Full text: The Problem of Capital Intensity

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 
- 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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