Capital-Intensity and the Efficiency of Factor Use (A Comparative Study Of The Observed Capital-Labour Ratios Of Pakistani Industries)

The concept of capital-intensity, denned as the ratio of capital to labour, has been used widely in both theoretical and applied problems of planning. These ratios have often been used in forecasting, e.g., in measuring the possible expansion of employment that would be generated from a given investment programme and in estimating the rate of investment that would be required in achieving a given employment target. More importantly, these ratios have been recommended for use in optimum decision-making. The usual argument is that in a labour-surplus backward economy with scarcity of capital, it is costless or nearly so to use labour which produces little at the margin. Thus, a given amount of capital, the scarce resource, should be combined with as much labour, the abundant resource, as possible. Minimizing capital-intensity has, thus, emerged as an investment criterion: from alternative sectors those with lowest capital-labour ratios should be expanded and from alternative technical blueprints for each sector the projects with the lowest capital-intensities should be chosen. The corollary in trade theory has been to identify comparative advantage with labour-intensity for the labour-abundant economies.