The Cambridge Controversies in the Theory of Capital: A Solution to the Reswitching Puzzle

32 Pages Posted: 24 Jan 2010 Last revised: 11 Aug 2011

Date Written: August 11, 2010

Abstract

When two production techniques are compared, reswitching occurs when a technique begins by being cheapest at a low interest rate, switches to being more expensive at a higher rate, and then reswitches to being cheapest at yet higher rates. Some believe the inconsistency undermines the foundations of neoclassical economics. The time-value-of-money (TVM) equation is at the core of the puzzle. The equation is an nth order polynomial having n roots (interest rates). In most economic analyses only one root is used. The remaining (n-1) roots, mostly complex or negative, are usually ignored. In this article, all roots are employed in an expression relating differences in the dependent variable to differences in interest rates. When multiple-interest-rate analysis is applied to the Sraffa-Pasinetti example of reswitching, the phenomenon disappears. The solution has contemporary significance because reswitching is one problem in a class of similar problems having the TVM equation at their core.

Keywords: Capital Theory, Complex Plane, Interest Rate, Reswitching

JEL Classification: A3, B1, B2, B5, C02, C6, E1, E2

Suggested Citation

Osborne, Michael J., The Cambridge Controversies in the Theory of Capital: A Solution to the Reswitching Puzzle (August 11, 2010). Available at SSRN: https://ssrn.com/abstract=1540528 or http://dx.doi.org/10.2139/ssrn.1540528

Michael J. Osborne (Contact Author)

University of Sussex ( email )

BMEc, Jubilee Building
University of Sussex, Falmer
Brighton, Sussex BNI 9SL
United Kingdom
(44)1273872687 (Phone)

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