0
$\begingroup$

In Capital by Thomas Piketty ( chapter The capital - labor spit in the twenty first century - page 271) we have below quote

The evolution of the rate of return on capita, r, significantly reduces the amplitude of this U-curve, however: the return on capital was particularly high after world war II, when capital was scarce, in keeping with the principle of decreasing marginal productivity.

This quote is little confusing because when capital is scarce then it should instead help in increasing marginal productivity as some watchful owner will try to put more capital and thus help increase the marginal productivity. How can it decrease marginal productivity and hence lead to increase in rate of return as mentioned in the quote.

$\endgroup$
1
  • 1
    $\begingroup$ If the answer below answered your question consider accepting it $\endgroup$
    – 1muflon1
    Aug 10 at 21:54
4
$\begingroup$

The claim is not that capital decreases marginal productivity, but that the marginal productivity of capital is decreasing. (See "diminishing returns.") That is, the first "unit" of capital increases productivity the most, the second unit still increases it but less so, the third unit increases productivity even less and so on.

Thus when there is very little capital (like after WW2) and industries have to compete for it, they will be willing to pay high interest for capital, as the effect on marginal productivity is stronger when the industry does not yet have a lot of capital invested.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.