Shionoya, Yuichi

English

Research Papers in Economics

Hitotsubashi University Repository
TitleReply to Professor Hoffmann
Author(s) Shionoya, Yuichi
Citation Hitotsubashi Journal of Economics, 11(1): 117-121
Issue Date 1970-06
Type Departmental Bulletin Paper
Text Version publisher
URL http://hdl.handle.net/10086/8035
RightREPLY TO PROFESSOR HOFFMANN 
BJ, YUICHI SHIONOYA* 
Professor Hoffmann in the above note kindly replies to my paper in this Journal,* where 
I made a conceptual criticism on his classification of consumer goods industries and capital 
goods industries, along with an empirical criticism on his thesis on the pattern of growth 
of the two sectors in long-term economic development. In this reply, I shall first point out 
contradictions in his present note and then present a general appraisal of his approach. 
To begin ~vith, it is quite necessary to define the terms involved. For this purpose we 
use the following symbols: 
X: total output (production) of manufacturing sector 
C: consumer demand for manufactured output 
I : investment demand for manufactured output 
U: intermediate demand for manufactured output. 
For the manufacturing sectQr, the identity holds: 
X= C+ I+ U, 
\vhere we are neglecting for simplicity the exports of manufactured output which are to be 
added to the right hand side. Thus, total output of the manufacturing sector (X) is absorbed 
by final demand (C+1) and intermediate demand (U). We can also call the goods of final 
demand as finished goods (i.e. , finished consumer goods and finished capital goods) and the 
goods of intermediate demand as unfinished goods (or intermediate goods). Then, intermediate 
goods (U) could be theoretically broken down into U* and U,: U, denotes the intermediate 
goods ultimately destined to the production of finished consumer goods, and U, the inter-
mediate goods ultimately destined to the production of finished capital goods. The 
breakdown could also be done in practice, if an input-output table is available. Therefore, 
the above identity for the manufacturing sector is written as: 
X= C+ I+ U.+ U*. 
~~rhat matters is how to classify the consumer goods industries and capital goods indus-
tries and this is the point ~vhich 1~'ould distinguish between Professor Hoffmann and myself. 
There are t\vo dimensions in the discussion: theoretical and empirical. 
* Assistant Professor (Jokyoju) of Economic Planning. 
l Y. Shionoya, "Patterns of Industrial Growth in the United States and Sweden : A Critique of Hoffmann's 
Hypothesis," Hitotsubashi Journal oj' Ecolto,,tics. June 1964. 118  HITOTSUBASHI JOURNAL OF ECONOMICS  [ June 
I 
On a theoretical level, we have to distinguish three methods by which to classify the two 
sectors in manufacturing. Confusion of these methods seems to have led Professor Hoffmann 
into trouble in his present note. In the first method one confines discussion to the finished 
goods (C+1) and regards as consumer goods industries those industries which produce the 
finished consumer goods (C) and as capital goods industries those industries which produce 
the finished capital goods (1). In this case the production of unfinished goods (U) is neglected. 
The second method is to regard as consumer goods industries those industries which produce 
the finished consumer goods (O and as capital goods industries those industries which 
produce the finished capital goods and intermediate goods (1+ U, or I+ Uc+U*). This method 
would be based on the conception of capital in the Austrian School, most clearly reflected in 
the theory of "Produktionsumwege" by B6hm-Bawerk. The third method of classification is 
to define as consumer goods industries those industries which produce the consumer goods 
directly and indirectly (C+ Uc) and as capital goods industries those industries which 
produce the capital goods directly and indirectly (1+ U*). 
It would be clear from the following, taken from his The Growth oflndust,-ial Economies, 
that Professor Hoffmann used the third method: 
"...we have attempted to classify all industries accordlng to the use made of their output. If an 
industry produces only raw materials and semi.manufactured goods we have examined the nature 
of the finished product into which those raw materials and semi-manufactured ultimately enter. We 
have regarded the whole industrial economy as being divided into two sectors which may be 
distinguished by the type of output-( i ) industries which make or contribute to the production of 
consumer goods, and (ii) branches of manufacture which contribute to the needs of the capital-goods 
industries." (The Growth, p. 5.) 
Thus, intermediate goods are classified as products of either sector by checking statistically 
whether they are indirectly used for the production of either finished consumer goods or 
finished capital goods. In fact, when he explains practical ways of classification, he writes: 
"The textile industries, excluding jute, supply the clothing industry with virtually all its raw materials 
and are consumer goods industries." (The Growth, p. 9.) 
