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Again on the relevance of reverse capital deepening and reswitching

Author

Listed:
  • Ariel Dvoskin
  • Fabio Petri
Abstract
Among the recent interventions in the capital controversy, the debate between Paola Potestio and Kurz&Salvadori has raised important issues. We agree with Potestio’s rejection of the legitimacy of a value endowment of capital but we disagree with her dismissal of the relevance of reswitching and reverse capital deepening: these phenomena are very important because they undermine the demand-side role of the conception of capital as a single factor. For the marginal approach to be plausible, this demand-side role had to imply the stability of the savings-investment market even in shorter time frames than those required by a complete adaptation of the ‘form’ of capital; this was taken by Marshall to authorize doing without a given endowment of value capital, which opened the door to the shift to the modern neo-Walrasian versions of the marginal approach. With proof from Hayek, Hicks, Malinvaud and Lucas we argue that a continuing belief in traditional time-consuming marginalist disequilibrium adjustments based on capital-labour substitution is the hidden reason why the claim, often made by contemporary marginalist economists, that the economy can be assumed to be all the time on the equilibrium-growth path is not found patently unacceptable. The true microfoundation of DSGE macromodels is not intertemporal equilibrium theory, but the adjustment mechanisms on whose basis the marginal approach was born and accepted, and on whose basis monetarism was then able to re-assert a pre-Keynesian view of the working of the economy.

Suggested Citation

  • Ariel Dvoskin & Fabio Petri, 2015. "Again on the relevance of reverse capital deepening and reswitching," Department of Economics University of Siena 710, Department of Economics, University of Siena.
    • Handle: RePEc:usi:wpaper:710
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    References listed on IDEAS

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    1. Heinz D. Kurz, 2000. "Wicksell and the Problem of the "Missing" Equation," History of Political Economy, Duke University Press, vol. 32(4), pages 765-788, Winter.
    2. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
    3. Hayek, F A, 1969. "Three Elucidations of the Ricardo Effect," Journal of Political Economy, University of Chicago Press, vol. 77(2), pages 274-285, March/Apr.
    4. Heinz Kurz & Neri Salvadori, 1998. "Reverse Capital Deepening and the Numeraire: a note," Review of Political Economy, Taylor & Francis Journals, vol. 10(4), pages 415-426.
    5. Fabio Petri, 2004. "General Equilibrium, Capital and Macroeconomics," Books, Edward Elgar Publishing, number 3438.
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    9. Kurz, Heinz D. & Salvadori, Neri, 2001. "The aggregate neoclassical theory of distribution and the concept of a given value of capital: a reply," Structural Change and Economic Dynamics, Elsevier, vol. 12(4), pages 479-485, December.
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    More about this item

    Keywords

    CAPITAL; MARSHALLIAN EQUILIBRIUM; NEOWALRASIAN EQUILIBRIUM; REVERSE CAPITAL DEEPENING; RESWITCHING; SAVINGS-INVESTMENT MARKET;
    All these keywords.

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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