Capital re-switching

Updated: Aug 20, 2021

A phenomenon which played an important part in the controversy over capital theory between a group of economists led by Professor J. V. Robinson at Cambridge, England, and a group at Cambridge, Mass., U.S.A., led by Professors P. A. Ssamuelson and R. Solow. Specifically, it can be shown that the proposition that investment increases as the required rate of return falls may not in fact be valid. We could imagine· that, as the required rate of return falls, firms would switch from less to more capital intensive methods of production, thus incrnasing the rate of investment. However, it is possible to show that under quite plausible circumstances the rate of retum could reach a leve! at which firms would switch back. i.e. re-switch, from more to less capital-intensive production methods, thus causing investment to fall as the required rate ofreturn falls. This possibility then undermines the neo-classical mode! on which the Cambridge, Mass., argument was based.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.