New Directions in Theory and Policy
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
Chapter 9: The Relevance of the Cambridge–Cambridge Controversies in Capital Theory for Econometric Practice
G.C. Harcourt* I There is a well-known tale of the mathematician who used to burst into tears at the sight of the binomial theorem ‘because it was so beautiful’. I have had occasion to remark that, for the same reason, economists at least get lumps in their throats at the sight of the Cobb–Douglas production function because it has such beautiful properties: the exponents of K and L measure the respective shares of proﬁts and wages in the national income; the marginal products of K and L measure the return to capital and the wage-rate; the marginal products themselves relate in a very simple way – proportionally, where the factors of proportionality have clear economic meaning – to their respective average products.1 Moreover, in growth theory the Cobb–Douglas allows simple measures of the contributions to growth in income per head of the respective growth in capital and labour. That is why, apart from Australian chauvinism/patriotism, I prefer Swan (1956) to Solow (1956). Trevor Swan’s algebra and diagrams neatly exploit the above properties (and more) to illuminate the processes being analysed and, in particular, show why competitive markets give out stabilising signals which guide Harrod’s warranted rate of growth towards equality with his natural rate of growth by aﬀecting the choice of technique (as reﬂected in capital–output ratios). And when technical progress is included, as Solow (1957) showed, manipulation of the basic equations allows us to get simple measures of the respective contributions of deepening and (disembodied)...
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