Capital and its productivity in Finland, 1975–2001

Abstract

The fundamental role of capital in economic growth has long been known. How capital should be defined and measured has been the subject of much discussion. The starting point of this study is methodological, as we define starting from a neo-classical production function the indicators for capital input and compare these with the traditional capital stocks of national accounts. The origin of Finnish capital measurement is also traced. In the empirical part of the paper, we apply the different capital measures to Finnish data for 1975–2001. This period is interesting as the early 1990s were turbulent times for Finland, with GDP declining by 1 1 per cent. We find as a result of our number-crunching efforts that there was a spectacular increase in capital productivity growth after the recession. Finally, we observe how our new estimates accord with the previous view on how capital has influenced recent Finnish historical economic development. Our main result is a resolution of the Artto-Pohjola paradox, as we show that a high rate of return was combined with a low capital productivity growth in 1975–1990.