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Retrospectives: Whatever Happened to the Cambridge Capital Theory

Controversies?

Avi J. Cohen; G. C. Harcourt

The Journal of Economic Perspectives, Vol. 17, No. 1. (Winter, 2003), pp. 199-214.

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Retrospectives

Whatever Happened to the Cambridge

Capital Theory Controversies?

Avi J. Cohen and G. C. Harcourt

This feature addresses the hi sto i~ f econorrlic nards and ideas The hope is to

deeper1 the norknclnl dialogue of economists, n l~ i le erhaps also casting ileu light

on orlgoiilg questions If xou hale suggestions for future topics or authors, please

nrite to Joseph Pershx , c/o J ~ L L )n l oJ bronomrr P~)sp~rtr-i~~s_), Depart~r lent f Econorn-

ics (hf / ( , 144), L-ni\ersit\ of Il li ~~ois hicago, b01 South Morgail Street, Roomt C

2103, Chicago, Il li ~~ oi siOCi07-7121

Preliminaries: Joan Robinson's Complaints

In "The Production Function and the Theoil of Capital," Joan Robillso11

(19.33-19.54, p. 81) wrote:

the production function has beell a ponerful instrument of rniseclucation

The student of ecoilorrlic theoil is taught to n n te (2 = J ( L ,A ) \\here L is

a quantitx of labor, K a qunntitx of caprtnl and Q a rate of outpc~tof

corrl~l~oditiesHe is instructed to nssume all norhers alike, and to mensure I in man-hours of labor, he is told something about the index-nc~rnher roblem

in choosii~g mlit of O L I ~ P L I ~ , iiid then h c 1s hcuiiecl oil to the next question,

in the hope that he nil1 forget to ash in nhat units K is measured Before he

el er cloes ash, he has become n professor, nrlcl so slopph habits of thought are

hnrlclecl on from one geileratioil to the next

w A712 J. C , o h ~ t ~ o f F ( o t ~ o t ~ r ( s , (; C:.c A sso ( r ( ~t r ~ O ~ P S S O I I h t k lj7r71rt o f ) , T o ) o n to , ( d a n ( ~ d ( ~

Hotcour? r c E m r i - z t ~ ~ s rt1 t kr Hz s to t~ JLrot101~1zr C ' t ~r z ~~t s r t ) (1n(1P(IC/P~ ~ ' ~ I P O I J , of ( ( l t ~ b i - z ~ l g ~

Linr)ztzls JPIIOW, PS U S.011~g~,botlc zn (,cctrll)trrlg~, C 'n r t~ d 'rt ~g( lot n,n n d P)c g~ ss or I I I P ) / ~ Z L ~ ,C't~rz~r)sr t )J L 4 ~ l ~ l ( l r d ~ ,~ P ~ I L Z ~ Y , T h ~ u n d d ) ~ s s ~ cllctt(llr(c P ? ~ I I L Z ~ ( I ) P ( c l 7 1 i t o h~~ l@)o ) k l l . ( ( ~ )

(end ( J P ~ ~ ~ ~ u s - s P c ~ P ~ ( L ~ z ~ k ) , ~ c f 1 ~ ( t i 7 1 ~ 1 1I P ~ Z ~ S . ( ( L ? ~ . ( ~ ( .

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Her article precipitated illto the public domaill the Cnmbriclge contro\ersies

111 capital t heon , so-called b\ Harcourt (1C)hC)) because the protagorlrsts ue re

prii~cipall\ nssocintecl clirecth or inclirectl\ ni th Cambridge, Fngland, o r Cam-

bridge, AMassnchusetts The contro\ersies raged from the mid-19.50s through the

mid-l97Os, ni th highh prominent protagonists-Piero Sraffa, Joan Robinson, Lcugi

Pnsiiletti and Pierangelo Garegilaili in th e "English" corner, \ersus Paul Samuelson,

Robert Solon, Frank Hah n nrld Christopher B l i ~n the "Xrner~can" r l~eoclassical

corilerl-slugging it ou t in first-rnnk journals 4uch a5 the (2unr?rr/~ our~ lctl of

Econ omzt s, the RRI/P~O Itzldzrs and the r t o t / o m / t o u r ~ c l lRlnug (1975) nndf F c o ~ o t ~ z r

Harcourt (I972, 1976) co\ er both sides of the contra\ ersx

Th e Carnbndge contro\ersies , if rerrlembered nt all, are usunlh pol tra~ec l

todax as a tempest 111 a teapot o \e r ailomalies inrol\iilg the measurement of capital

in aggreg'lte pioduction fui~ctiorlmodels, ha\ing as little sigilif~cance or rhe

neoclnssical mnrgiilnl productnit\ th eon of clistr~bution s do Giffcn good ailom-

alies for the Inn of demaild ll'hen theories of endogenous giou th and real busriless

cxcles took off in the 1980s using aggregate ploduction functions, co ntr ib~~tors

usunllx \ \ 1ote '1s if the contra\ ersies had 1 x 1er o c c ~ ~ r ~cl and the ( ,lml~ridge,

