Entrepreneurship, knowledge and employment

On the second stage of the Cambridge capital controversy

Fratini Saverio Maria, Roma Tre University

It is widely recognized that the Cambridge capital controversy falls into two stages. There are in fact two successive phases that can be distinguished with reference to the question involved. During the first, which ideally spans a period from the publication of Sraffa’s book (1960) to the symposium in the QJE of 1966, the point at issue concerned the explanation of the rate of interest as the price for the use of a special factor of production called ‘capital’. As is known, the conclusion was that this conception of the interest rate is inacceptable because the factor of production ‘capital’ does not exist. In particular, every attempt to regard the total value of a set of heterogeneous capital goods as the quantity of a factor of production inevitably exposes the analysis to the risk of paradoxical results. The second stage started with the Garegnani-Bliss debate in the RES in 1970 and has not yet arrived at any definitive conclusion, even though some results have been obtained. This stage concerns the neo-Walrasian theory, in which capital is not seen as a factor of production. In actual fact, this approach sees production processes not as employing factors of production (labour, land and capital), but rather commodities, i.e. goods and services with specified dates and places of delivery. The neo-Walrasians therefore claimed that their theory was immune to the results obtained during the first stage by the ‘neo-Ricardians'. The neo-Ricardian reaction to this claim developed along two lines. The first regarded the significance of the notions of equilibrium adopted in the neo-Walrasian approach, with particular reference to temporary and Arrow-Debreu equilibria. The second instead concerned the possibility that re-switching and reverse capital deepening, by affecting the working of the saving-investment market, might bring about equilibrium multiplicity and instability in a neo-Walrasian framework as well. The present paper seeks to address all these points.

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Keywords: Cambridge capital controversy; neo-Walrasian theory; Arrow-Debreu equilibrium; saving-investment market

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