The Marginal Productivity Theory of Capital in Intermediate Microeconomics Textbooks

Abstract

This paper focuses on the marginal productivity theory of capital and the price of capital, and examines some fundamental problems in this theory and how these problems have been dealt with in three leading undergraduate intermediate microeconomics textbooks by Varian, Frank, and Nicholson-Snyder. The three main problems to be discussed are: (1) it is impossible to incorporate materials inputs (and intermediate inputs in general) into marginal productivity theory because the existence of materials inputs in production processes invalidates the basic concept of the marginal product of capital (or labor), which is the foundation of the theory; (2) because the concept of the marginal product of capital (or labor) is invalid, so is the derivation of the demand for capital (or labor), which is based on the marginal product of capital; and (3) ultimately the marginal productivity theory of capital takes as given what it is supposed to explain: the return to capital.