N(t-1) + B(t) - D(t) + SM(t) … (1)
Regarding an economic system as a single complete structure is an idea which has garnered consistent support throughout the history of economic thought. One of the conditions necessary for a complete system is that there be what is called "consistent conditions of stock and flow." For example, an accounting system such as a System of National Accounts (SNA) can, through its accounting identities, be satisfied with the consistency of an entire structure.
A well-known example is "the equivalent of three aspects of national income." A condition is the consistency of flow aspects in production, distribution, and expenditures. Using factors of production, the value added originating in production activity in a fixed period (flow condition) constitutes national income produced. This value added, as factor income (national income distributed), is distributed among the owners of the factors of production being used. Thus, factor income is expended as consumption and investment, the final two elements of demand (national income expended). The total final demand is neither more nor less than the aforementioned value added originating in production activity. Thus, it is essential that the value added (national income) observed in the three aspects of economic activities be equal.
To provide one example of the consistent conditions of stock and flow referred to throughout this paper, consider the following identity equation on population (stock) and changes in population (flow),
N(t-1) + B(t) - D(t) + SM(t) … (1)
Here, N = population, B = number of births, D = number of deaths, SM = net migration, and t in parentheses = year. This formula is used, with the information from life tables, in order to make intercensus population estimates based on the Census of Population (kokusei chosa) conducted every five years.
On the other hand, regarding the SNA system, the "national balance sheet" guarantees calculations regarding consistent conditions of stock and flow, including both the real and financial sectors. The subject of this paper is on a consistent condition of stock and flow on the real side of the national balance sheet in terms of gross concept and at constant prices. In other words,
K(t-1) + I(t) - R(t) … (2)
Here, K = gross capital stock, I = gross capital formation, R = capital replacement. When the net concept is used as the concept of capital, the above symbols stand for net capital stock, net capital formation, and capital consumption, respectively. In the next section, I would like to use equation 2 to discuss the problems in estimating capital stock.
We have two problems in evaluating capital. The first is "gross versus net concepts." The gross concept assumes that stock generally encounters "sudden death" at the end of its expected lifespan. Further, for capital replacements, we can assume a distribution with its lifespan as its mean value. In contrast, the net concept assumes capital consumption with a continuous deduction method due to physical and economic obsolescence incurred over the lifetime of the stock. There are two basic types of capital consumption methods, the straight-line method and a number of fixed-rate methods. Further, we have to consider scrap rates whether they are positive or zero, and if they are positive, the level of the ratio to the amount of capital at the time of its acquisition, expressing the value of scrap immediately following the end of its lifespan. The reader should be aware that the words "asset," "investment," and "depreciation" are deliberately not used here.
The second problem is determining prices for the evaluation of capital stock. In the case of flow variables, there are two methods, "at current prices" and "at constant prices." In the case of stock variables, there is, in addition to the above two methods, the "at historical costs" method. In the SNA system the current "national balance sheet" is obtained by taking the previous "national balance sheet" and adding to it the current "capital account" and the current "other changes in volume of assets account" plus the current "revaluation account." Therefore, the method of evaluation is the method of stock variables "at current prices." The method of stock variables "at constant prices" is usually adopted in the analyses of production functions and growth accounting. In contrast to these methods, "at historical costs" is also termed "at book value." This method of evaluation does not introduce any reevaluation of existing capital stock, keeping its book value at its acquisition. This is one of the practices which makes possible the Japanese corporate practice of "management with large unrealized capital gains for assets" (fukumi keiei ).
3. Problems in Setting the Time of Observation
This is a problem with an important impact on the consistency conditions of stock and flow, and it has so far garnered too little attention. It is clear that the periods of observation are different for the flow variable, capital formation, and for the stock variable, capital stock. The former is observed over a period of time (one year, a quarter-year) and the latter is observed at a certain point in time (the beginning of a period, the end of a period, the middle of a period). The effect of this difference on evaluation problems can be ignored here.
This section will examine other problems instead. When measuring capital formation from the viewpoint of effective demand, at payment base is adopted. However, the possible bases for capital formation include the levels of (1) contract, (2) payment, (3) delivery, and (4) operation. Fixed capital stock, used to analyze production function analysis and growth accounting, is consistent with the level (4) of capital formation possible in operations. However, the usefulness of capital stock accumulated from capital formation series at payment base, as considered from the viewpoint of capital stock's social efficiency in terms of opportunity costs, is asserted. Therefore, a special mention must be made on the same point where there are multiple points of observation in the case of capital stock from the analytical purposes as in the case of capital formation.