England contributors had ne \e r existed (Kobinson and Si,tffa obligecl b\ d\ ri~gn

1983 ) Siilce l~eoclassicnl he on has su nir ed and the ch,~ llenger hn\ e larqelh

disappeared, the usual conclusion is that the "Englrsh" Cantabrig i~~ns\ere c lcarlx

TIrong or a i ongheaded

Did the C ambriclge contro\ersies identif\ "slopp\ habits of thoc~glit" t i ~ t alebeen handed dorm to \e t ailother generntion, or uer e the\ a teapot tempest of

concern n o ~ t nl\ to historians of ecoi~omic si11 this article, our alm is to put into

perspec tne \\ ha t nas at stake nild to argue that the contro\ersies c but t hr latest

in a series of still-unresol\ed contro\ersies o\ er th ree d eep issues Th e first is the

meniliilg an d, ns a corollan, the measurement of the concept of capitnl in the

anal\sis of industrial capitalist societies The secoilcl is Jon11 Kobinson's coinplniilt

that equilibrium nas not the outcome of an ecoilomic process ant1 there fore an

inadequnte tool for anal\zing processes of capital acc c~rnulntionand gro\\th The

third issue is the role of ide ol og an d \ision in fuelling con tro\eis\ then the results

of simple models are not robust Our aim is to coilrirlce the reader of the

importailce a nd re le\ance toda\ of these issues, nh ich , ne pl edict, \ti11 inc\i tnbl~

erupt in future contro\ers\.'

Sraffa. Robinson and Pasinetti were at the I;ni.r.er\iq of (:anibridge. Pasinetti and (;aregnani had hot11

been P1i.D. students there in the 1950s. On the "h re ri can" side, Samuelson and solo^\- lrcre at \11T.

Hahn was actually at the I'niversity of C:arnbl-idge.and Bliss, though at Essex and tlien Oxford. had been

an nndel.graduate and university teacher at (:ambridge.

2003 marks numerous anniversaries-the 30th of Robinson's oiiginal paper. the 100th o f her birth and

the %It11 of Robinson's and Sraffa's deaths.



Round 1: Meaning and Measurement of Capital in the Scarcity

Theory of Price

With the margirlal rerolution, Jerons, hleilger and Walras dereloped pure

exchange models in the 1870s tha t shifted the explailatioil of price auax from the

classical difficultj-of-production focc~s o the ileoclassical focus on utility a nd rela-

tire scarcitr Adam Smith's diamond-nater paradox nas no lorlger a pamclox, since

price nas explaiiled as proportioilal to margirlal utilitr , J\ hich deperldecl on scarcitj

Neoclassical capital theon uas the arena for exteildiilg the general priilciple of

relatir e scarcity to explaiil all prices, including factor prices in models 111th pro-

duction and time (Hennings, 1985).

A common starting poirlt for the neoclassical perspectire on capital is a

one-commoclitr Sam~~elson/Solo~\/S~\anggregate prodc~ction cmction model

\\he re the one produced good ( Q) call be consumed clirectlx or stockpiled for use

as a capital good ( k ) With the usual assumptions, like exogenousl\ k 'iren resources

a n d t e c l~ i~o lo ~g ~ ,onstailt returns to scale, dimiilishiilg margiilal productir itj an d

corrlpetitir e equilibrium, this simple model exhibits J\ hat Sarnuelson (1962) called

three kex "parables" 1 ) The real return on capital ( the rate of in teres t) is deter-

milled b\ the technical properties of the diminishing margiilal productiritr of

capital, 2 ) a greater quantitr of capital leads to a loner margiilal product of

additiorlal capital ailcl thus to a loner rate of interest, and the same inrerse ,

rrlonotoilic relation nith the rate of interest also holds for the capital/output ratio

ailcl sustainable lerels of consumption per head, 3 ) the distr ibution of illcome

between laborers and capitalists is explained b\ relatire factor scarcities/supplies

and margiilal products. The price of capital sen ices (th e rate of interest) is

deterrrlirled bx the rela tire scarcitj and margirlal productiritr of aggregate capital,

ailcl the price of labor senices (th e nage r ate) is determilled bx the relatire scarcitr

ailcl rnargirlal productnitr of labor ( I )

Th e three parables of this one-commoditj model depend on a plnsical con-

ception of capital (and labor) for their one-ua) causation-changes in factor

quantities cause i i lr erse changes in factor prices, al lo ~\ in g onerfcll, unambiguous

preclictiorls like parable 2But problems for these parables arise in more general models nit11 heteroge-

neous capital goods Heterogeneous capital goods caililot be measured a nd aggre-

gated 111 phxsical units, instead, capital raluation must be used, as Wicksell (1911

[I9341) rolurne 1, p 149) told us long ago Their ralue call be measured eithe r as

the cost of prodc~ction, ~ h i c hakes time, or the present ralue of the future output

stream thex produce In either case, since the measure inrolres time, it presumes arate of interest-nhich, in the simple model, is determil led in a one-nax maililer b\

the quantity of capital. This additiorlal circularitj, or interdependence, causes



202 Jour nnl of Eco~lotr~icerspectru~s

M'icksell effects. Wicksell effects in vol~e hanges in the value of' the capital stock

associated ~v ith ifferent intereat ratea, arising fiom either i nr en to ll revaluations of

the same physical stock due to new capital goods prices (pr ice MTcksell effects) or

diff'erencea in the physical stock of capital gooda (real Wickaell effects).

