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 (deriving from the Greek words οίκος [oikos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ... Capital has a number of related meanings in economics, finance and accounting. ...

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, it is an increase in the capital intensity. ...

To some economists, promoting capital accumulation is therefore a primary long-term aim of government economic policy. 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 improvements in technology and economic institutions, investment in human capital (education and training), infrastructural investment, and the like. 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. ... Neo-classical growth model is a term used to sum up the contributions by various authors in the framework of neoclassical economics. ... Growth accounting is a set of theories used in economics to explain economic growth. ... Economic growth is the increase in the value of goods and services produced by an economy. ... // General Human capital is a way of defining and categorizing peoples skills and abilities as used in employment and otherwise contribute to the economy. ...

The lessons of the Solow growth model were missed by the Soviet Union. 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. Monetary stability which increased certainty, low taxation and greater freedom for the entrepreneur would promote capital accumulation. A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... Entrepreneur is an import from the same French word. ...

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 is a school of economic thought which rejects opposing economists reliance on methods used in natural science for the study of human action, and instead bases its formalism of economics on relationships through logic or introspection called praxeology. ... 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 capital goods, the desired consumer goods are produced. ...

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. 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 simple "deflate" the total current money value of capital equipment by the average price of capital goods? In economics, the distinction between nominal and real numbers is often made. ... The present value of a future cash flow is the nominal amount of money to change hands at some future date, discounted to account for the time value of money. ...

Once this issue has been solved, the capital controversy rears its ugly head. 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. Further, it represents a definitive critique of the Solow growth model. The capital controversy refers to a debate in economics concerning the nature and role of capital goods (or means of production) that occurred during the 1960s, largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and...

See also

• Labor intensity