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.
Utility functions of equivalent form and the effect of parameter changes on optimum decision making