In the Cambridge controversies, the problem5 created for the ileoclassical

parables by Wickaell effects were termed reswitching and capital-re~ersing.Re-

s~vitching ccurs \vhen the same technique-a particular physical capital/labor

ratio-ia preferred at two or more rates of interest while other techniqc~esare

preferred at iilterrnediate ratea. At lower values of the intereat rate, the cost-

minirniziilg technique "a~vitchea"rom n to ha nd then ("res~vitches") ack to a . The

same physical technique is associatecl wit11 two different interest rates, violating

parahlea 1 and 2.

With capital-reversing, a lower capital/ labor ratio ia associatecl with a lowerinterest rate. In comparing two ateady-state equilibrium positions, it is aa though

capital aenrices h a ~ e lo~urrprice when capital is "more acarce." Capital-reversing

implies that the clernaild cu1l.e for capital is not ahvaya do\vn~varcl loping, violating

parables 2 and 3.

T.211y do rea~vitching nd capital- re~ersing ccclr? Sam~lelaon 1t)CiCi) pr o~i de a

the intuition using the ,;\ustrian collceptioil of capita l as titrw, ao that th e productivity

of capital is the productivity of time itaelf: Figure 1 illustrates two techniques for

making charrlpagl~e ~aing nly labor and time (and fi-ee grapea). In technique a ,

7 uilits of labor make 1 unit of brandy in one period, ~vh icherments into 1 emit of

champagne in another period. In technique b , 2 clnits of labor make 1unit of grape

juice in on e period, which ripens into \vine in another period. Then Cunits of labor

shaking the wine produce 1 unit of champaglle in a third period.

The cost-minimizing technique deperlds on relatiye factor prices. At high

interest ratea ( r > 100 perce nt), compounded interest on the 2 units of' labor

in~estedor 3 periods makes b more expensive, so n is chosen. At zero intereat, only

labor costs coun t, so n is also cheaper. Rut at irltereat rates bet~vee n 0 percent and

100 percent, h is cheaper. T he correspo l~d iilg eman d for capital cur\.e ~voulcl ook

like Figure 2. First, notice that at different ~ a l u e sf r alorlg any discreet do~v n~vard-

sloping segment, the ~ a l u e f the "capital" ia different for a physically unchanging

technique, clue to price MTcksell effects. Notice also that at lo~ver alues of' r, the

technique s~vitches rom n to b an d the n rea~vitches ack to a , due to real TTickaell

effects. And at a value of rjuat below 100 percent, capital-reversing occurs as a lower

r is associatecl with a lo~ ver apital/labor ratio.

Becauae of'Wickael1 eff'ecta, in rnoclela with heterogeneous capital goods (or

heterogeneous o utp ut) , the rate of interest depeilcls not only on exogenous tech-

nical properties of' capital, hut also on endogenously determilled prices like the

irltereat rate. The endogeneit). of' pricea allo~vsmultiple equilibria, ~vhich ompli-

cates the one-\vay parable explallatioils of income distribution. Differences in

quantities no longer yield unambiguously signed price effects. The power andaimplicit). of one-commodity modela emanate5 horn eliminatirlg these endogenous

price effect5 and measurement problems (C;ohen, lt189).



F i p r p 1

Samuelson's (1966) Example of Wicksell Effects in a Simple Austrian Model

Technique 6

I- = 6

The cost equations are:

Technique (1 ' i L ( 1 A F ) "

Technique 6 2 / . ( 1 A r ) ' 61.(1 + r )

\Vhen compar-ing cost \. I. cancels our for I~o tli ecliniques. Suitchpoint\ occur when the cob6 ar-e equal

F i g z ~ r ~ Demand for Capital (Per Unit of Labor) in Samuelson's (1966) Example

A\ earl\ as 1936, Sraffa ur ote a letter to Kobiilsoil explaining the essence of this

corrlplication for rleoclassical capital t h e o i ~Res~ \itch ing nd capital-re\ersiilg \ \er e

noted in the 1950sb\ Dn\icl Cha mpernonn e (1953-1954) and Robinson, but their

full sigilificance nas realized onh 111th Sraffn's 19bO book Smffa (19b2, p 4'79)

powd the kex question regarding the meailiilg 'uld measurement of capital %\lla t

is the good of a quan tih of capital . ~ \h ic h, ince it depends on the rate of



interest, cannot be used for its traditional purpose . . . to determine the rate of

interest[?]"'

