Again on the relevance of reverse capital deepening and reswitching

Abstract

Among the recent interventions in the capital controversy, the debate between Paola Potestio and Kurz&Salvadori has raised important issues. We agree with Potestio’s rejection of the legitimacy of a value endowment of capital but we disagree with her dismissal of the relevance of reswitching and reverse capital deepening: these phenomena are very important because they undermine the demand-side role of the conception of capital as a single factor. For the marginal approach to be plausible, this demand-side role had to imply the stability of the savings-investment market even in shorter time frames than those required by a complete adaptation of the ‘form’ of capital; this was taken by Marshall to authorize doing without a given endowment of value capital, which opened the door to the shift to the modern neo-Walrasian versions of the marginal approach. With proof from Hayek, Hicks, Malinvaud and Lucas we argue that a continuing belief in traditional time-consuming marginalist disequilibrium adjustments based on capital-labour substitution is the hidden reason why the claim, often made by contemporary marginalist economists, that the economy can be assumed to be all the time on the equilibrium-growth path is not found patently unacceptable. The true microfoundation of DSGE macromodels is not intertemporal equilibrium theory, but the adjustment mechanisms on whose basis the marginal approach was born and accepted, and on whose basis monetarism was then able to re-assert a pre-Keynesian view of the working of the economy.