The focus in the growth debate has not been on increasing the number of workers as much as it has been on capital and technical change.

The Role of Capital
How much can be expected of capital growth as a means of increasing the growth rate of output? Studies of the rate of return to capital in the United States show it to be about 12 percent for the economy as a whole. That means a dollar invested today will return 12 cents per year (after adjusting for inflation) in later years. Equivalently, if I percent of GNP is added to the capital stock, output next year should be higher by 0.12 percent of GNP. Thus if 4 percent of GNP is added to investment, output will be higher by about 0.5 percent of GNP.

Given that the GNP growth rate fell 1.5 percent in the last half of the seventies, it seems that investment could do a lot to improve the situation, taking us back toward the better growth performance ofthe sixties.But first we have to ask how large 4 percent of GNP is. The answer is that it would take a lot to get the share of investment in GNP to rise 4 percent. Gross investment in plant and equipment is now about 10 to 12 per cent of GNP. Thus an increase equal to 4 percent of GNP means increasing investment by nearly 40 percent. This is a very large increase that would be difflcult to achieve.

The message on investment, then, is mixed. There is no doubt that increased investment increases the economy’s growth rate, but it would take a lot of investment to get the growth rate to increase rapidly. That certainly does not mean that policies to encourage investment are wrong or would not increase growth. It does mean, though, that the role of investment should not be exagegerated. More investment would increase growth, but it is not a magical process.