May 2, 2014
By Mark Lasky
This paper presents two basic innovations: a new type of putty-clay capital, used to model business investment; and the use of investment to identify shares of capital income and market value accruing to tangible and intangible capital. Unlike in existing putty-clay models, new capital is complementary with existing capital, allowing investment to be specifi ed as a function of the productivity of existing capital and of Tobin's q. In contrast to Tobin's q models using neoclassical (putty-putty) capital, q is not a sufficient statistic for investment, which also depends on the growth of aggregate demand. The model implies that investment in the types of capital measured in the national income and product accounts, whether equipment, structure, inventory, or intellectual property product, depends on the market value of existing assets of those types. Thus, investment can be used to identify those assets' shares of market value and capital income. The market value and income of unmeasured intangible capital, which includes organizational capital, reputation, and market power, can be estimated by subtraction. I find a sharp increase in the income of unmeasured intangible capital since 2000. Relatively weak investment in measured capital in recent years can be reconciled with high levels of asset prices and capital income because those high levels are due to unmeasured intangible capital and so do not affect the incentive to invest in measured capital.