Full text: The Problem of Capital Intensity

said does not seem to confirm this ( Kuznets 1962 ). 
We may now arrive at something similar to condition (8) on a more 
traditional path. Let us assume, for sheer analytical simplicity, 
a log linear production function of the following form: 
ln 1/F = a lnJ2 • O) 
This is, assuming prices and wages constant, equivalent to a log 
linear relation between output per man and capital per man. 
If we differentiate the relation (9) we find that condition (8) 
will be fulfilled according to whether a ^1; a=l corresponds to 
the case of Harrod neutrality, a 1 is respectively the case of 
diminishing or increasing returns. The case of decreasing returns 
does not seem to be the rule in our economy whether we compare 
firms of different size or the historical growth of capital 
intensity; this is illustrated by the experience or the two-third 
rule. It is quite possible, however, that this case of decreasing 
returns of capital intensification exists potentially, i.e. it 
might be experienced if the tendency to use more capital per man 
were "forced" beyond the limit at which it usually has stopped. 
That would mean that the neo-classical economists which postulated 
such a law of diminishing returns were quite right in so far as 
they talked about a possibility but wrong in so far as this 
possibility seems to have had little practical relevance. 
The implication of this is, as (8) shows,that the capital-capacity 
ratio does not increase either with firm size or as a function of 
time and technical progress,and the available data do not seem to 
contradict this conclusion. 
As we have seen further above an increasing capital-capacity ratio 
would ,in our simple steady state growth model, sooner or later 
invalidate the condition (3) because it would necessitate an 
increased profit margin which would make the adoption of capital 
using methods less and less likely. 
Is it not natural that techniques which lead to such results are 
not applied by those business men who survive the struggle for 
existence? I would be inclined to answer in the affirmative and 
the conclusion would then be that the simple relations embodied in 
equations (3) and (4) and the arguments put forward above in 
connection with it offer an explanation for the apparent fact that 
entrepreneurs do not "force" capital intensification, that the 
capital-output ratio did not rise historically, in other words 
capital using processes are in general avoided and entrepreneurs 
with funds to invest prefer "horizontal" expansion to a purely 
"vertical"one and apply capital intensive techniques not before 
they have been developped in such a way as to guarantee sufficient 
cost savings to keep them out of the range of diminishing returns. 
4.So far the analysis has proceeded on the assumption of constant 
real wages but this is only the first step of the argument 
concerning the historical evolution of the capita1-output ratio.In 
the next stage the real wage rises as a result of the efforts of 
labour to capture a share of the increased prosperity due to the 
enlarged output per man. We have to assume that this adjustment 
takes some time because if it were immediate it would leave no 
gain for the innovator, and in so far as he could anticipate such 
an outcome it would eliminate any incentive to innovate. 
When it finally takes place the increase in real wage can take the 
form either of a decline in prices or of an increase in money 
wages. The effect on c/v = F will in both cases be the same.What 
will be the effect on I/v? So far we have taken I as given which 
really implies that we have left the whole department producing 
capital goods outside of our system which in this way really

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