Capital Formation

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.