Round 2: Equilibrium and Time, Differences Versus Changes

Capital is fundarnentallv intertnined with issues of time. A! Bliss (1975, p. 39)

urote: "On e of the esseiltial tasks of a theon of capital is . . . to make clear nhr a

purelv static and timeless economic theon could not be adequate." Questions

about the m easurement of capital in aggregate prodc~ction imction gron th models

segued to questions about hen, if at all, ma\ clrnamic processes of accumc~lation

an d distribution be analhzed nith in an essentiallr static equilibric~rn rarnenork.

The rleoclassical approach to capital comrnonlv exarnirles accumulation andrates of re turn using comparative statics exercises-inclctdil~g comparisons of

steaclv-state gro~vth aths-~vhich reflect differences in initial conditions. Robinson

irlslsted that such cornparisoils clicl not re\eal anrthing about p r o c ~ s s ~ sf accumu-

lation a nd gror\th, ere n their ultimate outcomes. She "frequenth had occasioil to

complaiil of the inabilitr of rleoclassical nri ters to distinguish betnee11 a dzft.rt.net. in

the paramete rs of an eqcullbrium model and th e effects of a changt. taking place at

a rnornerlt of time" (Kobinson, 1980, \o lu me 5, p. lil ) Her phrase "h iston \ ersus

equilibrium" summed up this methodological critique. Kobinson (19'74 [1980],

p. -5'7) argued:

The real source of trouble is the confi~sion et~veen omparisons of equilib-

rium positlolls arltl the hls ton of a process of accumulation. We mlght

suppose that n e can take a nu mber of still photographs of economies each in

statiorlan eqc~ilibriurn; . . This is an allor\able th oc~g ht xperiment. But it is

not allonable to flip the stills through a projector to obtain a moriilg picture

of a process of accumulation.

Thus , marlr hears ago, Robillsoil (1933, p. 390) put back on the agenda \\hat

u e nor\ call path-dependent equilibria: "the lei7 process of moving has an effect

upon the clestlnatiorl of the molernent, so that there is no such thing as a position

of long-run equilibrium r\hich exists inclependentlr of the course ~111ichhe econ-

ornr is follo~virlg t a particular date." Th e title of he r 1975 paper, "The Unimpor-

tance of Resnitching" (Robinson, 19'75a),reflected he r belief that J\ hile resr\itching

arld capital-re\erslng ne re problematic for neoclassical capital th eo n, he r methotl-

ological critique uas far Inore important.

" 110 similar valuation problems arise for heterogeneous labor? Th e crucial difference wit11 capital is tliat

tliere is no theoretical presumption tliat competition \<ill equalize wages across different t y e s of labor,

in the xvav that rates of return \\,ill equalize (arljnsted for risk) across im.esrments in different capital

goodsz ndustries. To the extent tliat liererogeneous labor reflects differences in lluman capiral, the

valuation problems for the neoclassical parables due to interest rate changes are only exacerbated.

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Avr J Cohpn a n d G. C. Harrour? 205

The neoclassical comparative statics exercises are clearlx an abstraction, as are

all econornic rnotlels. The crucial question is nhether the abstraction o f compara-

ti\e statics ca11fu)esor obscutes essential features of the accumulation process."

Round 3: Neoclassicals Fight Back: Aggregate Production

Functions-1 956 -1 966

Solow (1955-1956) irnrnetliately recogrlizetl that problems in measuring ag-

gregate capital clue to MTcksell effects could be overcorne only "in vei? special

cases" and presciently commented that "the real difficulty of [capital] comes not

from the physical diversity of capital gootls. It cornes horn the intertwining of past,

present and future . . ." He cocmteretl with an enz11im'ral tlefense of one-cornrnotlitymotlels as captclring the essential features of the growth process, a position heltl

consistently to this day (Solow, 2000; belt see also Pasinetti, 2000). With character-

istic xvit, he clefends his choice by saying that "if God had meant there to be more

than tsvo factors of protluction, He ~voultlhave matle it easier for us to tlra~v

three-tlimensional diagrams." Solow's (1956, 1957) one-cornmotlity proclc~ction

fc~nction noclel enabled h im to measure the respective contributions of capital

deep ening and technical progress to g ro~vth n output per head over time.

There were also three, less successfc~l, heoretical attempts dclring the period

from about 1956 to 1966 to fend off the problems of heterogeneoc~s apital. First,

Sxvan (1956) introducetl into this round of capital controversies what came to be

kn o~ vnas the metaphor of "putty capital." He collapsetl the ever present tension

between capital as physically heterogeneous capital goods and as homogeneous

funds flowing to equalize rates of retu rn through his metaphor of meccano sets, the

pieces of which can be timelessly and costlessly reshaped into appropriate quanti-

ties of "capital" in response to the pull of relative factor prices. These metaphors

originated with Biihm-Bawerk (1907, p. % 0) , who wrote in t he context of his

controversy with J.B. Clark: "Clark thinks of capital as a quan tum of value ' imputed'

in material goods. He strips off everything which may suggest material existence,

an d retains only a value jelly, existing eternally." Subsequent metaphors included

"leets" (steel spelled backward), butter , leg0 a nd putty (as opposed to clay). But all

of these metaphoric feints, which effectively collapse heterogeneous capital goods

into a one all-purpose commodity, only avoid, but do not solve, bVicksell's

problems.

