Revisiting the Cambridge Capital Theory Controversies: A Historical and Analytical Study

Abstract

This study deals with the Cambridge capital theory controversies from both a historical and an analytical standpoint. First, some basic analytical and methodological issues underlying the neoclassical theory are examined; attention is focused on how the problem of a measure of capital arises in economies with heterogeneous capital goods. Secondly, we survey some of the most relevant contributions to the Cambridge capital theory debates in the light of the salient results of ´reswitching´ and ´reverse capital deepening´, and show how the implications of these results - which undermine the factor substitution principle - brought about different strategies pursued by neoclassical scholars to overcome theoretic problems in a first phase of the controversies. Thus, it is argued that despite efforts made at the time by renowned economists to minimise the relevance of these results, the neoclassical school was compelled to give way to the criticisms which emerged from the controversies. Then we clarify some misunderstandings raised in a second phase of the debates and argue that the shift from a notion of capital as a single factor to a Walrasian treatment of capital as a set of physically heterogeneous goods in the wake of the Cambridge debates was the last ditch dug by the dominant theory to get away from the criticisms without giving up the supply and demand framework. Because the most salient results of this debate touch the foundations of the theory and hence are of a general character, the historical-analytical reconstruction here pursued led us to deem reasonable the argument that capital problems are still present in the contemporary versions of the theory. Moreover, even if we put this issue aside, we may have serious concerns about the usefulness of these versions, whose radically different method - in comparison with the traditional ones - makes it difficult to study real economies. Thus, we conclude that it is hard to accept the seemingly accepted idea in the discipline, that contemporary versions of the theory (Walrasian treatment of capital) are free of capital problems, while at the same time the capital debates (and their implications) are absent in the current literature used for training students in economics both undergraduate and graduate.