Drawbacks of the neoclassical theory of investment and capital

The real source of trouble is the confusion between comparisons of equilibrium positions and the history of a process of accumulation. We might suppose that we can take a number of still photographs of economies each in stationary equilibrium. This is an allowable thought experiment. But it is not allowable to flip the stills through a projector to obtain a moving picture of a process of accumulation. (Robinson, 1980 [1974]: 57)

No critique of neoclassical economics would be complete without reference to the Cambridge Controversy. The neoclassical model considers capital to be physically homogenous, computes physical capital goods or machines in value terms, and uses this money value as a proxy for physical capital involved in the production process (Samuelson, 1962). The total value of capital is computed as the product of physical units (buildings, machines, etc.) with their respective (equilibrium) prices. The neoclassical method attempts to overlook the complexities of the economic system, which is essentially built upon a set of heterogeneous capital goods. Samuelson contends that 'the surrogate (homogeneous) capital ... gives exactly the same result as does the shifting collection of diverse capital goods in our more realistic model' (Samuelson, 1962: 201). This result is considered sufficient to justify using the surrogate production function 'as a useful summarizing device' (Samuelson,

1962: 203). In other words, Samuelson's 'more realistic model' is functionally equivalent to an aggregate production function, in which one produced good can be stockpiled for use as a capital good along with labour in the determination of output, and the marginal products of these inputs are estimated on the assumption of substitutability between factors of production that gives rise to diminishing returns (Cohen and Harcourt, 2003).

Capital, however, is not homogeneous. Physical capital covers a multitude of things too various to be easily reduced to one homogeneous substance. This realisation incited a lively debate on capital theory during the 1960s - known as the Cambridge Capital Controversy - which principally deals with the measurement of capital goods in aggregate production function models.10 Piero Sraffa points out that there is an inherent measurement problem in applying the neoclassical model of value and income (Sraffa, 1960): in reality, capital is an ensemble of heterogeneously produced goods. It cannot be aggregated in physical units; capital valuation must be used instead.1 1 Sraffa (1960) argues that the value measurement of capital requires the prior knowledge of equilibrium prices, which in turn requires an equilibrium rate of profit that cannot be obtained unless the value of capital has been estimated. The neoclassical approach postulates that estimating the rate of profit requires the prior measurement of capital or 'aggregated capital,' which is measured independently of the rate of profit and of income distribution (Pasinetti and Scazzieri, 2008). This unidirectional method leads to the second paradox in the Cambridge debate: the circularity or interdependence paradox (Cohen and Harcourt, 2003). Sraffa shows that the direction of causation between the rate of profit or Marginal Productivity of Capital (MPK) and the amount of capital can be reversed. Rather than the rate of profit or MPK depending on or being set by the amount of capital used in the production process - as the neoclassical school argues - the amount of capital in fact depends upon the rate of profit (Harcourt, 1972). Following this argument, Sraffa shows that a change in the amount of capital can actually be affected by a change in the rate of profit (Schefold, 2000).

More importantly, Sraffa shows that the MPK, which is equal to the rate of return on capital, can reasonably approximate profits at the individual level but not at the aggregate level. Hence, the distribution of income (the profit, the wage rate) and their associated price levels are not determined by market forces. Micro-profits and wages denominated in prices are no longer an explanation superimposed on the macro-accumulation process. This raises the question as to which forces are actually behind the redistribution of income in society. Wages and profits denoted by prices are the product of the social forces that control the accumulation process and of the way society reproduces itself. Profits continue to be the prime mover of the production process; but it is the social class in charge of the process of capital accumulation that is earning profits as a whole and redistributing them among class members (Walsh and Gram, 1980).

While the neoclassical theory assumes that a supernormal profit rate fails to appear or is notionally set at the zero mark at the perfectly competitive equilibrium level, the Marxian analysis of capital accumulation allows for a positive rate of profit and views it as an integral part of the process of capital accumulation, and more generally as the essence of capitalism. Marx's analysis of capital accumulation is presented in Part VII of Capital, Volume I. The circuit of capital (M - C - M') is a simplified form of Marx's interpretation of the capitalist movement of value. A more complete description of the circuit of capitalist production is M - C {MP, LP}...P... C' - M' (Fine and Saad Filho, 2004; Foley, 1986). The process of capital accumulation for Marx starts when the capitalist proceeds with an amount of money (M) to purchase two types of commodities (C): means of production (MP) and labour power (LP). In capitalist society, the capitalist class does not produce anything itself (i.e., the class does not start with C). Rather, it starts with a sum of money (M) that it invests in workers, machines, and raw materials (C). During the production process (P), the workers transform the means of production (MP) into new commodities (C') that are then sold for more money (M'). There are two transactions, buying (M - C) and selling (C' - M') and the difference between M and M' is profit (Foley, 1986; Larrain, 1989). This implies that the sum of money used at the beginning of the process was not only spent but enlarged. The driving force behind this whole process is money and profit-making. That is to say, the profit fulfils the capitalist's desire to accumulate wealth.

