Capital, Income Growth, in American Economic History

Abstract

The role of capital accumulation in the process of long-run income growth has been the subject of great debate. The classical and early neoclassical economists viewed capital accumulation as the fundamental driver of growth. Economists informed by the Solow growth model (and its successors) and by twentieth-century growth accounting exercises assign capital accumulation a much more marginal role. This now standard view takes certain constancies for granted: the rate of capital formation (i.e., the saving rate), the capital-output ratio, capital’s share of income, and the rate of return on capital (i.e., the interest rate). This chapter documents the historical evolution of capital in the American economy and challenges the conventional thinking. It shows that the role of capital accumulation in economic growth is dynamic and has changed dramatically over the past three centuries.