1. WORLD KLEMS CONFERENCE August 2010 Harvard University KLEMS Methodology Basic Building Blocks: Measuring Capital Paul Schreyer, OECD

2. This talk The origins and basic ideas Capital services and the national accounts – the debate Looking ahead in capital measurement

3. The origins Flow of services and user costs discussed by Léon Walras (1874) and Böhm-Bahwerk (1891) Model of capital as a factor of production introduced by Dale Jorgenson (1963) Capital Theory and Investment Behaviour Application to growth accounting by Jorgenson and Griliches (1967) The Explanation of Productivity Change Large body of literature followed

4. The basic idea – 2 dimensions to capital Source of flows of services into production (the K in the production function) Production aspect –Captured by recognizing that different types of assets have different marginal productivities –These are captured by asset-specific prices of capital services: user costs –User cost weights are key in aggregating across different types of capital (akin to labour input) Component of wealth Wealth aspect

5. The basic idea (2) Traditionally, only wealth aspect recognised in NA, via balance sheets Production aspect, if recognised at all, only in a partial and inaccurate way: depreciation as measure of capital input into production Yet, both aspects can be integrated into a system of accounts in a conceptually correct and consistent way

7. The basic idea (3) Consequence: Symmetric treatment of labour and capital in the production (and generation of income) accounts Both the value of labour income and the value of capital income can be broken down into a price and volume component vital for productivity computations SNA 59, SNA 68 and SNA 93 had asymmetric treatment of labour and capital

8. Capital services and the national accounts – the debate First discussions in the context of the Canberra I Group on Capital Measurement but notion of capital services was not adopted More discussions in Canberra II Group (2005-2008) and recognition of capital as an input in production measure put forward as issue in the Revision of SNA 93 SNA 2008 5 issues in the debate

9. Issue #1: Capital services measures mix up the real and the financial side of the economy Misunderstanding about the role of rates of return and holding gains and losses in user costs Absent market transactions, they form part of an estimate of an imputed transaction but not a recognition of capital gains as production

10. Issue #2: Government production is not for profit – hence no net return on capital should be imputed for government assets Neglects the fact that government has financing costs or opportunity costs But SNA 2008 maintains that value of capital services for government asset = depreciation Ironically, net return is needed to identify non- market producers

11. Issue #3: There is no unique method to estimate user costs – this will impair international comparability No misunderstanding here but there are many instances in national accounting when different methods can be used and are used Real questions: –How much does it matter (N.Oultons paper) –Is not recognising user costs a better option?

12. Issue #4: Already too many imputations in the accounts – no need to add another one Fair point Judgement about optimal level of imputations varies between national accountants and analysts

13. Issue #5: Capital service measures imply a value judgement by the statistician on functional income distribution Capital services measures are indeed conceived with regard to a particular theoretical model (neoclassical theory) But issue is to be transparent about this. There is (and probably should be) no such thing as a theory-free national accounting

14. Do capital services measures evolve differently from capital stocks? Yes – example Australia

15. Looking ahead in capital measurement Linking industry and total economy accounts Capitalisation of intellectual property products beyond R&D: the debate on intangibles Capacity and capital utilisation Natural and environmental assets Human capital

16. For more, and for references to the literature see... Also available in French, Spanish and...Korean

17. Thank you! Paul.Schreyer@oecd.org OECD Productivity data www.oecd.org/statistics/productivity/