2 
same way as they are when they have borrowed money. The practice 
of avoiding ownership has therefore nothing to do with the 
capital-output ratio which is a matter of technology but is rather 
pertinent to the topic of the following essay on the financial 
structure of firms. 
As far as production technique as such is concerned statistics of 
the above type can give us little help and we have to turn to 
other sources such as engineering data to get at least a tentative 
answer. The evidence,in fact,tends to show that the capital-output 
ratio often decreases with increasing size of the production 
unit.To be more precise,the capital investment required for a 
given capacity decreases with increasing capacity ( Weintraub 
1939; Bain 1956; Haldi and Whitcomb 1967; Pratton 1971 ). This is 
largely the consequence of some of the same principles which are 
responsible for large scale economies: The dimensional scale 
effect which implies that the surface increases less than the 
volume with increasing size of a container. This gives rise to the 
two-third rule: If the surface of the container is linked to the 
cost and the volume to the capacity, then, since the first rises 
with the square and the second with the cube of the dimension, the 
cost will rise with a factor of 2/3 of a proportionate increase in 
the capacity. For the firm which uses the container the rule will 
be relevant, for example, for the fuel requirements; these are the 
current or ordinary large scale economies. In the production of 
the container the above considerations will be important for the 
cost of a larger or smaller capacity. Another consideration 
concerns the whole trend of technology which is typified by the 
conveyor belt (mechanisation): The unremitting continuity of the 
process not only saves labour but it at the same time also 
increases the output of a given equipment. 
2. It should be of considerable interest to analyse the relations 
between capital-output ratio,profit rate, profit margin and 
technology. To sharpen these concepts somewhat we shall talk of a 
capital-capacity ratio,and consider a profit margin at full 
capacity use. The idea is that we should distinguish between the 
economies of scale and those savings which automatically arise 
owing to the presence of fixed cost from a fuller utilisation of 
an existing equipment. In other words we should distinguish 
economies of scale and economies of utilisation. . Again, we 
should distinguish the changes in the capital-output ratio which 
arise merely from varying utilisation of an existing equipment and 
infrastructure and the changes in the capital-capacity ratio which 
depend on technique of production. Another refinement needs to be 
made,too. Instead of gross value of output we shall use the 
concept of value added when we define capacity,that is, we shall 
talk of capacity in terms of value added; and in defining the 
profit margin we shall, instead of relating cost to output value 
consider the cost net of raw materials and other goods bought from 
outside the firm in relation to the value added. In this way 
different degrees of vertical integration will not, in principle, 
disturb the comparison between firms because a firm with raw