The Reswitching Critique Was Perhaps the Main Challenge for Capital Theory in the Twentieth Century

The capital debates dwelt mainly on the neoclassical production function. Apparently well-established conclusions in the profession coming from the Hicksian view of the pricing process were the following: (1) Cobb-Douglas functions, where output is determined by two distinct aggregate variables, labor and capital (in addition to rest, which remained unexplained), exist; (2) both of those factors earn their marginal returns, such that the wage rate depends on the marginal productivity of labor, while the return on capital depends on the marginal productivity of capital; (3) the rate of interest (i.e., profit on capital) is related to the relative scarcity of capital, meaning that its abundance should lead to lower returns, its relative scarcity to higher returns (Pressman 2005, p. 422). From these basic, though at-times-questioned, lines of neoclassical reasoning, many flowers blossomed. If the production-function approach has withstood criticism, the Clarkian task of unifying the theories of capital and capital goods (production on the one hand, and distribution on the other) has been successfully completed (Laibman and Nell 1977, pp. 878–879).

The reswitching debates started off with Joan Robinson’s (1953) famous publication on the production function. Yet perhaps the clearest exposition of the reswitching challenge can be found in the summary by Paul Samuelson, who suggested that the capital structure is an example that validates the “simple story” of William Stanley Jevons, Böhm-Bawerk, and Knut Wicksell—a story of how lower time preference (i.e., greater abstention from consumption) favors more productive and longer processes of production (Samuelson 1966, p. 568).

—Mateusz Machaj, “Challenges Concerning the Structure of Production: Capital-Reswitching Puzzles; What in Production Can Be Measured?” in Money, Interest, and the Structure of Production: Resolving Some Puzzles in the Theory of Capital, Capitalist Thought: Studies in Philosophy, Politics, and Economics (Lanham, MD: Lexington Books, 2017), 37-38.