I come at last to the nub of the Controversy: the Production Function itself. Product as a function of Labour and Capital applied—a function that is unchanged with given technology, but changes when technology changes. So static a concept does not fit at all readily into our present line of thought; it does not belong to that line of thought, so I shall treat it rather briefly. There are however ways in which the work we have been doing can be made to throw some light upon it.
I have elsewhere 1 explained what I mean by static theory. Its characteristic is that 'the equilibrium of the current period is taken to be determined by current parameters only', so that the current period 'can be treated as self-contained'. The Production Function, as commonly used, is without doubt a static concept in this sense. 'Product', 'labour', 'capital' and 'technology' are from its point of view all current concepts.
How is 'capital' to be made a current concept? The forward- and backward-looking measures of capital, which we have been distinguishing, are time-oriented; into a static model they will not fit. The 'capital' that is to figure in the production function must be neither forward- nor backward-looking; it must live in the present and belong to the present. Now if capital (against what we have learned to think of as its essence) is to be kept in the present, it must be interpreted as physical capital; and it had better be interpreted as physical fixed capital—'machines'. (Working capital is inherently uncomfortable in a static model; so by most production function theorists it tends to be forgotten.) In order to remind ourselves that it is physical fixed capital which is here to be the meaning of 'capital', I shall henceforward call it not 'capital' but equipment.
'Product' also must be made a current concept. So no distinction can be made, in this static model, between investment and consumption; we are not entitled to ask what happens to anything when the current period is over. Investment goods are