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Capital intensity

Capital intensity is the term in economics for the amount of capital present in relation to other factors of production, especially labor.

Capital intensity pushes up the relative value of other commodities (such as labor) so a society that is capital intensive tends to have a higher standard of living over the long run than one with low capital intensity.

Capital accumulation to many economists is therefore the primary long term aim of government economic policy. Most free market economists argue that capital accumulation was best aided by a monetary stability which increased certainty, low taxation and greater freedom for the entrepreneur. The Austrian School maintain that the capital intensity of any industry is due to the roundaboutness of the particularly industry and consumer demand.

By contrast, starting in the 1930s the Soviet Union attempted to force capital accumulation through state direction of the economy, based on the premise that natural accumulation of capital would not allow for rapid development of the economy. Most economists now believe that while the Soviet system allowed for rapid economic development into the 1950s, the state direction of the economy eventually forced too much investment in capital-intensive industries which led to an unbalanced economy with stagnant standards of living.