Solow (1963) re-entered the ring with a second theoretical response from the

'Robinson also aimed this critique at her otherwise allies, Sraffa's followers. Gare gnani, for exam ple,

staunchly defends the view that rigorous results mav only be established within a franlework capturing

the effects of persistent forces that charac terire long-period positions-for exam ple, the natural prices

of the classical political economists, the prices of production of Marx and the long-period normal

equilihriunl prices of hlarshall, the econo mist 's counter par t of the natural sciences' traditional cente rs

of gravitation. Garegnani's (1970) insistence on using this long-period nlethod is why Robinson directh

and Iialdor indirectlv fell out with the Sraffians.



206 Journal of Economzc Perspectzm

neoclassicals, attempting to aloid problerns of capital by focusing on the rate of

return on in ~e st me nt . n the tradition of Ii-ring Fisher (1930), this was capital

the oq without any inention of either "capital" or "its" marginal product. Solow's

model addressed the question "what is the expected marginal re turn to a little rnore

saving/investment in a fully employed economy?" and sei-red as the basis for

empirical estimates of rates of return in actual econoinies. Pasinetti (1969, 1970)

argued that nei ther Fisher's nor Solo~v's pproach provided an intuitively satisfying

explanation of the rate of return unless an "unobtrusive postulate" that disallo~ved

capital-reversing was slipped into the analysis, although Solow (1970) disputed this.

The third theoretical neoclassical response attempted to extend the one-

cornlnoctitv lesults to inore general heterogeneous coinmodit). models. Sarnuel-

soil'\ (1963) attempt in the "surrogate production function" included what ap-

pealed to be a Tariet! of ph!sicallv distinct capital goods, but he also assumed equalfactor proportions in all industries, rnaking relatile prices independent of changes

in distrib~ ~tionetween wages an d profits. As Sainuelson subsequently realized, this

ef fec t i~el~ollapsed his model back to one cornmodit! .'By the late 1960s, Sainuelson's (1966, p. 568) judicious "Summing Up" article

admitted that outside of one-commodity models, reswitching and capital-re~ersing

may be usual, rather than anomalous, theoretical results and that the three neo-

classical parables "cannot be universally valid." On a theoretical level, the "English"

Cantabrigians won the round over aggregate production functions. Even neoclas-

si ca l~ike Hahn (1972, p. 8) sllorved no mercy for aggregate production functions,

which "cannot be sho ~vno follo~vrom proper [general equilibrium] theo n and in

general [are] therefore open to severe logical objections." They fell out of favor in

the 1970s and early 1980s until their revival with elldogerlous growth and real

business cycle theories.

Round 4: General Equilibrium-1966 and Beyond

X final neoclassical theoretical counteroffensi\e moTed into the arena of

general equilibrium, with Bliss and Ha hn replacing Solow an d Samuelson as k e ~

protagonists General equilibrium models sustain the general lleoclassical principle

of explainillg all pnces, including factor prices, bv relatiTe scarcl t~in that prices are

detelnuned bx preferences, endo~tments nd te chno log , and factor returns are

q u o 1 to or nzeosz~redby disaggregated marginal products. CompetitiTe equilibrium

prices are also corlslstent 1~1th Pareto-efficient dlspositioll of output.

The three parables, howel er- especiall~ he in\ erse, monotonic relation be-

tween the qu an ti t~ f capital and the rate of interest-\\ere not rescued. Bliss's 1975

book (which most obsener s consider the definitiTe lleoclassical treatment of capital

theon that ended the Cambridge contro\ersles) exarnines this relation uslng

" Ironically, Sanluelson's simplifying assunlption also supported Ifarx's labor theoq of value!



Tt71at~oerHnfifiened to the Cnnzbridge Cnfiital The07 Controverszes? 207

intertemporal general equilibriurn models to generate comparative static results."

Bliss (1975, p. 85) collcludes that "there is no suppor t from the t h e o l ~ f general

equilibrium for the proposition that an input to productioll will be cheaper in an

econorn: where rnore of it is available." Sraffians get the same result (Schefold,

"00).

The general equilibriurn round was motivated by Samuelson's quest, in his

surrogate production filnction model, "to pro\ide some rationalization for the

validit: of the simple J. B. Clark parables" (Sarnuelson, 1962, p. 194, emphasis in

original) . Clark (1891, p. 312) made straightforward one-way causal claims: " [A ]s

capital increases, while other things rernained unchanged, interest falls and as the

labor forces increases, if other things remain the same, wages fall." Samuelson's

failure prompted a "retreat" to general equilibrium models. But the switch to

general equilibriurn, rather than saving the lleoclassical parables, abandoned themfor simultaneous equation price systems, and correct statements about factor

returns being equal to or measured b! disaggregated marginal producti~ ities.

