Transformations of the Cambridge Critique

The debate on capital theory has recently been revived. Reswitching had led to agnosticism regarding the substitution of capital for labour in consequence of changes in the rate or profit. The paradoxes of reswitching and reverse capital deepening now turn out to be rare for theoretical reasons, and this is confirmed empirically, but new results also show that the possibilities of substitution between capital and labour are quite limited; their ratio is given within narrow limits by technology, if the choice of techniques is efficient. This is a new critique of neoclassical theory; it confirms the complementary theories of distribution advanced by the Cambridge economists: the share of profits is influenced by effective demand (Kaldor) and by the level of interest rates as an element of cost (Sraffa). Both theories presuppose the stability of the capital-output ratio. This finding also sheds light on the options of central banks regarding the fixation of interest rates. JEL Code: B51, C67, D57, E11, E13, E44