Capital as a Factor of Production

Abstract

The role played by capital in production has frequently been in dispute: ‘When economists reach agreement on the theory of capital they will shortly reach agreement on everything else’ (Bliss 1975, p. vii). Disagreements are due as much to divergent definitions, or uses, of the term ‘capital’ as to different views about what should be considered a factor of production. But above all there have been differing views about whether, and in what sense, capital can be said to be productive. In particular, there has been disagreement about whether it can be said that a more capital-intensive production method is more productive than a less capital-intensive one. Preclassical, classical, neoclassical and neo-neoclassical economic theory have given different answers to these questions. These will be considered below, but the discussion will be confined to the role of capital as a factor of production. It should be noted in particular that the problem why capital earns its owner an income depends as much on the social institution of ownership and the institutional organization of production as on the role capital plays in production. It is only the latter, in a sense technical, problem which will be addressed here.

This chapter was originally published in The New Palgrave: A Dictionary of Economics, 1st edition, 1987. Edited by John Eatwell, Murray Milgate and Peter Newman