"Blank spaces in the growth columns for the recent period are shown for education in the Armed Forces, conventions, wholesale agents, and three smaller items, because we have only a single recent estimate of each of these expenditures. The combined value of the six items for which no rates of increase are available is only $6,839 million, or 5 percent of total knowledgeproduction. Thus, we have the short-period rates of increase for the other 46 items, making up 95 percent of the total. In the columns for longer period growth rates we have blank spaces in 16 lines, representing 1958 expenditures of $22,625 million, or 16.6 percent of total knowledge-production. The lack of comparable figures, in some instances due to changes in census classifications, explains several of these blanks. In one case-electronic computers-the industry did not exist in the early years of our longer period, and we do not wish to start with the very first year and have it as a part of a shortened period, because this would give astronomical growth rates. Incidentally, we do catch in our longer period the beginnings of television broadcasting, exhibiting a growth of 54,000 percent over the 11 years, but this is 'only' an annual growth rate of 77 percent. By clipping off the first 2 years, 1947-48, and observing the growth only for 1949-58, we would reduce the 'growth rate' for TV broadcasting to 2,930 percent for the 9 years, and 46 percent per year. We should never forget that the early years of an industry regularly exhibit enormous rates of increase, impressive to those who do not understand the principle. Electronic computers and TV broadcasting are at least as impressive as some of the rates of growth of the output in new industries in Soviet Russia.

Telecommunications media: Telephone.. Telegraph..

Information machines:

Wholesale agents...

Miscellaneous business services..

"Of all the annual 'growth rates' tabulated for the various branches of knowledge production, the short-period rate for computers is the highest: 104 percent. The second highest is the longer period rate for TV broadcasting: 77 percent. The short-period rates for office machine parts (30 percent), Federal education programs (25 percent), phonography (20 percent), applied research and development (19 percent), and basic research (18 percent), and the longer period growth rate for broadcasting station investment (18 percent) are next in the list of top performers. A considerable number of annual rates above 10 percent appears in table IX-2. The most interesting are the short-term rate of over 13 percent for money expenditures for colleges and universities, the longterm rate of 12 percent for money expenditures for elementary and secondary schools, and the short-term rate of almost 11 percent for books and pamphlets. "All these individual annual growth rates should be viewed against the background of the average growth of knowledge production and the growth of GNP. The weighted average of the annual rates of increase over the most recent period of the 46 branches of knowledge production for which we have data is 8.8 percent. This compares with a 5.1-percent rate of increase of GNP (at current prices) per year over the same 4 years. The weighted average of the annual rates of increase of the 36 branches of knowledge production for which we have data covering the longer period is 10.6 percent, which compares with a 5.9-percent rate of increase of GNP (at current prices) over the same 11 years. The differences in the rates appear even more impressive if knowledge production is compared with the production of everything else that is included in GNP. If knowledge production, the sector comprising 28.7 percent of total GNP, increased by 8.8 percent (or 10.6 percent over the longer period) per year, an increase of total GNP by 5.1 percent (or 5.9 percent) implies that the production of other goods and services increased by only 3.7 percent (or 4.1 percent over the longer period).

"RESERVATIONS AND SPECULATIONS

"These comparisons must be taken with several grains of salt. The procedure by which the growth of knowledge production is held up for contrast with the growth of all other things, may be questioned because no account was taken of the missing data for 5 percent of knowledge production over the most recent period or 16.6 percent of knowledge-production over the longer period. If the missing branches happened to be slow growing, the use of the weighted average of 'growth rates' of the branches represented in the tabulation as the rate applicable to the entire knowledge production would overstate its growth. But it is unlikely that an overstatement on this ground would be serious enough to vitiate the general conclusion. The contrast would remain impressive even if the rates of increase in knowledge production were not the full 2.4 times (or 2.6 times) the rates of increase in the production of other things.

