On Mon, Sep 02, 2002 at 10:19:05AM -0700, Bradford DeLong wrote:
> >No, I read the Cambridge Controversy book and some other stuff some
> >years ago. But I'm not persuaded that mutual determinations are
> >fatally flawed - aren't lots of things in social life like that?
> >
> >Doug
>
> It's not mutual determination, it's that the definition of "capital
> intensive" can switch when the interest rate switches. That is, if
> the interest rate is above 10% per year, it may be that production
> process "A" is more capital-intensive than production process "B";
> between 4% and 10%, production process "B" is more capital-intensive
> than production process "A"; and below 4% production process "A" is
> more capital-intensive again.
>
> In such situations, the claim that lower interest rates trigger
> shifts to more capital-intensive production processes is incoherent...
>
> Of course, there are similar problems in garden-variety consumer
> demand theory: Giffen goods, where (over some range) demand increases
> as the price rises.
>
> The big question has always been: "Are the Cambridge counterexamples
> unlikely freaks of theory, or do they say something about the
> situations we are likely to find in the real world?"
>
> On this question I am agnostic leaning toward the MIT view: no one's
> shown up with an empirical example of "reswitching", or even a real
> investment project with a cash-flow profile that would make
> "reswitching" likely.
>
> On the other hand, there are big and deep problems with the Solow
> production function view that are completely unconnected with the
> Cambrdige Controversy...
>
>
> Brad DeLong
-- Michael Perelman Economics Department California State University Chico, CA 95929
Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu