Reswitching of Technique

Reswitching of technique refers to the virtual adoption of production techniques, either by the individual producer or by the economic system as a whole. Standard economic theory treats technical adoption on the assumption that there is a multiplicity of techniques for producing any given good, and that the producer, as a rational decision maker, will switch from one technique to another according to a certain hypothetical sequence as the prices of productive factors are changed. This sequence would depend on the ranking of techniques in terms of capital per man or ‘capital intensity’, so that a lower rate of interest (which is equal to the rate of profit in equilibrium) would be associated with the ‘adoption’ of a technique characterized by higher capital per man. This process is known as capital deepening. The development of discrete production models in the 1950s led to the discovery that this view of ‘rational’ technical adoption is not necessarily well founded. David Champernowne (1954) and Joan Robinson (1956) pointed out that a movement of the rate of interest in a given direction might make it optimal once again to use techniques that had been previously excluded. This phenomenon is known as reswitching of technique. The paper highlights that reswitching calls attention to a paradox that has long been overlooked. This is that rational choice, in its classical formulation, presupposes not only agents capable to rank alternatives in a consistent way, but also objective states of the world making such a consistent ranking feasible. The reswitching debate shows that a ‘granular’ representation of production techniques leads to a complex pattern of interaction such that any given technique may be associated with two or more different positions on the profitability ranking of techniques (see above). This discovery was made possible by the consideration of price movements in a capital-using economy (see above). Its most immediate implication has been to cast doubt upon the representation of capital structure in terms of simple aggregate parables. However, reswitching also called attention to another, perhaps more fundamental, feature of technical choice. This is the dual nature of the grading procedure associated with choice. For grading situations express not only the agent’s ability to rank states of the world in a consistent way, but also the possibility to rank those states in terms of ‘objective’ characteristics independent of the agent’s preferences and choices. The reswitching debate has proved that the latter prerequisite may be a will-o-’the-wisp as soon as we consider the complex interactions that take place in a production economy.