The Baran Ratio, investment, and British economic growth and development

Abstract

Investment in capital, new technology, and agricultural techniques has not been considered an endeavor worthwhile in a medieval economy because of a lack of strong property rights and no incentive on the part of lords and barons to lend money to or grant rights to peasant farmers. Therefore, the medieval economy and standards of living at that time often have been characterized as non-dynamic and static due to insufficient investment in innovative techniques and technology. Paul Baran’s concept of the economic surplus is applied to investment patterns during the late medieval, mercantile, and early capitalist stages of economic growth in England and the UK. This paper uses Zhun Xu’s Baran Ratio concept to try to develop general trends to demonstrate and reinforce other historical accounts of these times that a productive and sufficient level of public and private investment out of accumulated capital income, taxation, and rents does not have a real impact on economic per capita growth until around the 1600 s in Britain. This would also be about the time of capitalism’s ascent as the dominant economic system in England. Even then, dramatic increases in investment and economic growth do not appear until the late 18th Century when investment more consistently becomes more than one hundred percent of the level of the domestic economic surplus and takes in government spending. The types of investment, threshold amounts of investment out of profits and rents along with government spending seem to matter when it comes to a growth path raising GDP per capita and national income per capita to higher levels. Although much of this knowledge perhaps is embodied in current historical accounts, the Baran Ratio nicely summarizes and illustrates the importance of levels of investment to economic growth.

Keywords:

• Baran Ratio
• capitalism
• economic growth
• feudalism
• investment

JEL CLASSIFICATION CODES:

• B51
• E11
• E12
• N13

Notes

1 Sato (2018) points out that claims and rights to land and land usage were multi-layered under feudalism with lords holding political power over the land while serfs and other commoners of lower classes had rights to use it for subsistence farming, fishing, etc. as long as they shared in the proceeds of their harvests and catches. He argues that it is not until under capitalism that land becomes a commodity and then ownership and rights to land revert to just one person or group of owners who are part of one social class. Multi-layered ownership along class lines ceases to exist.

2 Which some have claimed were also caused indirectly by a mini-ice age (e.g., Fagan 2000; Blom 2019 among others).

3 Stanfield (1974) emphasized one of Baran’s (1957) concepts of the economic surplus as potential output less essential consumption of a society to yield potential surplus. Without knowing or being able to estimate slack in the British economy from the 13th to 19th Centuries, this paper focuses on Baran’s concept of the actual surplus, which is actual output minus essential consumption.

4 Rimmer, Higgins, and Pollard (1971) assess the year-to-year rates of investment in the 18th and 19th Centuries in the UK and estimate it to be slower than other estimates and believe a lot of capital investment undertaken was due to the rapid deterioration of many forms of plant and equipment. They cite the frequency with which horseshoes and many farm tools had to be replaced. Nonetheless, such replacement was necessary to propel agricultural output to higher levels, and therefore the investment expenditures could be considered productive still.

5 The debate over productive versus non-productive pursuits and occupations can be traced at least as far back as Smith (2000). In general, those commercial and governmental activities and occupations which do not add to or help to create value in the production or distribution of products or services are considered unproductive whereas those that do add value are productive. In an enterprise, workers who design and create a product would be considered productive whereas cleaning and bookkeeping personnel, although important, would not really be considered productive. In classical political economy this was an important distinction, and it is still considered important to many heterodox economists. It has mostly been discarded, however, by mainstream and neoclassical economists. It is not a primary focus of this paper, however.

6 The preceding line nor anything else in this paper should be construed as indicating that surplus is a causal prerequisite for investment. A Post-Keynesian tradition is to view investment as causally prior to savings/surplus and independent from income and output in the short run. The Baran Ratio, as applied in this paper, simply looks at investment as a share of surplus (savings) and is not concerned with whether surplus causes investment or the other way around. Either is possible. More important to this paper is their degree of correlation and whether investment yields subsequent long term growth and higher income. A supplement to this paper which appears after the Appendix covers Keynesian and Marxist views of the relationships between surplus/savings and investment for those who want more elaboration.

7 An exception is a paper by Broadberry and de Pleijt (2021) which estimates capital stock and investment levels of different types (working capital, fixed, domestic and overseas assets, etc.) usually going back to the 1350s on a every half century basis. They do not estimate government deficit/surpluses, however. Lambert (2021) finds a high correlation between his estimates and theirs for the years for which there is overlap.

8 Clark's estimates of indirect or excise taxes correlate well with those of of O'Brien and Hunt (1999) who give estimates over the centuries. Most of the taxes colleccted by Britain over the centures were indirect or excise taxes rather than direct and/or income taxes (Seely 1995, HM Revenues and Taxes 2010).

9 The United Kingdom formally came into existence in 1707 thanks to the Treaty of Union between England and Scotland although the two states had been unified through a common monarch when James I (James VI of Scotland) became King of England around 100 years earlier (Macinnes 2011). Although Great Britain or Britain is not quite the same as the United Kingdom, this paper uses these terms interchangeably.

10 Broadberry and de Pleijt (2021) show zero for some of their every 50 year estimates but no negative values.

11 This paper takes a Post-Keynesian/Kaleckian point of view that almost all wages or labor income is spent on consumption and that investment almost entirely comes from upper class income which mostly goes to savings or economic surplus (Lavoie 2009). The high labor costs of the 15th and 16th Centuries are factors that constrained the economic surplus amounts as a portion of NNI shown in Figure 1.

12 One could argue that the government’s buy out of slaves could be considered as the retirement of one form of human capital, slaves, for another, labor, although the first was considered property (investment), and the second one is labor.

