Reswitching, Wicksell Effects, and the Neo-Classical Production Function

Abstract

This article examines the validity of the neoclassical economic theory of distribution as it relates to the issues of reswitching of techniques and negative price Wicksell effects. Reswitching of techniques and perverse changes in the value of capital arise in the connection between two equally significant and practical concepts of capital the portfolio concept, a homogeneous fund of value, shifted about in pursuit of the highest rate of return, and the productive concept, heterogeneous goods and equipment designed for specific uses. In reconsidering the condition for successful coordination of capital funds and capital goods within a supply and demand framework, the appropriate model is a genuinely circulating capital model, in which the rapid turnover of capital goods releases funds that can migrate within a time frame consistent with a given set of conditions in financial markets. The neoclassical story requires an inverse monotonic relationship between the rate of profit and fund- or real-capital, respectively. In the absence of reswitching and perverse shifts in the value of real capital at switchpoints validation of the inverse relation would depend on the premise of infinite substitutability, unless it were shown that the value of capital varies inversely with the profit rate within a single technique.