Capital intensity - Citizendia

Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor. Economics is the social science that studies the production distribution, and consumption of goods and services. In Economics, capital or capital Goods or real capital refers to items of extensive value In economic theory factors of production (or productive inputs) are the resources employed to produce goods and services At the level of either a production process or the aggregate economy, it may be estimated by the capital/labor ratio, such as from the points along a capital/labor isoquant. In Economics, an isoquant (derived from quantity and the Greek word iso equal is a Contour line drawn through the set of points at which the same quantity of output

Capital intensity and growth

Since the use of tools and machinery makes labor more effective, rising capital intensity (or "capital deepening") pushes up the productivity of labor, so a society that is more capital intensive tends to have a higher standard of living over the long run than one with low capital intensity. Capital deepening is a term used in Economics to describe an economy where capital per worker is increasing Productivity in Economics refers to measures of output from production processes per unit of input

To some economists, promoting capital accumulation is therefore a primary long-term aim of government economic policy. Most generally the accumulation of capital refers simply to the gathering or amassment of objects of value the increase in wealth or the creation of wealth However, the Solow growth model and research in growth accounting suggest that most of economic growth is due to other factors besides capital intensity: these include improvements in technology and economic institutions, investment in human capital (education and training), infrastructural investment, and the like. The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model is a term used to sum up the contributions of various authors to a Growth accounting is a set of theories used in Economics to explain and model short run Economic growth. Economic growth is the increase in the amount of the goods and services produced by an economy over time Human capital refers to the stock of skills and knowledge embodied in the ability to perform labor so as to produce Economic value.

The lessons of the Solow growth model were missed by the Soviet Union. The Union of Soviet Socialist Republics (USSR was a constitutionally Socialist state that existed in Eurasia from 1922 to 1991 Starting in the 1930s, the Stalin government attempted to force capital accumulation through state direction of the economy. Most economists now believe that while the Soviet system allowed for rapid economic development into the 1950s, as long as large surpluses of land, labor, and raw materials could be tapped by the urban and industrial leading sector, this strategy led to an unbalanced economy with stagnant or slowly-growing standards of living. With the emphasis on raising capital intensity, diminishing returns were hit; the Soviet Union's weak ability to use new technologies meant that this problem was not solved in the same way as in the rich Western countries.

Most free market economists argue that capital accumulation was best aided largely by leaving it alone to be determined by market forces. A free market is a Market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers Monetary stability which increased certainty, low taxation and greater freedom for the entrepreneur would promote capital accumulation. An entrepreneur is a person who has possession over a company enterprise, or Venture, and assumes significant accountability for the inherent risks and the outcome

The Austrian School maintain that the capital intensity of any industry is due to the roundaboutness of the particularly industry and consumer demand. The Austrian School, also known as the “ Vienna School ” or the “ Psychological School ” is a heterodox school of economics that advocates Roundaboutness, or roundabout methods of production, is the term used to describe the process whereby Capital goods are produced first and then with the help of the

Measurement

The degree of capital intensity is easy to measure in nominal terms. It is simply the ratio of the total money value of capital equipment to the total amount of labor hired. However, this measure need not be related to real economic activity because it can rise due to inflation. The distinction between real versus nominal value occurs in many fields Then the question arises, how do we measure the "real" amount of capital goods? Do we use book value (historical price)? or replacement cost? or the price justified by the present discounted value of future profits? Or do we simply "deflate" the total current money value of capital equipment by the average price of capital goods?

Once this issue has been solved, the capital controversy rears its ugly head. Present value is the value on a given date of a future payment or series of future payments discounted to reflect the Time value of money and other factors such as Investment The Cambridge capital controversy was a 1960s debate in Economics concerning the nature and role of capital goods (or Means of production)

This controversy points out that measure of capital intensity is not independent of the distribution of income, so that changes in the ratio of profits to wages lead to changes in measured capital intensity.

Capital intensity and growth

Measurement

See also