However, I would like to point out that, in the case of capital stock, one more difficulty relates to the selection of bases. That is the opposition between the "owner concept" and "user concept" of capital stock. Expenditures toward capital ordinarily respond to the occurrence of the right of ownership. Thus, the right of ownership, and the creation and attribution of the income thereby produced, is defined as the "boundary of capital (assets in the case of SNA)." Capital formation or capital stock obtained from the SNA system constitutes the "owner's base" while capital stock desired for the sectoral production analysis or the growth accounting analyses is on the "user's base." The situation is the same for the National Wealth Survey as well. However, the deteriorating environment for the National Wealth Survey means trouble for the Survey itself, and it seems unlikely at present that a supplementary survey using the "user's base" will be conducted.
4. Problems in Estimating Methods
Three methods can be used to estimate capital stock: (1) PI (Perpetual Inventory) method -> Flow series accumulation (2) BY (Benchmark Year) method -> Stock figures (benchmark) with additions and subtractions of flow series (3) SV (Stock Valuation) method -> monetary evaluation of stock series (physical units)
When using the same method of measurement (mainly the PI method) to make estimates, it is generally desirable to use a single standard. However, three points must be fulfilled for the purpose: (a) it must be possible to obtain capital formation time series across an adequate period of time; (b) it must be possible to obtain price deflator time series corresponding to capital formation series; and (c) the lifespan of various capital items must be prudently determined. However, regarding raw materials related to capital, and the experience of investigating the possibility of obtaining such data in Japan, construction (buildings and construction) has, compared to other capital items, a long lifespan, so a capital formation series of over 50 years is necessary for construction when capital stock estimates are compiled using the PI method. For example, to obtain figures for capital stock in 1995, it is necessary to go back to 1945 to obtain real capital formation time series. That is not possible, and it is all the more impossible to obtain capital stock series prior to 1994, so it is clear that we must make use of methods other than the PI. Therefore, we can understand that it would have been impossible to compile postwar Japan's capital stock series using only the PI method. In fact, the BY method was used to estimate capital stock. This method can also be used to compile national balance sheets. Anyone attempting to compile estimates for capital stock in the postwar period using only the PI method would need to deal with innumerable difficulties, including: (a) the problem of linking prewar and postwar indicators, (b) the problem of determining a method for excluding wartime damage (the real gross value of damage to separate capital categories and age distribution), and (c) the need to deal with differences in both periods of the lifespans. Under present conditions, it is safest to assume that it is not possible to solve these problems.
A representative example from among cases using the SV method is prewar Japan's agricultural stock estimates (Umemura = Yamada time series). In principle, in this case, the basic raw time series (real units) were the numbers of agricultural households by prefecture (fu or ken). Estimating capital formation series which could meet the consistent conditions of stock and flow was extremely difficult. The main problem was thought to be the gradual but long-term decreasing trend in the number of agricultural households. I first presented one approach (Ishiwata 1981) for handling this difficulty while compiling estimates of housing capital formation and capital stock in Australia.
5. The Need for National Wealth Surveys
The postwar national wealth surveys of Japan conducted in 1955 and 1970 were like basic census surveys. Thus, throughout the preceding quarter century, no national wealth survey was conducted. Major problems resulted.
Many individual researchers, both in Japan and elsewhere, had attempted to conduct national wealth surveys [Nakagawa 1935]. There were periods when national wealth surveys were conducted at the same time as national income surveys. When economic growth was relatively low, it was stipulated that national income (flow) is determined by national wealth (stock) and, therefore, the attention of economists turned toward national wealth surveys. Afterward, when economic growth was at high levels, attention shifted toward national income estimation. At present, the economic growth rate in advanced industrial nations is at low long-term levels, while concern for national wealth is, as before, minimal. In Japan, interest in stock (including financial assets) reached extraordinary levels during the "bubble" boom of the late 1980s, only to dissipate when the boom ended. This is one sort of distortion.
