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(1) which will be in terms c/v = F(z). If we assume that large scale economies outweigh the cost firms have to occur in order to obtain a larger market F a decreasing function of z. The profit margin will be 1 - c/v = 1 - F(z) or 1/F - 1 if we measure the margin of cost (mark up); it will thus be, on the conditions just stated, an increasing function of z. From this it does not necessarily follow that the rate of profit will be an increasing function of the size of the firm, if the increasing size by any chance involves a greater capital intensity. We ask now for the conditions under which the larger firm will be superior also in terms of the profit rate. Let the ratio of capital to capacity be a function of the size of the firm i.e.of capacity z: I /v = (p* (z) ( 2) As we have seen above this function may well be decreasing; but the interesting case which we are going to analyse arises when it is increasing. The rate of profit can be defined as follows: el = v - c; e J ( z ) = 1 - F ( z ) • e=( 1 - F If the rate of profit is to be increasing,constant or decreasing with size its derivative with respect to size z must be positive,zero or negative: de/dz /e = - Fy/(1-F) - ^ 0. The condition for a constant or increasing profit rate will thus be 4. - F/F ( 1/F - 1 ). (3) The condition (3) involves three magnitudes: The proportionate increase in the capital-capacity ratio <j$ /^? , the proportionate decrease in the cost to value added ratio VjfF, and the profit margin as a percentage of cost, 1/F - 1 (the mark up). In words the condition (3) says: If an increase in the size of the firm involves a certain proportionate increase in the capital-capacity ratio then this must not be larger than the proportionate decrease in the cost-value ratio, divided by the mark up, if the rate of profit is to be prevented from falling. Thus if the increase of the firm is associated with more *’capitalistic** methods of production their adoption will be limited not only by the possible proportionate cost saving achieved but also by the size of the mark up from which we start. Now it will be appreciated that usually firms have more than one way of expanding by investment.They can avoid more capital intensive methods altogether if only by continuing to use the same techniques on a larger scale.In many cases they will, however, find superior new techniques which enable them to expand their size without increasing the capital-capacity ratio at all. Neo classical theory, in the contrary, can conceive of additional investment only in the form of using more capital intensive,more ’’capitalistic" methods of production. The reason for this is probably that they assume,tacitly or openly, full employment. If we are not constrained by this assumption we can easily see from the above analysis that there are powerful impediments against increasing the capita1-capacity ratio and that the natural way of