"There are, however, other grounds for objections or reservations. One may question the significance of the comparisons on the ground that the increases refer to amounts not corrected for possibly very different rates of price inflation. But the failure to correct for possible differences in price inflation may just as well involve an understatement as an overstatement of the differences in 'real' growth rates. In any case, even if there should be less of a 'price inflation effect' in other parts of GNP at current prices than in the expenditures for knowledge production, the relative money expenditures and relative rates of increase remain interesting. This is to say, it is important to note that the money expenditures for intangible knowledge services rose much faster than the money expenditures for physical goods and other services.

"For a better understanding of the meaning of 'growth' in areas of production in which output cannot be measured, and most of the increase is in terms of expenditures for input, it may be helpful to go through a bit of hypothetical reasoning. Imagine an economy divided in two sectors, one, A, producing physical goods, the other, B, intangible services, A employing three-fourths, B one-fourth of the total labor force. Assume now an increase in productivity in sector A due to technological progress and a consequent increase in the physical output of sector A by, say, 10 percent; assume further that all wages and salaries, in A and B, are increased by 10 percent and that product prices remain unchanged. If there is no change in the allocation of resources, money expenditures will have increased by the same 10 percent in both sectors. In sector A, where 'growth' is measured in terms of sales of output, an increased quantity of goods

is sold at unchanged prices; in sector B, where 'growth' is measured in terms of payments for input, an unchanged quantity of labor is paid increased wages. Thus, the 'real' increase in production in A, with no change in activity in B, results by way of adjustment in factor incomes in the same relative increase in expenditures for the intangible services of B. The 'production' of intangible services by an unchanged quantity of labor with unchanged productivity will show the same percentage increase as the production of physical goods.

"There is a reverse side to the coin. Increases in productivity in the performance of intangible services cannot be measured; indeed, most of them are in the form of improvements of quality, defying all attempts at quantification. No matter how 'real,' how substantial, how important they are, they need not be reflected in any increased money values of input-their only measure. As we have seen in the discussion of research and development, an increase in the efficiency and productivity of those activities may eventually result in increased productivity in industries producing physical goods, but the production of knowledge does not exhibit an increase on that score. This failure of 'growth indexes' to reflect improved efficiency in the production of intangible services has several implications. One of these relates to structural differences between economies: an economy with a large service-producing sector may not be able to 'show off' with as large a physical growth rate as an economy that concentrates on the production of tangible goods, the increase of which is shown in the index of physical production and in GNP in constant dollars.

Mr. CURTIS. Dr. Machlup has a chart here showing how he measured human wealth. Just reading some of the headings: "Education: In the Home, On the Job, In the Church, In the Armed Forces, Elementary and Secondary Schools, Colleges and Universities, Monetary Expenditures, Implicit Costs, Commercial, Vocational and Residential Schools, Federal Funds, Not Elsewhere Classified, Public Libraries."

Then another big heading: "Research and Development." Another heading is "Printing and Publishing, Stage, Podium, and Screen." Going down a list of criteria that we can measure that might help us in understanding what we have in the way of skills and knowledge within the society as a better test of what our wealth is. To emphasize the point let's pose this question: "If you as the head of a business were presented with the unfortunate choice of losing your factory building and fine machinery (your physical wealth) or the skilled personnel you have put together, which would you choose?" There has never been much hesitation on the part of the business leaders when they reply to the question. They, in effect, say: "We'll take the personnel and go to work in a barn.”

The investment credit provision in the 1962 tax law was in error on two basic counts. First, it took the theory of the "seed corn" tax bill for small business I had developed in the original Curtis-Ikard bill and perverted it to assist essentially the manufacturing sector and bigger business units in two ways:

First, by removing the dollar ceiling I had imposed and, second, by defining capital investment to include only depreciable type assets, such as machinery and equipment.

Excluded from the 1962 law's definition of capital investment was investment in inventory and accounts receivable (provided in the Curtis-Ikard bill) which are so important to the service and distributive area of endeavor in which small business is dominant.

Second, and more importantly, the 1962 investment credit was based on the erroneous assumption that capital investment was needed primarily in physical items. Instead, the great portion of capital investment in modern America should be used to develop human