Midyear Investment Review and Outlook : View No. 2: Capital Exists, Can Be Grown

The idea of a global capital shortage is hardly universally embraced. Some academics, in fact, dismiss it as patently ridiculous.

“I think it’s a little bit absurd to talk about a shortage of capital when the world isn’t able to use the capital it’s already got,” argues James Tobin, Nobel Prize-winning professor of economics at Yale University.

Industrial capacity--the “capital” that results from the savings and investment alleged to be in short supply--remains in excess supply in much of the world, Tobin notes. Hence, the continuing plant closings and restructurings that have become a global phenomenon, he says.

Tobin also isn’t inclined to fret about the declining Western savings rate. Technological advances, he says, may in effect be “capital-augmenting,” in the United States in particular.

In other words, the nation may not need as much savings to move ahead and boost productivity in this era compared to, say, the late 1800s, Tobin says. After all, saving for a personal computer “is not like having to save for a locomotive,” he notes.

Robert Eisner, professor of economics at Northwestern University, says there is no capital shortage that can’t be solved by renewed economic growth around the world. While some Wall Streeters focus on the idea that growth takes investment, Eisner notes that growth also generates capital as more people work, earn and save.

“We’re nowhere near the limit of savings in the world, because we’re nowhere near full employment,” he says.

*

He also advises Wall Street to stop trying to pin high real interest rates on a supposed capital shortage.

“We know why interest rates are high: because central banks are keeping them high” in the name of fighting inflation by restraining growth, Eisner says.

He views that policy as horribly misguided. “The notion that things can be too good for us is just terrible,” Eisner says.