Abstract
Neoclassical capital theory regards the interest rate as the market price of the composite factor ‘capital’. In this theory the interest rate is equal to the marginal product of capital, since the demand curve for capital is its marginal productivity schedule. Moreover, the theory assumes that capital obeys the law of diminishing returns just like any other factor, so that its demand curve is downward-sloping. In an economy where labour is the only primary factor and constant returns to scale prevail, this implies the following postulate: as the interest rate falls, the capital – labour ratio increases, which plays an important role in neoclassical growth theory and in comparative static analyses of interest rate determination.
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
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Hatta, T. (1987). Capital Perversity. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_488-1
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DOI: https://doi.org/10.1057/978-1-349-95121-5_488-1
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