ABSTRACT
TheQuarterly Journal of Economics symposium had shown that the possibility of reswitching and capital reversing could not be ruled out. Levhari and Samuelson admitted the correctness of the criticism: ‘The Non-Switching Theorem is False’ (Levhari and Samuelson 1966). And ‘Pasinetti, Morishima, Bruno-BurmeisterSheshinski, Garegnani deserve our gratitude for demonstrating that reswitching is a logical possibility in any technology, indecomposable or decomposable.’ (Samuelson 1966: 582). Samuelson also admits that reswitching shows the possibility of capital reversal, and a positive relation between changes in the interest rate and changes in the steady-state consumption level and the capital-output ratio. And he concludes: ‘If all this causes headaches for those nostalgic for the old time parables of neoclassical writing, we must remind ourselves that scholars are not born to live an easy existence. We must respect, and appraise, the facts of life.’ (ibid.: 583). Now, if to respectmeans to leave alone, wemay observe that several neoclassical
scholars appraised rather than respected the fact that reswitching had been proved to be a possible consequence of the two-sector fixed-coefficient production model. They tookSamuelson’s remark about the scholar’s predicament literally and started looking for ways of saving as much of the original neoclassical predictions as they could. But their defence did not concentrate on refuting the results of the critics, but rather on the question of how perverse, inconvenient and worrying reswitching and capital reversing are. We shall discuss two reactions: one by Brown, who develops an idea of Hicks, the other by Ferguson and Allen. Brown examines the conditions under which the relation between the rate of
profit and capital intensity is ‘perverse’. He extends the analysis of Hicks (1965).
Hicks1 had constructed a model in which the rate of profit operates on the choice of technique via two intermediate mechanisms. One is a change of the production coefficients within a sector of production, which Hicks baptizes the substitution effect. The other is a change in the relative capital intensity between production sectors. The latter effect is later called2 the composition effect. In what follows we will first see how Hicks dealt with the relation between the
rate of profit and the choice of a technique with a particular capital intensity. Then it will be shown how Brown uses Hicks’ analysis to try and make some progress in finding the conditions that ensure that there is a unique relationship between the rate of profit and the capital intensity of the technique of production that is chosen. This batch of case studies will be concluded by a discussion of an article by Ferguson and Allen, who go a step further than Brown did in finding conditions that rule out reswitching and the possibility that one particular capital intensity may be associated with more than one rate of profit. But now first Hicks.
