Introduction

There has been a long tradition in the literature on the theory of economic growth, whether written in Cambridge, United Kingdom, or in Cambridge, Massachusetts, to neglect the role of corporate shares in the process of capital accumulation. This neglect constrained researchers to formulate the equilibrium condition in such a manner that whenever net saving takes place, additional real capital is purchased by the same amount (less the increment in the holdings of money and government bonds, if any). That is, in such an economy net saving must always be balanced by net investment in real capital unless money or government bonds are introduced into the model to fill in the gap between them. Such a treatment may be justified if one's intention is to analyze an economy where most firms are single proprietorships or partnerships; however, in order to analyze a modern economy where most firms are corporations, the neglect of the role of corporate shares could result in a serious misunderstanding.

In a corporation the decision of management to invest in real capital and the decision of investors to purchase shares do not have a direct relationship, unlike a single proprietorship in which these two decisions are actually equivalent. Management and ownership are functionally separated even though an executive could be a shareholder himself. As a consequence, in an economy where most firms are corporations, which we call a corporate economy, the decision by the corporate sector on investment in real capital and the decision by the noncorporate sector on saving are functionally separated and may diverge.