Finance and capital accumulation are closely related, although fundamentally different. “Capital accumulation” refers to increases in productive structures and equipment, while “finance” refers to the borrowing and lending undertaken by and through banks, securities markets, and among private individuals. In market economies, many real investment projects require a corresponding financing plan, so finance is often the complement to capital accumulation. In such cases, a more efficient financial system may increase the pace of capital accumulation or better direct it. Financial transactions, however, need not necessarily lead to capital accumulation, and projects financed out of retained earnings need not involve any new financial dealings. What about nonmarket economies? Is there a relationship between finance and capital accumulation? In a case like the Soviet Union in the 1930s, there is the possibility of no link. After all, in a market economy where capital formation requires monetary outlay, a lack of money can stop investment, but in a planned economy where investment goods are allocated by fiat, why should money matter? However, even Stalin balanced his budget, so finance was an issue in Moscow as well as New York. The agricultural surplus hypothesis is the link usually suggested between finance and capital formation in the U.S.S.R. The hypthesis deals with two issues – state finance and farm marketing. So far as finance is concerned, the agricultural surplus hypothesis contends that the investment drive of the 1930s was financed by mobilizing the agricultural surplus.
|Title of host publication
|Finance, Intermediaries, and Economic Development
|Cambridge University Press
|Number of pages
|Published - Jan 1 2003
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)