The Empirics of the Equilibrium Balanced Growth Model

THE FOCAL POINT of this dissertation is an empirical investigation of the analytical relevance of the equilibrium balanced growth model from the standpoint of long-term financing patterns in the corporate sector. Specifically, the postwar (i.e., 1950-1969) corporate sector and property share data for the United States, United Kingdom, Canada, France, and Japan are examined to determine whether any insights into the historical growth process can be gleaned from balanced growth equalities. In addition, a recursive or adjustment-periods model is constructed as an alternative explanation for the actual patterns of growth observed in the five sample countries. In the ideal balanced growth model, under conditions of Harrod-neutral technological progress, the rate of return on capital, the market cost of capital, and the growth rates of the capital stock and of total output all tend toward equality. This result emerges because competition reduces the rate of return on capital to the market interest rate (= normal rate of return) and because an amount equivalent to total profits is assumed to be saved and invested. Viewing the corporate sector as a self-contained investment unit, it was argued that, if an equilibrium balanced growth path were to be realized, all corporate sector earnings would have to be absorbed into savings and investment. That is, if the whole economy is investing at a rate equal to the property income share and if the corporate sector over time approximates a constant share of total output, then along the balanced, golden age path, the corporate sector's reinvestment rate (I/K) would have to be equal to its average profit rate (P/K). The actual satisfaction of this condition would mean that any payment of net dividends by corporations, in the aggregate, would represent a useless financial maneuver, since it would transfer investible funds out of the corporate sector. Moreover, if useable funds (i.e., funds that could be invested at rates of return equal to or above the financial cost of capital) were actually paid out, for example, to satisfy the preferences of stockholders for cash dividends instead of capital gains, then according to the Modigliani-Miller thesis, one would expect corporate managers to issue net new external capital sufficient to compensate for the loss of investible funds. The statistical data for the five sample countries revealed several interesting