CCC: tl; dr

1.0 Introduction

You can easily find peopole on the Internet asking for a summary of the Cambridge Capital Controversy. An answer is easy.

Supply and demand is balderdash. If you want to understand markets under capitalism, you might as well throw away most microeconomic textbooks and most introductory textbooks.

2.0 Some Expansions

No consistent, valid model in which more than one commodity is produced supports the following two mistaken stories.

Suppose the tastes of those making decisions for households change. They become more future-oriented, more willing to defer consumption. The supply of capital has increased. With an increased supply, the interest rate is driven down. The firms ultimately choose to adopt more capital-intensive techniques. They tend to equip workers with more machinery and to run exisiting machinery longer.

Suppose, again, that the tastes of those making decisions for households change. Workers now prefer consumption over leisure more than they did before. The supply of labor has increased. The real wage is driven down. Firms ultimately choose to adopt more labor-intensive techniques. Equilibrium employment in competitive markets thereby increases.

Numerical examples of capital-reversing and other so-called capital-theoretical paradoxes or perversities are enough to demonstrate that the above stories do not follow from the assumptions of mainstream economics.

3.0 Extension to Technical Discussions

Well-educated economists know that their theory does not support the causal stories in the textbooks. I concentrated above on factor markets. I now go into more technical points. I think that if my powers of exposition and understanding were much greater, this section would still not be clear.

The above refuted stories can be augmented with stories about natural resources and about produced commodities. The assumptions of mainstream economics do not justify explaining equilibrium by the intersection of well-behaved supply and demand curves.

Demonstrations of capital-reversing, for example, are usually presented in open models of competitive, cost-minimizing firms. These models can be closed by assuming households are utility-maximizing. These closures include intertemporal utility-mximizing. Overlapping generations (OLG) models are examples.

Are long-run equilbrium models like this 'neoclassical'? Endowments of capital are not among the givens. The mixture and level of capital goods are found from solving the model. Likewise, the numeraire value of the capital stock is endogeneous, not a parameter.

The claim that, in equilibrium, the rate of interest is equal to the marginal product of capital might be justified as applying to Champernowne's chain index measure of the quantity of capital. This chain index, basically, excludes price Wicksell effects from the measure of the quantity of capital. Both the interest rate and the value of this chain index are found from the solution of the model. They are not part of what needs to be known to find the solution. Furthermore, the chain index is not what is measured in empirical applications of the Solow-Swan model and in measurements of total factor productivity (TFP).

Another argument turns around how capital-theory paradoxes apply to models of intertemporal equilibria, if at all. Can a continuum of equilibria be found in either long-run models or models of intertemporal equilibrium? Do capital-theoretic paradoxes add anything to examination of the stability of intertemporal equilibrium, either for tattonement or for individual paths? Typically, stability cannot be demonstrated, and multiple equilibria exist. No reason exists to expect paths to approach steady states. J. Barkley Rosser Jr. argued that the reswitching of techniques is manifested in intertemporal equilibrium as a cusp catastrophe. Personnally, I think Michael Mandler is more correct than Pierangelo Garegnani about stability.

I finally bring up that you do not have to close long run models with intertemporal utility-maximization. Richard Kahn, Nicholas Kaldor, Luigi Pasinetti, and Joan Robinson had closures related to the Cambridge equation. Or you can take the wage as a matter of social conventions or norms. Or, perhaps, you can have a monetary theory of distribution, in which the monetary authority sets the interest rate. Stephen Marglin had a overdetermined closure that explained stagflation. Questions exist about how some of these closures relate to a generalization of John Maynard Keynes' principle of effective demand to the long run.

I see I have left out debates over the the history of more than two centuries of political economy.

4.0 Conclusion

But the mainstream defenders in these discussion are not defending what is in the textbooks. The simple-minded depiction of well-behaved supply and demand curves determining equilibrium lacks any theoretical or empirical foundation.