Optimal versus actual investment behavior

By the standards of the contemporary Third World and the late nineteenth century, Britain recorded very modest investment shares in national income (Williamson, 1984a). That fact has generated a long and active debate centered around the question: Was the investment share low because investment requirements were modest, or was the investment share low because of a savings constraint? The first argues that investment demand in the private sector was the critical force driving accumulation during Britain's industrial revolution, low rates of technical progress and an absence of a capital-using bias both serving to minimize private-sector investment requirements. The second argues that Britain's growth was savings-constrained. Until very recently, the first view dominated the literature.

This dominant view sees early nineteenth-century Britain as so labor-intensive that investment requirements to equip new workers could be easily fulfilled by modest amounts of domestic savings, so easily in fact that domestic savings had to look for outlets overseas.