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Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 24: Reswitching and Reversing in Capital Theory

Avi J. Cohen and Geoffrey C. Harcourt

Subjects: economics and finance, economic psychology, history of economic thought


Avi J. Cohen and Geoffrey C. Harcourt Reswitching and capital reversing – anomalies contradicting the neoclassical marginal productivity theory of income distribution – figured prominently in the Cambridge capital theory controversies (Blaug 1975; Bliss 1975; Cohen and Harcourt 2003, 2005; and Harcourt 1969, 1972). These anomalies in the measurement of capital, particularly in aggregate production functions, gained prominence with the 1966 ‘Paradoxes in Capital Theory: A Symposium’ in the Quarterly Journal of Economics. Both sides of the controversy came to agree on the existence of reswitching and capital reversal, and aggregate production functions fell into disrepute in the 1970s and early 1980s. However, there has been no agreement on the significance of the controversies, and aggregate production functions have been revived with theories of real business cycle and endogenous growth. CONTEXT Since the first pure exchange models of the marginal revolution, price has been explained as an index of scarcity. Price is proportional to marginal utility, which depends on scarcity. Neoclassical capital theory is the arena for extending the general principle of relative scarcity to explain all prices, including factor prices in models with production and time. A common starting point for the neoclassical perspective on capital is a one-commodity Samuelson/Solow/Swan aggregate production function model: Q = f (K, L), where the one produced good (Q) can be consumed directly or stockpiled for use as a capital good (K). With the usual assumptions, like exogenously given resources and technology, constant returns to scale, diminishing marginal productivity and competitive equilibrium, this simple model exhibits...

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