"The products of the tanneries may be regarded as part of the consumer-goods industries because 
they are largely used by the footwear industry and by the leather industries \vhich are themselves 
both consumer-goods industries." (The Growth, p. 9.) 
Can we infer from these remarks that he used any other method than the third ? Moreover, 
a reference to his British Industry, 1700-1950 also suggests that he classified the two 
sectors by the third method, although in this case the word producer goods industries 
instead of capital goods industries is employed: 
"Consumer goods Include all those fimshed goods which are ready for immediate consumption and 
also those semi-finished goods which, although often used in industry, are largely bought by the 
public in a finished form primarily for consumption in the home. Cotton yarn, for example, may 
be either a producer-good or a consumer-good. It is a consumer-good if the yarn is woven into 
cloth and the cloth is finally purchased by the general public. On the other hand cotton yarn is 
a producer'good if the cloth made from it is consumed by industrial or commercial firms, e,g. in 
the form of overalls for their employees. This factor in the situation must be borne in mind 1970] REPLY To pROFESSOR HOFFMANN 119 
when handling output and consumption statistics. Producer-goods, on the other hand, are those 
products which are used in a finished or a semi-finished form by industry alone." (British Industry, 
p. 73.) 
In my own case I adopted the same principle (the third method) as the legitimate method of 
classification, and in my ear]ier article my criticism of his approach was confined to his 
empirical procedures in substantiating this principle. 
, Therefore, it is quite surprising that Professor Hoffmann in his present note argues that 
the difference between us in dealing with the intermediate goods is basically theoretical. He 
seems to insist here that he deals with only the finished goods and omits the intermediate 
goods in the classification of the two sectors, while he claims I include the latter. In other 
words, he tries to state the difference between us in terms of his employing the first method 
(C vs. I) and my employing the third methed (C+U, vs. I+Ui). But, this is not true as 
far as his previous \1'orks are concerned, because, as shown above, he himself has used the 
third method. 
Even if we confine ourselves to his present note, however, we find 1le is far from 
consistent in employing the first method. In spite of his explicit statement that he treats 
only the finished goods, he actually defines in his note the intermediate goods destined to 
finished consumer goods as capital goods. See his discussion on textile yarn: he now regards 
it as a capital good, even if it enters into finished consumer goods, although it lvas precisely 
treated as a consumer good in his previous books. It follows that he now seems to have 
shifted from the first to the secolid method of classification (C vs. I+ U), as far as this example 
is concerned. 
Fortunately, I could examine Table I of his note in order to infer what he has really in 
mind. I checked the input-output tables ~vhich he used as the basic source and found out 
how he constructed the ratios in Table 1, although the ratios were hard to reconstruct for 
Great Britain. I found that in Table I the figures for ten major sectors of manuLacturing 
in the column for cousumer goods are calculated as the ratios of private consumption demand 
to total final demand, while for the USA the ratios are calculated against total demand (not 
final demand.) In all cases, the ratios of capital goods are obtained as the residuals from 
100. Therefore, we could say that in Table l, except for the USA where the second method 
(C vs. I+ U) is applied, Professor Hoffmann maintains the first method (C vs. I). It is due 
to such difference in the methods of calculation that in Table I the ratios of consumer goods 
for the USA appear lower than those of other countries; for this reason ~ve can not directly 
compare the US figures with others. 
There are still other shortcomings in Table 1. For West Germany, the US_~L and Great 
Britain the ratios are calculated for domestic output, but for France, Italy, Netherlands and 
Belgium the ratios are calculated for the totals of domestic output plus imports. For this 
reason the r t  , a ios for the two groups of countries are not strictly comparable. Furthermore, 
since in Table I the consumer goods cover only private consumption and the capital goods 
are counted as residuals in the final damand, the capital goods must include government 
consumption and exports as well as capital formation. How can one plausibly argue that 
the goods for government consumption and exports should belong to the capital goods ? 
From the preceeding observations we can perhaps conclude that in spite of several 
inconsistencies and shortcomings in his present note, Professor Hoffmann now relies on the 
first method (C vs. l) and that his present approach differs from his previous one which 19_O HITOTsuBASHI JouRNAL OF EcoNoMlcs [June 
was based on the third method (C+U, vs. I+ U) 