The objective content of the circulation we have been discussing - the valorisation of value - is his subjective purpose, and it is only in so far as the appropriation of ever more wealth in the abstract is the sole driving force behind his operations that he functions as a capitalist ... Use values must therefore never be treated at the immediate aim of the capitalist; nor must the profit on any single transaction. His aim is rather the unceasing movement of profit making. (Marx, 1990: 254)

The capitalist system of production hence lacks any intrinsic end or limit and has an entrenched need for additional expansion. This process continues as M' - C - M''. Nevertheless, further capital accumulation inevitably leads to a drop in profit rates (due to excess capacity and higher organic composition of capital - better technology) and this in turn leads to a drop in capital accumulation. Marx develops in Capital, Volumes I and III, the idea that capital must accumulate in order to survive. In this sense, 'the movement of capital is limitless' (Marx, 1990: 253). For Jorge Larrain, 'the process of development can be described simultaneously as increased capital accumulation and as continuous growth of productive forces and of commodity production ... the latter is the condition for the former' (Larrain, 1989: 42). However, not only are commodities and surplus produced, but the whole set of conditions necessary for the continuation of this process must also be reproduced (Emmett, 1923: 217). For Marx, capitalist development is about the continuous expansion of productive forces and the increased production of commodities, along with the reproduction of class relations (workers and capitalists as separate classes) in the capitalist process of commodity production (Foley, 1986: 63).

The third paradox of the Cambridge Controversy is known as 're-switching,' which can be summarised in the proposition that there exists no monotonic relation between the amount of capital and the rate of profit (Pasinetti, 1969). The idea that there exists an inverse monotonic relation between the demand for capital and the interest rate holds true in the 'financial' concept or definition of capital but not in its 'technical' or 'physical' conception (Cohen and Harcourt, 2003: 201). This debate on capital theory proves that an increased amount of capital in production need not be followed by a falling rate of profit. On the contrary, a combination of high rates of profit and increased amounts of capital can be attained by way of cost-effective techniques (Cohen and Harcourt, 2003: 202). It follows that capital does not necessarily manifest diminishing marginal productivity, and this represents a challenge to one of the major assumptions of the neoclassical theory of capital. The condition that an economy comes to rest at an equilibrium level is dissipated by virtue of these results. In this regard, Samuelson sums up the Cambridge Controversy discussion by saying that 'the simple tale told by Jevons, Bohm-Bawerk, Wicksell, and other neoclassical writers,' according to which a falling rate of interest is unambiguously associated with the choice of more capital-intensive techniques, 'cannot be universally valid' (Samuelson, 1966: 568). In passing, the use of universal validity in something as manifold, heterogeneous and real as social science proves the corrupting element of Neoplatonist mathematics on economics. Nonetheless, the lack of adequate stability raises concerns about the equilibrium level as an end of the economic process. Robinson (1980 [1974]) explains that the equilibrium theory cannot be considered adequate for analysing the process of capital accumulation. That is why a demand-led - which incorporates the 'circulating' or 'fluctuating' aspect of investment - becomes a more appropriate analytical tool for studying investment in developed countries. In the following section, investment is studied via the aggregate-level performance of the economy, in that it is looked at as a function of changes in output (income) and rates of profit. The conventional assumptions of microlevel optimisation and their associated equilibrium levels are thereby set aside.

It is peculiar why, after so much evidence invalidating the neoclassical construct of capital and the way it is circularly defined by profits and defines profits, the concept remains in common usage. A prima facie, all is heterogeneous, and homogenisation is simplification for the sake of illustration, but not theory. Quantification by mathematics is a tool and not an end of knowledge in itself. To base a social theory on universal mathematics or outward manifestation of quality in quantity reduces reality to an illusion. Syria, of all places, is as heterogeneous as can be. Between the social and technological levels, one can find the tribal social bonds or ox-driven technology and advanced atomised families or assembly line production. The macro prices: wage, interest, and exchange rates are administered by the social force in control of the state. It universalises different economic processes in the same money form for the purpose of grab. But at what social cost? And what are the underlying value transfers from the working to the ruling class?

Value is the category which is omitted from the Cambridge Controversy. This school reads the capital circuit from the money form manifest in the macro structure. In the developing world, behind the exchange structure, the money form serves as an instrument of repression and re-colonisation. Without value theory, an adequate reading of conditions in developing formations, cannot be accomplished. Capitalism does not impart progress onto non-sovereign developing formations that have lost or are on the way to losing the national liberation war. It, in fact, deconstructs developing capital to render developing states into repository of loose materiel, raw material export, and consumption basins. Weakened developing formations become pedestals for the growth of central capitalism. The developing formation's value that could be produced is capped by imperialist assault. These operations of the law of value, which are at work in Syria, are not entertained by the Cambridge Controversy.

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