Relinquished, ho~vever,were one-way causal claims about unambiguously signed

differences in the interest rate associated with differences in the quantity of capital.

As Hahn (1981, p. 128) put it, lleoclassical general equilibriurn "is no t cornmitted

to a relatile scarcity theon of distribution."

hloreo\er, the general equilibrium approach re\italized Robinson's concerns

about equilibrium. Theoretical work, specifically, the disappointing Sonnenschein-

Mantel-Debreu stability results, found no particular reason to believe in the stabiliq

of the general equilibrium outcome. In discussing these results, Hahn (1984, p. 53)

wrote: " [Tlhe Arrow-Debreu construction . . . must relinquish the claim of prolid-

i ~ i glecessan descriptions of terminal states of ecollonlic processes." The lack of

adequate stability results raised questions about the conception of equilibrium as

the end of an economic process and the adequac! of comparat i\e statics as

explanations of the process of change following a parameter shift (Fisher, 1989;

Irlgrao and Israel, 1990).

And the Winner is . . . ?Not so fast. The fight was far from oler because there was no agreement on the

~z~p7zficancef all of these result^. The two sides used different criteria to judge the

agreed upon outcomes of the contro\ers:.

The different criteria involve another ongoing and unresolved controvers::

Has there been continuity in the e\o lution of economic th eoq frorn Adam Smith

to the present o r discontinuit!, with the marginal relolu tion setting lleoclassical

economics on a different path from earlier classical political econonq and Marx

(Bharadwaj, 1978)'i The "English" Cantabridgians, who viewed Sraffa's 1960 book

" Dixit ( 1 9 i i ) said in effect that Bliss's arguments made the quasi-rents of most prelious writing on

capital theor? either rero or, with regard to those of Cambridge, England , negative.



as a revival of classical theo1-1 (Sraffa also edited Ricardo's collected works), belie1e

in discontinuity; most neoclassicals, in continuity.

il.lnile neoclassical economics enlisions the lifetime utility-maximizing con-

sumption decisions of individuals as the driving force of econonlic activity, with the

allocatioll of given, scarce resources as the fundamental econoinic problem, the

"English" Cantabrigians argue for a return to a classical political econom: vision.

There, profit-making decisions of capitalist firins are the driving force, with the

filndanlelltal economic problem being the allocation of surplus output to ensure

reproduction and growth (bl'alsh and Gram, 1980). Because individuals depend o n

the market for their livelihoods, social class (their position within the dilision of

labor) becomes the fundainental unit of analvsis. The potential rate of profits on

capital arises from differing power and social relationships in production, and the

realiration of profits is brought about b7 effectke demand associated with sal ingand spellding behaviors of the different classes and the "aniinal spirits" of capital-

ists. The rate of profits is thus an outcome of the accumulation process.' Robinson

argued-citing I'eblen (1908) an d raising the specter of hlarx-that the mealling

of capital la7 In the properq owned b! the capitalist class, which confers on

capitalists the legal right and economic authoritv to take a share of the surplus

created by the production process.

Imagine for a moment the Cambridge contro\ersies as a crucial thought

experiment between two competing visions of econoinics. From a Cambridge,

England, perspective, how much inole decisi\e could the results have been? Capital

theon was the arena for extending the principle of scarcity to explain the return

to capital through rnarginal productivity. It was precisely on this key point of

what determines the rate of return that the "anomalous" reswitching and capital-

re\el sing results occurred. The three neoclassical capital parables were sho~vll nly

to hold in a one-commodiq model (where classical theon was equal17 lalid). A1

attempts to extend the parable results to inore general nlodels of heterogeneous

goods failed, because 'CZ'icksell effects made the links between capital and interest

bidirectional rather than one-~va! lloreover, the stability literature of general

equilibrium called into question the neoclassical vision of the lifetime utilit7-

inaxinlizillg decisions of individuals driving an optimal allocatioll of resources

through the inechanisnl of prices as scarcit: indexes. M7hat else would it take to

collvillce an ecorloinist to shift visions?

For neoclassicals, none of this was obvious. For them, the controversies were

conducted largely in lleoclassical terins about lleoclassical models. Reswitching and

capital-reversing prompted inuch useful neoclassical work to t1-1 and refine the

theoq through secondan hypotheses and additional assumptions; Burmeister's

' In the neoclassical vision, rates of interes t and profits are inte rchangeable terms. "English" Cantabridg-

ians differentiate profits ( th e return on investment in capital goods) fi-om interest ( th e hire price of

finance) and stress the theoretical importance of profits. Outside the one-conlmodity model, the price

of capital's sei~ices-its rental-is the rate of profits multiplied by the price pe r unit of capital goods

(Har cour t, 1972, pp. 37-39).



AUZJCohen and G. C. Harcourt 209

(2000) "regular economies" are a good example. But there was little sense of a

viable alternatke vision waiting in the wings and even less sense that the neoclas-

sical ~ l s i o n as at stake.

