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Concept
Capital intensity
Summary
Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labor ratio, such as from the points along a capital/labor isoquant.
The use of tools and machinery makes labor more effective, so rising capital intensity (or "capital deepening") pushes up the productivity of labor. Capital intensive societies tend to have a higher standard of living over the long run.
Calculations made by Robert Solow claimed that economic growth was mainly driven by technological progress (productivity growth) rather than inputs of capital and labor. However recent economic research has invalidated that theory, since Solow did not properly consider changes in both investment and labor inputs.
Dale Jorgenson, of Harvard University, President of the American Economic Association in 2000, concludes that: 'Griliches and I showed that changes in the quality of capital and labor inputs and the quality of investment goods explained most of the Solow residual. We estimated that capital and labor inputs accounted for 85 percent of growth during the period 1945–1965, while only 15 percent could be attributed to productivity growth... This has precipitated the sudden obsolescence of earlier productivity research employing the conventions of Kuznets and Solow.'
John Ross has analysed the long term correlation between the level of investment in the economy, rising from 5-7% of GDP at the time of the Industrial Revolution in England, to 25% of GDP in the post-war German 'economic miracle', to over 35% of GDP in the world's most rapidly growing contemporary economies of India and China.
Taking the G7 and other largest economies, Jorgenson and Vu conclude: 'the growth of world output between input growth and productivity... input growth greatly predominated... Productivity growth accounted for only one-fifth of the total during 1989-1995, while input growth accounted for almost four-fifths.
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Solow–Swan model
The Solow–Swan model or exogenous growth model is an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress. At its core, it is an aggregate production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model.
Roundaboutness
Roundaboutness, or roundabout methods of production, is the process whereby capital goods are produced first and then, with the help of the capital goods, the desired consumer goods are produced. An argument against Böhm-Bawerk's theory of roundaboutness, in economies with compound interest, was presented by Paul Samuelson during the Cambridge capital controversy. The concept, interpreted as rising technical composition of capital, is also used by some Marxian authors.
Cambridge capital controversy
The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution.