Investment and the Stock of Capital

Abstract

Investment in intangibles does not increase the volume of the capital stock nor is it designed to do so. The aim is to increase the efficiency of tangible investment. The volume of the capital stock must therefore be represented by tangible capital; intangible assets such as those that arise from investment in research and development and other forms of intellectual products must be excluded. A large tax credit in the US for R&D was introduced in 1981. Before that private sector spending on IP averaged 12 per cent of total investment and has since risen to over 30 per cent. Over the same period TFP, as measured by either the consensus model or mine, has deteriorated, investment in R&D is either ineffective or mismeasured. Measuring the volume of capital exclusively in terms of tangible assets thus has the additional advantage of excluding data of dubious accuracy.