# Full text: The Problem of Capital Intensity

```(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
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