Comment on Peter Temin's comment
tI seems to me that Temin's characteristically ingenious and thoughtprovoking "Comment" on my paper' is not so much a critique of its contents or conclusions as an extension of them, seeking to offer certainty where I remained in doubt. I nevertheless gladly accept the offer of the editors to add a comment of my own. Temin chooses what one might call an economist's approach rather than a historian's. He does not ask: "did this happen or did that happen?" but rather, "supposing that is what happened, can we find a formula that will take care of all the facts we feed in, and show up relationships we were not aware of before?". There are frequently two problems with models of that kind: (i) to be manageable, inputs have to be simplified to a point at which they no longer usefully represent reality, and (2) the data fed in are not the appropriate ones. Neither of these pitfalls, it seems to me, have been entirely avoided here. On the first score, it does less than justice to the Victorian investor to suggest (p. 454) that he merely had a clear choice of two types of assets: liquid foreign bonds or illiquid shares in domestic firms-quite apart from the fact that the literature I surveyed was much more concerned with returns than with liquidity. In practice, there was a large variety of intermediate choices available, from debentures in domestic industrial firms, to domestic railway shares and debentures, to local authority loans, many of which were raised for productive infrastructure enterprises which competed with potential private ventures-and many others. The trade-off between returns and liquidity, risks and foreign/domestic alternative was a continuous band rather than a clear choice. Moreover, as my article demonstrated, the literature is by no means unanimously of the opinion that high foreign investment raised the returns on domestic capital and that a transfer to home investment would have lowered them (p. 456). At least one party to the debate holds strongly that a sufficiently large switch to home investment might have raised productivity and international competitiveness to a point at which capital owners would have benefited also. Lastly, and most damagingly, it will not do (p. 455) to assume glibly that capital stocks and returns "determine" (via the S-I difference) net foreign investment. Net foreign investment is also, quite independently, "determined" simultaneously by the balance of real trading transactions which have quite different determinants, and the substantial literature which debates how these quantities might be brought into equilibrium, and which are cause and which are effect has made some of the most interesting and most difficult contributions to the ongoing discussion.