Asian countries, on the other hand, have attracted attention for achieving high growth over long periods, including short-time adjustments. The causes for short-term periods of adjustment are primarily internal rather than external, with much attention being focused on the lack of social overhead capital. In these regions, from now on, there will be demand for scarce resources to be distributed in these areas. At that time, efforts to conduct national wealth surveys will be advanced by the need to improve efficiency in the allocation of resources. When individual attempts at national wealth surveys are called for, and the time is right, the "external economy" of individual attempts at national wealth surveys will overcome the unfavorable conditions. For example, a semi-individually conducted national wealth survey which has drawn attention is the "Takahashi-Igarashi estimates" (Ishiwata 1982).
When there is strong interest in national wealth surveys, we can anticipate similarly strong interest in time series statistics and distribution statistics (cross-sectional statistics). This phenomenon suggests that we need to consider that there will be interest not just in stock time series but in income distribution in flow time series as well.
Capital coefficient (capital-output ratio) and capital intensity (capital-labor ratio) have come to play important roles as variables for economic theory and as indicators for quantitative economic analysis. For example, capital coefficients, as well as their reciprocals, are important variables for the Harrod-Domer model. This coefficient, as an indicator of the social efficiency of aggregate capital, should become an indicator of the efficiency of resource allocation. Further, it is emphasized that capital intensity supported economic growth during the early period of development when capital was in short supply, as Fei and Ranis judge in the case of the special character of technological advance which made possible capital-saving or labor-using and, also, in cases of "capital shallowing" observed in prewar Japan and postwar India. I have described elsewhere how errors in handling statistics on Japan meant that we were unable to observe such facts in our capital stock estimates (Ishiwata 1991). Further, "capital shallowing" is observed in postwar Thailand's manufacturing industries (Shintani 1995). The measurements for Thailand are based on capital stock series from the Report on Manufacturing Survey. The nature of the "amount of fixed assets" for capital stock included in the report is unclear. If the Report might provide the same type of information on the "amount of assets" as in the Manufacturing Census Survey (Kogyo tokei hyo) for Japan, measurement errors would be unavoidable. Thus, judging from the direct observation of capital shallowing in "Figure 1: Changes in capital and labor ratios in manufacturing industry (1952-1988)" (p. 49), I think that it is necessary to deal with problems in estimates of capital stock.
Fixed capital stock is necessary to analyses of production functions and growth accounting, and investigation was conducted on revising the "1953 SNA" into the "1968 SNA" but in the end nothing was included in the system. I think this was a step backwards in making revisions to the "1993 SNA."
The issues of the efficiency of allocation of limited resources is at the base of the long-term declining trend in economic growth and is an increasingly important policy issue. Maintaining the efficiency of capital stock in the public sector is a central issue in the efficient operation of the economic system. It is urgent that we further our efforts to resolve the many problems related to capital stock statistics, which provide the basic information for such issues.
International Christian University
Reference /
Fei, J.C.H. and G. Ranis, 1964, Development of Labor Surplus Economy: Theory and Policy, Homewood, Illinois: Richard D. Irwin.
Ishiwata Shigeru, 1979, "Oosutoraria no jutaku shihon keisei to shihon sutokku, 1860-1939" [Residential capital formation and capital stock in Australia, 1860-1939], Aoyama Keizai Ronshu [The Aoyama Journal of Economics] 30, No. 2-4 (February), pp. 127-167.
------, 1981, "Nihon no soshihon keisei no suikei ni tsuite: "furoo-sutokku joken" o chushin to shite" [On the estimation of gross capital formation in Japan: focusing on "flow-stock conditions"], Shakai Kagaku Jaanaru [Journal of Social Sciences] 21, No. 1 (October), pp. 1-17.
------, 1991, "Shihon sutokku suikei to zosengyo no seisan ni tsuite: Yasuba Yasukichi-kyoju no komento ni kanren shite" [On capital stock estimation and the production of the shipbuilding industry: with regards to the comments of Prof. Yasukichi Yasuba], Osaka Daigaku Keizaigaku [Osaka Economic Papers] 41, Nos. 2-3 (December), pp. 58-67.
Shintani Masahiko, 1995, "Tai no keizai hatten to shihon senka" [The economic development and capital shallowing of Thailand], Toyo Bunka Kenkyusho Kiyo 127 (March), pp. 43-68.