Saturday, November 25, 2006

Kurz and Salvadori on the "Non-Substitution" Theorem

“The ‘non-substitution theorem’ states that under certain specified conditions, and taking the rate of profit (rate of interest) as given from outside the system, relative prices are independent of the pattern of final demand. The ‘non-substitution theorem’ is of particular interest in the present context since, as was already mentioned, it puts into sharp relief the role of demand in neoclassical theory…

…The theorem was received with some astonishment by authors working in the neoclassical tradition since it seemed to flatly contradict the importance attached to consumer preferences for the determination of relative prices… This astonishment is all the more understandable, since several ‘classroom’ neoclassical models, for didactical reasons, are based precisely on the set of simplifying assumptions … underlying the theorem without however arriving at the conclusion that demand does not matter…

It is therefore not so much assumptions [of the production model] which account for the theorem: it is rather the hypothesis that the rate of profit (or, alternatively, the wage rate) is given and independent of the level and composition of output. This hypothesis is completely extraneous to the neoclassical approach and in fact assumes away the role played by one set of data from which that analysis commonly begins: given initial endowments…

… It goes without saying that in the framework of classical analysis with its different approach to the theory of value and distribution, a characteristic feature of which is the non-symmetric treatment of the distributive variables… there is nothing unusual or exceptional about the ‘non-substitution theorem’.” --H. D. Kurz and N. Salvadori (1995). Theory of Production: A Long-Period Analysis, Cambridge University Press: 26-28.

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