A problem with conventional output measures is that they do not capture such outputs as cleaner air, cleaner water, and a more accident-free work environment, which result from the installation of equipment that abates pollution or promotes health and safety on the job. Conventional input measures, on the other hand, do include inputs which perform such functions. In this study, we test different specifications of the relationship between manufacturing capacity and the manufacturing capital stock. Not surprisingly, the empirical results indicate that the drive to control pollution and provide a safer and healthier work environment has caused a decline in the elasticity of capacity with respect to total capital in manufacturing, because pollution abatement investment (PAI) and occupational safety and health investment (OSHI) generally do not augment conventionally-defined productivity. Additionally, we discover that some indexes of manufacturing capacity are constructed by means of methodologies which assume an unchanging historical relationship between capacity and capital, and thus are unable to detect the declining capital elasticity of capacity. Indexes of capacity and operating rates have many important uses in economic analysis. Operating rates are helpful in explaining and forecasting price changes, investment levels, and cyclical productivity behavior. Investigators looked at operating rates during the 1971-73 expansion for evidence that pressures on capacity limits were the cause of the subsequent inflation. Again during the 1976-80 expansion there was discussion of what rates of operation might be designated as the inflationary flashpoints. Frequently industrial utilization rates are reliable indicators of approaching supply bottlenecks. But when the methodologies employed to construct capacity indexes erroneously treat PAI and OSHI as capacity-expanding investment, capacity is overstated, operating rates are understated, and the indexes will no longer provide the correct signals. Because the effect of pollution controls and occupational safety and health standards on productivity is secular rather than cyclical, we make the dependent variable in our equations the capacity-capital ratio. In contrast to the output-capital ratio, the capacity -capital ratio is relativley invariant over the cycle. If a firm installs pollution abatement or safety equipment which adds