The 'stakes' in reswitching (Henwood's original point) may be better illustrated by using wages/profits rather than the interest rate (per de Long below). According to Cambridge, as you increase or decrease the wage two things happen: profits go up or down ... and then suddenly the more 'efficient' technique becomes worse than some 'inefficient' technology. So the struggle over wages vs. profits is what determines how much 'capital' gets as its share. This struggle also determines which approaches (technique in a broad sense) look efficient. Of course for the neo-classics it is supply and demand that choose the technique with objective 'efficiency' and determine how much of a share 'capital' gets. [All this crudely put, of course. And I don't claim any expertise in capital theory.]
Many people, especially outside academia, react like Doug: that the Cambridge controversies didn't really illustrate much and bog down in technicalities. Personally, I think this has a lot to do with the social-political situation the Cambridge school was in at the time: not being a part of rising movement at the time. The political and policy implications of these issues tend pulled out by the larger context rather than by the ivory towers themselves.
Paul A.
Michael Perelman writes:
>Look again. It is the mutual determination that lies behind the
>switching, whereas in neoclass. economics ceterus paribus prevents
>reswitching.
Bradford DeLong writes:
>> >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...