Thursday, April 30, 2015

#tbt Luigi Pasinetti 1966 Changes in the Rate of Profit and Switches of Technique

So the Cambridge capital controversy is currently my favorite thing in straight economic theory. One of my favorites is this one by LL Cool J L. L. Pasinetti. In it, he tests the theoretical underpinnings of the Solow growth model.

Pasinetti builds a two-sector economic model with two available technologies: one with relative capital intensity in one sector, one in the other. He shows that the demand for capital is not monotonically downward-sloping across industries, as maintained by neoclassical theory. Either each industry responds to unique rates of interest which are uncorrelated with any sort of leading market rate (e.g., interbank lending rate), or some industries genuinely do exhibit Giffen-like behavior with respect to capital. In either case, this approach demolishes the notion that you can aggregate or disaggregate factor demand in any meaningful way. Any generalizations derived from macroeconomic data says nothing about underlying microeconomic phenomena.

Unfortunately, the capital critique has been ignored into oblivion in most corners of the economics profession, but I know I'm not the only one trying to bring it back.

Download the article here