Furthermore, neoclassical one-commodity models remained intact an d fruitful

as a basis for empirical work. As explicit simplifications, the: could get b! with the

less rigorous notion that relatile scarcities must be the emnpimcnlb do~nznant eter-

minant of relative prices, even if Wicksell effects are theoretically p ~ s s i b l e . ~olow's

rationale for his empirical work has always been straightforward an d frank: assum-

ing that the data mav be regarded "as if" the! were generated b! the un de rl ~i ng

simple model, the estimation procedures s ene to provide orders of magnitude of

the ke! parameters of the model. These "lo~vbro~v" odels remain heuristicallv

important for the intuition thev provide, as well as the basis for empirical work that

can be tractable, fruitf~il nd polic v-re le~a nt.~In contrast, the "English" camp was sorely lacking empirical work on the causes

and impact of capital inlestment. The Cambridge, England, rejoinder on the

empirical issue, baffling to many "American" economists, was that the empirical

likelihood of Wicksell-type feedback effects was beside the point. This was a

theoretical debate, in which all models assume a gilen technology. An: time series

or cross-count17 data would ha le different technology bases, which could be used

to explain awa! anv contra^^" empirical tests by ad\ocates on either side.'' Ac-

cording to Sraffa (1961, pp . 305-306): "Theoretical measures require absolute

precision. Any imperfections . . . were not merelv upsetting, but knocked down the

whole theoretical basis. . . . The work of J. B. Clark, Bohm-Bawerk and others was

intended to produce pure definitions of capital, as required by their theories. If we

found contradictions. . . these pointed to defects in the theon."ll

Another weakness on the "English" side was that neither Robinson nor her

fellow Cambridge critics del eloped a n alte rnatk e set of theoretical (as opposed to

descriptke) tools that avoid her concerns about the limitations of equilibrium

analysis. Or e\en where thev have-we think here of Kalecki's (1968) and Good-

'Following Stigler, Cohen (1993) argues tha t the neoclassicals held a "93% scarcity th eo q of value" after

the Cambridge controversies, akin to Ricardo's admission of a 93 percent lahor theo q of value after the effects of capital were taken into account.

"here are important limitations on the empirical support for the neoclassical parables. Fisher (1971,

p. 325) has shown that as long as factor income shares remain constant, an aggregate Cobb-Douglas

production function will fit the data well "even though the underlying technical relationships are not

consistent with the existence of any aggregate production function."

'"The recent endogenous growth literature on convergence has grown out of the lack of empirical

evidence for the predictions of the neoclassical one-commodity rnodel (that is, countries with higher

capital/labor ratios should, but do not, have lower rates of return and growth). Robinson's (19751>,

p. .54) comment presaged this literature: "In comparisons across countries, American industry is

generally found to have the highest ratio of inputs per worker . . . but I do not know that anyone has ever

suggested that the rate of profit on capital is exceptionally low in the United States."

'' D a ~ l dLaidler suggests that Sraffa was ahead of his time in pointing ou t that neoclassical models based

on an aggregate production function lack proper microfoundations, because this is a far more telling

criticism of modern real business cycle theory, whose exponents make strong claims about such matters,

than it was of 1950s vintage growth models.



210 Journal of Et ono~nirP ~ r s p ~ c t z v ~ s

win's (196'7) cyclical growth models, Kaldor's (1996) cumulative causation pro-

cesses an d Pasinetti's writings (1981, 1993)-the profession by an d large ignored

them.

Thus, the two Cambridges could not agree about the sigrlificallce of either the

results nor the support ing e\idence . Such disagreeinerlts about sigllificarlce are an

endernic problem in economic anal!sis. What is the meaning of a simple model

whose clear-cut results are n ot sustained when restricti\ e assumptions are loosened?

Is it nonetheless a valuable parable , useful heuristicall! an d empirical17 to isolate

crucial terldellcies that get obscured in rnore general models? Or is it a mistake

whose insights must be discarded while searching for a better explanation in a

completel! different direction?

Blaug ( in Caravale, 1976, p. 38) captured beautifully the typical neoclassical

response to these questions: "The Cambridge School has this crazy idea, that if weha \e a rigorous simple th eo n, and then we disco\er one little flaw in it, that inakes

it more complicated to use it, we are finished. If we need five tyres to ru n a car

instead of four tyres, we haven't got a car any more, so we must give up e \en.thing

and start using an aeroplane."

bl'ith neither side able to deli\ er a knockout punch, issues of faith and i de ol og

entered the ring xvith clairns about the sigrlificallce of the results and coinpeting

\isions of economics. 12'hen one-corninoditv results are not robust in inore general

models, the lack of definitive e\.idence leaves room for id eolop to pla! a role in the

decision to hang on to a theoq or vision. The intensit) and passion of the

Cambridge contro\ersies were generated not by abstract technical questions about

FVicksell effects, but by strong ideological undercurrents like the ethical justifica-

tion of the return to capital and fundamental methodological questions about

coinparing deepl! differing ~is io ns f economics and the extent to which equilib-

rium is a useful tool of econoinic analysis. Ideology and methodology, two subjects

most ecollomists would rather avoid, were pervasive ulldercurrellts fueling the

contro\.ersies (Bliss, 19'75, chapter 15).

