Antibiograma 68

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INVESTMENT AND MONEY, 1870-1914

In th is c h a p te r , w e f i r s t i n v e s t ig a t e th e c a u ses b e h in d th e s h o r t - r u n c y c lic a l v a r ia tio n s in d o m estic c a p it a l fo rm a tio n , w h ich h a ve b e e n show n t o b e a t th e b ottom o f in t e r n a tio n a l econ o m ic flu c tu a t io n s in m a jor econ o m ies w ith an a d e q u a t e d a ta base. S in c e c a p ita l e x p o r t s fro m B rita in w e re s e en t o h a v e p la y e d a v it a l r o le in in v e s tm e n t c y c le s in some c o u n tr ie s , in t h e s eco n d s e ctio n w e sh all t r y t o lo c a te th e d e te rm in a n ts o f th e flu c t u a t io n s in B ritis h o v e r s e a s le n d in g to m a jor r e g io n s . I t is n e x t a s k e d how th e flo w o f fu n d s fro m B rita in o n su ch an e x t e n s iv e s c a le c o u ld h a v e b e en c a r r ie d o u t w ith o u t c a u s in g m ajor b a la n ce o f p a y m e n t s d iffic u lt ie s in p re-1914 y e a r s ; in th e same c o n te x t w e exam ine t h e fo r c e s te n d in g to p ro d u c e e x t e r n a l e q u ilib riu m in o t h e r v a r io u s ec o n o m ie s . In th e fin a l s e ctio n , m o n e ta ry fo r c e s a r e in t ro d u c e d in to th e s ys te m , an d t h e ir r o le in in t e r n a tio n a l flu c tu a tio n s w ill b e a s s e s s e d : p a r tic u la r a tt e n tio n is p a id t o th e e x p la n a tio n o f th e c y c lic a l p a t t e r n in th e v a r ia tio n o f m o n ey sto ck an d in t e r e s t r a te s .

Home Investment

While in t h e o re tic a l a n a ly s e s in v e s tm en t is u s u a lly t r e a t e d as a hom ogen eou s a g g r e g a t e , t h is a p p ro a c h a p p e a rs to b e o f lim ite d use: d if fe r e n t f a c t o r s seem t o b e r e s p o n s ib le f o r th e v a r ia t io n s in th e l e v e l o f rep la c e m en t a n d e x p a n s io n in v e s tm en t, an d t h e r e is a case f o r c o n s id e r in g fix e d a n d in v e n t o r y in v e s tm e n t s e p a r a t e ly . I t is a ls o w e ll-k n o w n th a t, h is t o r ic a lly , flu c tu a t io n s in c o n s t ru c tio n in v e s tm en t fo llo w e d a p a t t e r n d i f fe r e n t fro m n o n -c o n s tru c t io n . H ence, in t r y i n g to lo c a t e th e d e te rm in a n ts o f th e l e v e l o f home in v e s tm en t in m ajor e c o n o m ies o f 1870-1914 p e rio d , w e a d o p t a 'le a d in g s e c t o r ’ a p p ro a c h : main in v e s tm en t fie ld s a r e in t h e f i r s t p la ce id e n tifie d ; th e f a c t o r s in flu e n c in g th e l e v e l o f c a p ita l fo rm a tio n in th es e k e y a re a s w ill b e e s ta b lis h e d ; w e s h a ll th en s e e h ow th e in v e s tm en t flu c tu a t io n s in t h e le a d in g s e c t o r s in d u c e d th o s e in o t h e r s e cto rs.

In th e f i r s t tw o o f th e f i v e pre-W W I US t r a d e c y c le s , a c c o r d in g t o R. F els, in v e s tm en t in th e fo rm o f r a ilw a y b u ild in g w a s a main d r iv in g fo r c e . In th e fo llo w in g t r a d e c y c le , C y c le I I I , th e in flu e n c e o f ra ilw a y b u ild in g u p on t h e c o u r s e o f th e t r a d e c y c le , a lth o u g h s till im po rtan t, d im in ish ed . T h is is r e fle c t e d in th e f a c t th a t, b y re a c h in g a p e a k in 1887, r a ilw a y in v e s tm e n t fa ile d to v a r y in a s c lo s e a g re e m en t w ith to tal in v e s tm e n t a n d n a tion al incom e (p e a k in g in 1892) as in C y c le s I & I I . 1 T h u s , o n e o b s e r v e s in F ig T II-1 t h r e e m ajor 1 R. F els(1 9 5 9) C h a p te rs 6-1 0. R a ilw a y b u ild in g in C y c le I a n d I I w e r e o f d i f fe r e n t n a tu re in th a t i f th e ra ilw a y b u ild in g d u r in g th e u p s w in g o f C y c le I w as c h ie f ly b u ild in g new main lin e s , in C y c le I I 'much o f th e r a ilro a d b u ild in g c o n s is te d o f c o m p letin g th e m ain lin es o f th e ro a d s w h ich had b e e n s t o p p e d b y th e p a n ic o f 1873 ... E v en m ore im p o rta n t w as c o n s t ru c tio n o f fe e d e r s an d b ra n c h e s f o r p a r e n t lin e s . I n a d d itio n , r e p a ir s a n d im p ro vem en ts th a t had b e e n p u t o f f d u r in g th e d e p r e s s io n w e r e now in it ia te d .’ p.115, 118

