicating the c listing n e i sometimes called dinning of capt I in contrast with deepening of capital which imp of more capital-intensive technique. In fact. ital accumulation and technological progress go hand. Technological improvement is virtually I without prior capital accumulation. Th thc most efficient techniques rcq ire I menl for their introduction, even If the total costs per unit of output. once they arc installed and arc operating. IllUS no nation. that is to save and pay taxes or to borrow about the fruits of the advanced techniques.