Whence and Whither the Cambridge Capital Theory Controversies?

The Cambridge controversies were the last of three great twentieth-centun.

capital theoq controversies. Earlier contro\.ersies occurred at the turn of that

ce nt uq among Bohm-Bawerk,J. B. Clark, In in g Fisher and ITeblen nd then in the

1930s among Knight, Hayek and Kaldor. Similar issues recurred in all three

controversies, and we will sketch some examples here.''

At the turn of the twentieth century, J. B. Clark and Biihm-Bawerk were

consciously countering hlarx's theory that the return to capital in\.olved exploita-

l2 Colien and Harcourt (forthcoming) provide a fuller treatment of these early episodes and more detail

on all arguments in this paper.



Whatever Hafipened to the Cambrzdge Capital The091 Controverszes? 211

tion of labor.13 Clark's response, that wages and interest were simply prices stem-

ming from the respective marginal products of labor and capital, is best expressed

in his famous claim that "what a social class gets is, under natural law, what it

contributes to the general outpu t of i ndu st l~ " Clark, 1891, p. 312)).Veblen

disputed Clark's marginal productivity theoq, arguing instead that profit was

institutionallv grounded in the social power of the capitalists that enabled them to

appropriate the technological achievements of the society as a whole. Irving Fisher

(1907) believed that the interest rate could be viewed as the equilibrium outcome

of' simultaneous equations. Bohm-Bawerk disagreed, arguing that simultaneous

equations, while useful, in\.olved circular reasoning and failed to provide a causal

explanation of interest. Bohm-Bawerk, in defending an alternative Austrian vision

of economics, sought a one-way explanation tracing interest determination back to

the original physical factors of labor and land.In the 1930s controversies, Hayek insisted that decreases in the interest rate

prom pt more roundabout, capital-intensive production, even though he could no t

prove this in heterogeneous goods models. Hayek (1941, pp . 141-142) freely

acknowledged: "All attempts to reduce the complex structure of waiting periods

. . . are bound to fail, because the different waiting periods cannot be reduced to a

common denominator in purely technical terms." Kaldor and Knight agreed that

the inverse, rnonotonic relation between capital intensity an d the interest rate is not

sustained in heterogerleous commodity models. The! disagreed about which of

their respective one-commodity models pro\ided better insights. All three authors

(Bohm-Bawerk an d I'eblen, too) expressed concerns about equilibrium. For exam-

ple, Hayek's (1941, p. 17) "dpnamics" emphasized historical causation over mutual

interdependence. Kaldor (1938, p. 14) argued against comparative statics and for

a "process of change." Knight (1931, p. 210) believed that capital and growth are

"long-run historical changes [that] must be faced as problems of historical causality

and treated in terms of concepts very different from those of given supply and

demand functions and a tendency toward equilibrium un der given conditions."

Looking back over this intellectual history, Solo~v 1963, p. 10) suggested that

"when a theoretical question remains debatable after 80 vears there is a presump-

tion that the question is badly posed-or very deep indeed." Solow defended the

"badly posed" answer, but we believe that the questions at issue in the recurring

capital controversies are "\.en deep indeed."

The Cambridge controversies were not a tempest in a teapot. M7e agree with

Bliss's conclusion (1975, p. 346) in viewing "the theory of capital not as some quite

separate section of economic theory, only tenuously related to the rest, bu t . . . as

an exterlsiorl of equilibrium theory and production theory to take into account the

role of time." Major issues-explaining (and justifying) the return to capital,

visions of accumulation, limitations of equilibrium tools-were an d are at stake.

M'hile many of the key Cambridge, England, combatants s topped asking questions

'"or a short introduct ion to the earliest controversy in this jou rna l, ~v ith focus on Clark hu t some

discussion of the other participants, see Persky (2000).



212 Journal of Economic Perspectives

because they died, the questions have not been resolved, only buried. M7hen

economists decide to delve again, we predict controversies over these questions will

be revisited,just as they were time and again in the 80 years prior to the Cambridge

controversies.

The authors a7e moct grateful to the edztors of t he jour na l, Ma7k B laug; ChristopherBlzss,

Harnld Hagemnnn, Heznz Kun, Dauid Lnidler, Muwny Milgcite nnd the pnrticipants in

senzznn7s at Q ueens' College, Cnnz(,mdge,Brock CTniz~ersztj,he Y ork /Toron to W orkshop in the

Hzrto? of Economzcs, the Histo? of Economic Th ought conference at the CTniue~sityof ,\'ew

England, i Y ~ ~outh Wales , and the Hzstory of Economzcs Societj meetzngs at Wake Forest

Lizzuersztj for thezr comments on drafts of thzs artzcle. Th an ks to Bonn3 Stevensen for creating

t h ~gures.

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[cohen.harcourt-cambridge] (conroversy retrospectives) whatever happened to the cambridge capital...

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