II 
Let us now turn to the empirical dimension of his work and observe how he has applied 
the theoretical principle of classification to actual statistics. It puzzles me that he seems to 
have changed his theoretical principle from the third to the first method without any remarks. 
But, to be comprehensive I shall criticize his empirical approach in both cases of employing 
the thil-d and fi,-st methods. 
Wllichever method he may claim theoretically, it is beyond question that in his books he 
actually used an "industry output approach" in the statistical classification. By the "industry 
output approach" I mean the procedure by which one classifies aggregate output of an 
industry either as consumer goods or capital goods without breaking it down into different 
categories. Thus, Professor Hoffmann constructed the consumer goods industries by aggre-
gating the output of four industries (food, drink and tobacco, clothing and footwear, Ieather 
goods, and furniture) and the capital goods industries by aggregating the output of another 
four industries (ferrous and non-ferrous metals, machinery, vehicle construction, and chemi-
cals). But, in reality, most industries produce finished consumer goods (O and capital goods 
(D as well as unfinished goods (U). Therefore, he had to design a rule of thumb when he 
1;vanted to identify staistically an industry as either a consumer goods industry or a capital 
goods, industry. Such a rule was what might be called a 75 percent test in his case (The 
G,-owth, p.5). What a 75 percent test means in statistical calculation depends on a theoretical 
criterion which is adopted in the classification of consumer goods and capital goods. 
Since, as I mentioned earlier, he adopted the third method as a theoretical definition of 
the two sectors in his books, a 75 percent test as a statistical device for classifying the two 
sectors implies the following procedure: if C+U. (or I+ U,) of an industry is more than 75 
percent of total output (X) of that industry, it is regarded as a consumer goods industry 
(or capital goods industry); and if this test is not met for an industry, it is omitted from 
the scope of the two sectors. In fact, in his G1-0wth, industry by industry, the use of output 
is treated in terms of the third method. As an example of his approach, the reader is referred 
to my quotations in the preceding section from his Growth for textile industry and leather 
industry. In short, he examined in his book the destination of unfinished goods and assessed 
the proportions of (C+Uc) and (1+ U.) in the total output of an industry in his 75 percent 
test. 
But, in his note, he now shifts to tlle first method and calculates the proportions of 
C and I in the total final demand (C+1) of an industry by using recent input-output statistics, 
although he does not mention explicitly a /~5 percent test. In other words, he tries to support 
tlle previous classification of the consumer goods industries and capital goods industries by 
a different criterion (i,e. the fi,-st method). This "industry output approach" to the classifica-
tion of the two sectors is misleading for the third as well as the first method in that the 
output of an industry never corresponds to a single use, while this approach defines the 
aggregate output of an industry simply as either the consumption or investment use. The 
application of the first method in an "industry output approach" would be more defective 
than the thi,-d because, on the demand side, it entirely neglects the intermediate goods; on 1970] REPLY To pROFESSOR HOFFMANN 121 
the supply side, it still'includes in the net output of the two sectors the value added which 
originates from the production of the intermediate goods. Structure of the final demand is 
not the same as structure of intermediate demand. 
If Professor Hoffmann is really concerned with the changing pattern of production 
structure in terms of the t~vo sectors, the output of each sector should be estimated on the 
basis of an "economic use approach", by which I mean a breakdown of the output of an 
industry in exact accordance with its economic use. On the other hand, if the purpose of 
his study is to observe the changing structure of final demand for manufactures he need 
not have constructed the two sectors of production; he had only to deal with the final demand 
itself ~vithout jumping from it to value added. Of course, I am perfectly sympathetic with 
Professor Hoffmann who had made great efforts to compensate for insufficient data. But his 
results based on an "industry output approach" cannot be accepted as even rough measures of 
output of the consumer goods industries and capital goods industries; they are simply measures 
of output of his specifically selected industries. His findings might indicate a specific version 
of the changing proportions of "heavy" and "light" industries of manufacturing in the process 
of industrialization. 

Reply to Professor Hoffmann

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Reply to Professor Hoffmann

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