13 Interestingly one thing that Barro finds is that as long as currency could be converted to gold, money supply growth and inflation are not problems resulting from the budget deficits or the temporary rises in government spending mostly due to military spending. He claims that such deficits are associated with increases in long term interest rates, however, except for the deficits associated with the slave buy out and the income tax dispute. In those two cases, long term rates do not rise. Clark (2001) in estimating deficits from the 1720s to the 1830s finds no “crowding out” effects of British deficits. Figure A1 in the Appendix also plots Clark’s estimates of real interest rates from 1200 to 1860. Admittedly, according to some, greater government debt implies greater taxation later, which in turn cuts into consumption and profits, and any decline in these would limit the economic surplus. However, the growth of the British economy during the 17th to 19th Centuries show no such effects in the data used for this paper.

14 Esteban (2001) writes that the French wars would have been very difficult for Britain to finance had it not been for trade credits from India.

15 Richardson (1987) and Eltis and Richardson (2008), among other scholars, estimate that the British slave trade of the 17th to 19th Centuries had a big impact on British economic growth. Graeber (2006), among others, claims that earnings from the slave trade is a key factor in propelling capitalism to greater heights in Europe, yet also notes that wage labor is a necessary replacement to slavery since mass consumption is necessary to complement the mass production that starts with the industrial revolution. Eltis (1987) writes that the slave trade is not in decline in the late 18th Century as some have described it, although abolitionists begin to slowly work against it, which transforms the British economy. This is also about the time of key advances in manufacturing. According to the findings of this paper, the year 1780 and the late 18th Century are associated with the beginning of large gains in UK domestic investment. The Broadberry et al. and Clark estimates do not give any data on the value or number of slaves in England and/or the UK for the centuries for which they provide conjectures.

16 Banking and investment exchanges were not that developed in medieval England or in later centuries due to fragmented markets, church teachings, and a lack of lending institutions. The emphasis on investment during medieval times was on land, and probably wealthier land owners often loaned funds to others for land purchases (Postan 1972, 150–153). Some held their surplus earnings and income in the form of gold or silver.

17 Clark (2009) calculates domestic estimates for the UK from 1200 to 1860 yet refers to “net national income” rather than using net domestic income. Also, since Broadberry et al (2015) are very careful to count only income and output from within England and the UK, one must accept that income and output from colonies and territories are not included in their estimates. The emphasis of both studies in constructing data from the 13th to the 19th Centuries is on a closed economy, probably because it is not until the 1800s that trade becomes a large part of the English economy according to Feinstein and Pollard (1988). These methods all assume that national income accounting (NIA) can apply to a feudalistic economy from the late medieval period as well as to a mercantilistic and then capitalistic economy in later centuries. One could argue that NIA was developed for a capitalistic economy and perhaps not appropriate for a feudalistic system. Yet using NIA allows for some standardization across the centuries for comparison purposes.

18 Again, and of course, investment generates surplus too. The order is not important for the purposes of this paper, although many would subscribe to Baran’s view of investment being driven by surplus.

19 He uses the income shares of different nations in modern times to do this. This paper takes a different approach.

20 A table of all the data used in this paper is displayed in the Appendix.

21 There is of course a simultaneous relationship among many of these variables with investment usually and not only leading to higher real output/income per capita, but the latter also leads to higher investment, consumption, etc., in turn over the long run. That is, a feedback loop exists among investment and output. Again, the emphasis of this paper is not on short run but on the long term and general correlations among surplus, investment, growth, and real income/real GDP.

22 The high negative correlation between investment per capita and government surpluses/deficits per capita is not surprising, of course, since surpluses/deficits were derived by taking the economic surplus minus investment estimates.

23 These results can be provided upon request by the author.

24 Conceptually the relationships among some of the variables should not be spurious since they are related by definition. Investment is defined as coming from savings (surplus), and investment is part of the equation GDP = Consumption + Investment + Government Expenditures + (Exports – Imports).

25 Please see these tables in the Appendix.

26 Graphs of real GDP per capita using the Clark and Broadberry et al data showed pretty much a flat line trend pretty much during both feudalistic and mercantilistic (or transition period) epochs.

27 The authors omitted the period of 1497–1549 because of a lack of historical records and difficulties in coming up with accurate estimates.

28 In modern times, Baran and Sweezy (1966) claim that most research and development is for minor changes in products regarding their design and packaging. Substantive R&D is mostly done by the government, and much of it is only used in the private sector after some time has passed and when it appears that investment in the new technology is safe and profitable regardless of societal needs or possible demand. In a letter to Sweezy, Baran writes that capitalist investment only follows innovation depending upon the investment climate at the time (Baran and Sweezy 2017, 145–146). Lambert (2020) finds some empirical support for the Baran and Sweezy assertions, and it also appears that a lot of R&D and innovation results in greater monopolization of markets.

29 Although Baran and Sweezy emphasized that it was World War II that eventually lifted the US out of the Great Depression and restored full capacity utilization and full employment.

30 It is granted that Britain engaged in a slave trade and engaged in overseas conquest in order to expand its export business, and these also are factors in its debt and deficit levels. Yet it also engaged in investment in many productive activities, such as infrastructure, scientific innovation, manufacturing plants, etc.

31 Recall in one of the graphs presented in this paper that the economic surplus was very high in late feudalism with very little productive investment being done in feudalistic times in general.

Additional information

Notes on contributors

Thomas E. Lambert

Thomas E. Lambert is at University of Louisville, Louisville, KY, USA. He would like to thank John Bellamy Foster, L. Randall Wray, and the reviewers of this paper for their helpful comments in developing it. Any errors are strictly the authors.