p e a k s in th e flu c t u a t io n s o f th e US ra ilw a y b u ild in g in 1870-90, w h ere a s in 1890-1914 ra ilw a y in v e s tm en t d is p la y e d much w e a k e r v a ria tio n s . I t is e s s e n t ia l to v ie w th e s e s h o rt te rm flu c tu a t io n s in th e p re-1914 US r a ilw a y in v e s tm en t in th e c o n te x t o f th e p ro c e s s o f th e in tro d u c tio n o f r a ilw a y s in th e U S , b e g in n in g in th e e a r ly 19th c e n tu r y and v i r t u a l l y com in g to a n d e n d in th e la t e 1880s. T h e c o u r s e o f th e US r a ilro a d iz a tio n w as, W. Is a rd s a y s , c h a r a c t e r iz e d b y th r e e m ajor lo n g s w in g s , th e s eco n d lo n g s w in g c o r r e s p o n d in g w ith th e c o u rs e o f r a ilw a y in v e s tm en t d u r in g th e C y c le I y e a rs , an d th e t h ir d , i.e. fin a l, lo n g s w in g c o m p ris in g th e v a r ia t io n s in th e l e v e l o f ra ilw a y b u ild in g in C y c le I I and I I I y ea rs .* T h e c o n s id e r a b ly s h o rte r d is ta n c e b e t w e e n th e tw o p e a k s in th e 1880s - f i v e y e a r s as com p ared w ith 15 y e a r s b etw een t h e f i r s t an d s e c o n d ra ilw a y lo n g s w in g p ea k s - se em s to ju s t if y t r e a t in g th e t w o s h o r t w a v e s aB fo rm in g to g e t h e r o n e lo n g sw in g.*

In th e S c h u m p e te ria n th eo ry o f in n o v a tio n w it h a n in it ia to r and im itato rs, th e in t r o d u c t io n o f a s in g le n ew te c h n o lo g y w ou ld g i v e r is e to a s in g le c y c le in in v e s tm en t. W ith th e s t a r t o f th e in tro d u c tio n o f an in n o v a tio n b y a p io n e e r in g e n t r e p r e n e u r (A in th e f i r s t c h a r t o f F ig I I I - 2 ) , th e l e v e l o f in v e s tm e n t w ill r is e a s th e n u m ber o f fo llo w e rs in c r e a s e s , i.e . as th e te c h o n o lo g y is d iffu s e d o v e r th e econom y c o n c e r n e d , u n t il th e p o in t o f s a tu ra tio n (B in th e f i r s t c h a r t o f F ig I I I - 2 ) , a f t e r w h ic h in v e s tm en t d e clin e s d u e t o th e ex h a u stio n o f p ro fita b le in v e s t m e n t o u tle t. A s is show n in t h e seco n d c h a r t o f F ig I II - 2 , th e c o n s e c u t iv e a p p lic a tio n o f n d i f f e r e n t te c h n o lo g ie s

2 W. Is a r d ( 1942a)A( 1942b)

3 M o re o v e r, 'th e r e c e s s io n in th e m id -e ig h tie s w a s n o t as s e v e r e n o r o f a s lo n g d u r a tio n a s th o se e x p e rie n c e d in th e m id - s e v e n t ie s '. W. Isa rd (1 9 42 a ) p.152 A c c o r d in g to R. F els(1 9 5 9) p.124,125, 'In c o n tra s t [ t o th e d o w n tu rn a f t e r 1873, 1893 a n d 1907), th e d o w n tu r n o f th e e a r ly e ig h t ie s w as s lo w an d q u ie t.’

1 0 0 Fig HI-2 Innovation and Investment

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r e s u lt s in n w a v e s in in v e s tm en t4. I n r e a lit y , h o w e v e r , the r a ilro a d iz a tio n o f th e US w as a s s o c ia te d w i t h t h r e e m ajor lo n g sw in gs, and m o r e o v e r th e fin a l lo n g s w in g c o n s is t e d o f tw o s h o r t e r c y c le s .