Capital re-switching

3 Key Takeaways

• Capital re-switching refers to the phenomenon where a production technique becomes optimal again at both low and high rates of profit.
• It challenges the neoclassical assumption of a simple, monotonic relationship between capital intensity and profitability.
• The concept has significant implications for capital theory and the debate between neoclassical and heterodox economics.

What is Capital Re-switching?

Capital re-switching is a concept that arose from the Cambridge Capital Controversy, a debate between economists from Cambridge, England, and Cambridge, Massachusetts, in the 1960s and 1970s. It refers to a scenario where a production technique, characterized by a certain combination of labor and capital, becomes the most cost-effective option at both low and high rates of profit.

This means that as the rate of profit increases, firms may switch from a more capital-intensive technique to a less capital-intensive one, only to switch back to the more capital-intensive technique at an even higher rate of profit. This contradicts the neoclassical view that there is a simple, inverse relationship between capital intensity and the rate of profit.

Importance of Capital Re-switching

• Challenge to Neoclassical Economics: Capital re-switching challenges the neoclassical theory of capital, which assumes a smooth, continuous relationship between the rate of profit and the choice of production techniques.
• Theoretical Implications: The existence of capital re-switching has significant implications for capital theory, income distribution, and the debate between neoclassical and heterodox economic schools of thought.
• Empirical Evidence: While the theoretical possibility of capital re-switching is widely accepted, empirical evidence of its occurrence in real-world economies remains limited and contested.

How Capital Re-switching Works

The concept of capital re-switching can be illustrated with a simple example:

Imagine two production techniques, A and B. Technique A is more capital-intensive than technique B. At a low rate of profit, technique A is more profitable because the lower cost of capital outweighs the higher labor costs. As the rate of profit increases, the cost of capital becomes a more significant factor, making technique B more profitable. However, at an even higher rate of profit, the cost of capital becomes so high that technique A, despite its higher capital intensity, becomes more profitable again.

Real-World Application

The practical implications of capital re-switching are subject to ongoing debate among economists. Some argue that it invalidates the neoclassical theory of capital and undermines its policy prescriptions. Others maintain that its empirical significance is limited and that the neoclassical model remains a useful tool for analyzing economic phenomena.

Regardless of the theoretical debate, capital re-switching highlights the complexities of capital investment decisions and the importance of considering multiple factors beyond just the rate of profit. It also underscores the need for a nuanced understanding of the relationship between capital intensity, profitability, and technological choice in the real world.pen_sparktunesharemore_vert