CAPITAL EXPANSION, RATE OF GROWTH AND EMPLOYMENTI By EvSEY D. DOMAR I INTRODUCTION This paper deals with a problem that is both old and new-the rela- tion between capital accumulation and employment. In economic litera- ture it has been discussed a number of times the most notable contribu on belonging to Marx. More recently, it was brought forth by Keynes nd his followers a thorough analysis of economic aspects of capital accumulation is a tremendous job. The only way in which the problem can be examinee at all in a short paper like this is by isolating it from the general eco- nomic structure and introducing a number of simplifying assumptions Some of them are not entirely necessary and, as the argument pro- gresses, the reader will see how they can be modified or removed The following assumptions and definitions should be noted at the outset: (a)there is a constant general price level;(b)no lags are pres- ent;(c)savings and investment refer to the income of the same period (d) both are net, i, e, over and above depreciation;(e) depreciation is L measured not in respect to historical costs, but to the cost of replace lent of the depreciated asset by another one of the same productive capacity; 2 (f)productive capacity of an asset or of the whole economy is a measurable concept. he last assumption, on which(e)also depends, is not entirely safe Whether a certain piece of capital equipment or the whole economy is considered, their productive capacities depend not only on physical and technical factors, but on the whole interplay of economic and instit tional forces, such as distribution of income, consumers'preferences 1 This is a summary of a paper presented before a joint session of the Econo- metric Society and the American Statistical Association in Cleveland on January 24, 1946. It contains the logical essence of the argument with relatively little economic detail. I hope to develop the latter in a separate paper to be published n one of the other economic journals. Many thanks for help and criticism go to my fell mbers of the‘ Little Seminar": Paul Baran, Svend Laursen, Lloyd A. Metzler, Richard A. Musgrave Mary S Painter, Melvin W. Reder, Tibor de Scitovszky, Alfred Sherrard, Mary Wise Smelker, Merlin Smelker, and most of all to James S. Duesenberry 2 If the original machine worth $1,000 and producing 100 units is replaced by another one worth also $1, 000, but producing 120 units, only $833. 33 will be egarded as replacement, and the remaining $166.67 as new investment. A simi lar correction is made when the new machine costs more or less than the original one. The treatment of depreciation, particularly when accompanied by sharp technological and price changes, presents an extremely difficult problem. It quite possible that our approach, while convenient for present purposes, may give rise to serious difficulties in the future 137