Pasinetti on Capital Theory

It was in the 1950s that economists first came to doubt that it could no longer be taken for granted that there is a unique, unambiguous profitability ranking of production techniques in terms of physical capital intensity along the scale variation of the rate of profits (Pasinetti and Scazzieri 1987). According to Pasinetti:

Up to the 1966 QJE, many skirmishes had indeed taken place, especially between Joan Robinson and Bob Solow—rather harsh in tones, but hardly convincing in substance. The real point of departure of the controversy was provided by the last chapter—XII: ‘Switch in methods of production’—of Piero Sraffas (I960) book, where it was shown that the same method of production can become the most profitable one of many different levels of the wage-rate/ rate-of-profit distribution curve, thus contradicting the neoclassical basic contention of a monotonic inverse relationship between capital and its ‘price’ (the rate of profits) (Pasinetti 2003: 227).

In the early 1960s, Paul Samuelson with a number of fellow economists started looking for the conditions that would ensure a strictly monotonic relation between the rate of profits and capital intensity (capital-labour ratio) even in the presence of a non-linear relation between the wage rate and the rate of profits. As already noted, this was claimed to have been found by a pupil of Paul Samuelson, David Levhari, in an article published in 1965 in the Quarterly Journal of Economics. Levhari claimed to have shown that while reswitching and capital reversing could occur in an industry, they could not occur in the economy as a whole. It was left to Pasinetti (1966, 1969) to prove otherwise.

Pasinetti’s 1969 paper was attacked, especially by Robert Solow, Christopher Dougherty, John Craven, Christopher Bliss, and Avinash Dixit. One main point remains unchallenged to the present day and that is the disjunction between the ‘profit-wage rate’ relationship and the ‘technique of production- profit rate’ relationship. More specifically, slight changes in the rate of profits may lead to sharp variations in the choice of techniques of production in terms of capital intensity (per man). This is a property of capitalist economic systems, first pointed out by Pasinetti, which has never been challenged. The implications are far reaching: for the price system variations may be quite small, but for the choice of techniques and the distribution of income such variations will be much greater. This is what Pasinetti adds to his 2003 paper on the ‘Cambridge Capital Controversies’:

A vast literature followed. Attempts were made to minimize the shattering effects of reswitching and capital reversing on neoclassical models, by focusing on an intertemporal general equilibrium scheme, where reswitching and capital reversing can be hidden or confused with many other difficulties and causes of instability of the solutions. Yet, even among the general equilibrium theorists, one fact remains undisputed as a result of the 1966 QJE symposium, namely that the relationship between capital—whatever the way in which it is measured or aggregated (Fisher 1971)—and its ‘factor price’ is in general a non-monotonic relation.

This characteristic is contrary to the assumptions underlying neoclassical capital theory, including the recent models on endogenous growth (Pasinetti 2003: 228).

This is what he concludes:

Samuelson closed the 1966 Symposium with a few wise words (p. 583): ‘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.’ Current neoclassical economists do not seem to like Samuelson’s ‘facts of life’. True, we have been told by Thomas Kuhn.. .that ‘normal science’ must sometimes put up with black spots like inconsistencies and adverse evidence, ignoring them temporarily and waiting for further investigations. But the nonmonotonic adverse relation between capital intensity and rate of profit seems to be more than a mere black spot. Indeed, Sraffa thought that it could swallow up the whole neoclassical theory of capital— a ‘black hole’, we might say, rather than a black spot (ibid.).