Factors Underlying Long-Term Trends: Capital-Product Ratios and Capital Formation

IN the previous chapter we proposed a general framework linking the secular behavior of net capital formation in the regulated industries tothe long-run trends in two series: the marginal capital-product ratio and the increments in output. In addition, we explored the factors underlying the secular pattern of production in this segment of the economy. In the present chapter we turn to the determinants of the capital-product ratio, and then once again to our central problem—the long-run trend Of investment. Determinants of Trends in the Capital-Product Ratio The average capital-product ratio is ssentiaIly an inverse measure of the efficiency with which capital is employed. It is one-dimen-sional, of course, since it takes no account of the length of life of capital, its cost, or the cost of the other principal factor of production —labor. Nevertheless, other things being equal, a decline in the capital-product ratio is a gain in efficiency. In a business economy