CAPITAL EXPANSION, RATE OF GROWTH, AND EMPLOYMENT 139 general. Even without technological progress, capital accumulation in- reases labor productivity, at least to a certain point, both because more capital is used per workman in each industry and because there is a shift of labor to industries that use more capital and can afford to l pay a higher wage So if labor productivity is affected by capital accum- ulation, the formula that the latter should proceed at the same rate as the former(and as the increase in labor force)is not as helpful as it ap- The standard Keynesian system does not provide us with any tools for deriving the equilibrium rate of growth. The problem of growth is entirely absent from it because of the explicit assumption that employ ment is a function of national income. This assumption can be justified only over short periods of time; it will result in serious errors over a period of a few years. Clearly, a full-employment level of income of five years ago would create considerable unemployment today We shall? assume instead that employment is a function of. the ratio of national in- come to productive capacity. While this approach seems to me to be I superior to that of Keynes, it should be looked upon as a second ap- proximation rather than a final solution: it does not allow us to separate unused capacity into idle machines and idle men; depending upon various circumstances, the same ratio of income to capacity may yield different fractions of labor force employed Because investment in the Keynesian system is merely an instru-l ment for generating income, the system does not take into account the extremely essential, elementary, and well-known fact that invest- ment also increases productive capacity. 6 This dual character of the investment process makes the approach to the equilibrium rate of growth from the investment(capital)point of view more promising:if investment both increases productive capacity and generates income, it provides us with both sides of the equation the solution of which may yield the required rate of growth t investment proceed at the rate i per year, and let the ratio of F the potential net value added(after depreciation), i. e, of the produc- tive capacity of the new projects to capital invested in them, i.e., to 5: Pr I, be indicated by 8. 7 The net annual potential output of these projects will then be equal to I&. But the productive capacity of the whole econ Whether every dollar invested increases productive capacity is essentially a matter of definition. It can safely be said that investment taken as a whole cer ainly does. To make this statement hold in regard to residential housing, im- puted rent should be included in the national income. See also note 19 7 The use of the word"project"does not imply that investment is done by the government, or that it is always made in new undertakings. I am using"pro (in the absence of a better term) because investment can mean the act of in ing and the result of the act