Get premium membership and access questions with answers, video lessons as well as revision papers.
i.This theory is one sided:
Economists have called this theory as one-sided. It is half-truth, because it is related only to the demand aspect of capital and it completely ignores the supply side. If, however, the supply of capital is abundant, then, however great the capital productivity may be, the question of Interest will not arise, or at-least, Interest will be only normal.
ii.Considers only the higher productivity of capital:
Next, this theory suggests that when productivity of capital is higher, Interest is payable. On the contrary if capital is in short supply, greater will be the relative scarcity and higher will be the rate of Interest.
iii.Productivity of Capital Varies:
Again, productivity of capital varies in different industries and in different trades. This means that Interest rates should differ from industry to industry. However, the fact is that the pure Interest rate will be the same throughout the market and the borrower may borrow capital for any use.
iv.Difficult to measure the exact productivity:
It is difficult to measure the exact productivity of capital, as capital cannot produce anything without the help of labour and other factors.
v.How much interest for consumption loans?
This theory fails to explain the Interest paid for consumption loans. Because in practice we find that interest-bearing loans are also made for consumption purposes.
sharon kalunda answered the question on March 6, 2019 at 11:39