Full text: The Problem of Capital Intensity

represented only the consumption goods department. Extending the 
analysis now to the capital goods sector we can see that I/v will 
have to increase as a consequence of the rise in real wages. If 
money wages increase this will affect also the capital goods 
sector; the prices there will be marked up and I will increase. 
If, in the alternative case, the prices in the consumption goods 
sector decrease this will depress v and in this way again lead to 
an increase of I/v. 
Thus the rate of profit in the consumption goods sector will 
decline for two reasons: The profit margin will decline and the 
capital-output ratio will increase: 
e = (1 - F )j$ 
If the real wage ( w/p ) increases just so much as to compensate 
for the decline in real cost ( m/z ) we are back in the situation 
from which we started, as far as the cost-value ratio (c/v = F) is 
concerned: In fact, the increase in "real wage", as we have seen, 
will increase the capital-output ratio; this could be avoided only 
if the "real cost" of the production of capital goods has been 
reduced to a corresponding extent by technical progress in this 
Even that,however, would not be sufficient to restore the profit 
rate to its former level if the capital-capacity ratio had been 
increased in the process of technical change in the consumption 
goods department. In fact, it will be realised that a policy of 
constant"efficiency wage”, that is, of compensating reductions in 
"real cost" by corresponding increases in real wages is not 
compatible with an increase in the capital-capacity ratio. But 
we have hardly heard of that problem in the decades of full 
employment when something like efficiency wage policy was often 
practiced, and this seems to confirm the opinion expressed further 
above that an increase in the capital-capacity ratio can hardly 
have played a role in that time. 
If technical progress in the capital goods sector has not kept 
pace with its advance in the consumption goods department there 
will be a fall in the rate of profit in the latter department, and 
a brake on investment. This will produce a structural crisis in 
the capital goods industries. Sooner or later this will enforce a 
process of cheapening capital goods by introducing new more 
efficient types of equipment as a condition for the survival of 
this industry. In this way the process of innovating by investment 
can be set in motion again in the consumption goods industries. 
Thus there seems to be a race between cheapening of output (or of 
labour) and the cheapening of equipment so that neither gets too 
far ahead of the other which again tends to explain why the 
capital-capacity ratio has not risen historically and why it does 
not rise with the size of the firm.

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