Capital Theory: paradoxes

The idea that capital theory might lead economists to discover forms of ‘paradoxical’ behaviour has emerged in the economic literature of the 1960s largely as an outcome of developments in the field of production theory (linear production models leading to enquiries into discrete and discontinuous relations). What happened in capital theory is in fact a special instance of a more general phenomenon. Economists sometimes tend to examine a large domain of economic phenomena by adapting theoretical concepts that had originally been devised for a much narrower range of special issues. The discoveries of ‘paradoxical’ relations derive from the fact that their process of generalization often turns out to be ill-conceived and misleading, if not entirely unwarranted. For a long time, in capital theory, it had been taken for granted that there is a unique, unambiguous profitability ranking of production techniques in terms of capital intensity, along the scale of variation of the rate of interest. The discovery that this is not necessarily true has induced many economists to speak of ‘paradoxes’ in the theory of capital. But the roots of apparently paradoxical behaviour are to be found, not in the economic phenomena themselves, but in the economists' tendency to rely on too simple ‘parables’ of economic behaviour. The paper examines the emergence of the aggregate view, and its criticism during the capital controversy debate. It also considers the aftermath of capital controversies and their influence on contemporary economic research. An importance consequence is that the conception of ‘capital’ has had to be jettisoned, which has stimulated reformulations of the pure theory of capital. There has been on the one hand a return to the Walrasian general equilibrium theory in its inter-temporal formulation, and on the other hand a remarkable revival of classical political economy. The controversy had also a number of less striking but perhaps longer term consequences. The consideration of paradoxes has alerted economists to the richness and complexity of economic relationships, and to the need to avoid a process of generalization from the consideration of special cases. In any case the debate seems to have compelled theoretical economists to be more rigorous about the nature and limits of their assumptions. In many important cases, it has also brought about a change in the main focus of their analysis.