Beginning in the mid-1950s and for the following twenty years or so, a debate concerning the neoclassical treatment of capital turned apparent in the discipline. This gave rise to a series of exchanges between scholars associated with Cambridge, England, and Cambridge, Massachusetts, (US). This debate is broadly known in the literature as the ‘Cambridge capital theory controversies’.
The relevance of this controversy lies in that the criticisms of neoclassical theory raised by Cambridge (UK) concern both the theoretical illegitimacy of measuring ‘capital’ as a single magnitude in value terms to determine prices and distribution, and the foundational premise underlying the dominant supply and demand approach: the factor substitution principle. In the controversies it has been shown that this principle cannot in general be posited to explain the distribution of the social product in terms of supply and demand. This result, discovered by means of the analysis of the relation between prices and distribution in economies with heterogeneous capital goods, has been revealed as theoretically irrefutable, and, as this study will argue, concerns the hard core of the neoclassical or marginal theory both in its traditional (capital measured in value terms) and in its contemporary formulations (capital as a set of heterogeneous goods).
Capital as a single magnitude has been the treatment on which, under conditions of free competition, traditional theory had to resort to explain the distribution of the social product between wages and profits (and rents) in terms of supply and demand – in other words, by applying the factor substitution principle. As we shall see in the following chapter, capital in value terms not only is needed in order to allow for factor substitutability, but also to determine a uniform rate of profits on the supply prices of the several capital goods. Satisfaction of this condition ensures that the equilibrium determined by neoclassical supply and demand forces could conceivably be taken as a long period equilibrium in that the persistent nature of the conditions of the economy can guarantee that the theoretical variables become gravitational centers of the actual ones (trends or average) over time. Thus, that treatment of capital
allows determining a normal position of the economy’s quantities and prices characterized by a uniform rate of profits on the capitals’ supply price under free competition both in consumption-goods’ and factors’ markets. For that determination it is crucial that the theory accounts for downward-sloping demand curves for factors. As we shall see in this study, the Cambridge controversies have shown that the belief on an inverse relation between demand for factors and their rewards cannot in general be postulated.
2. Circularity of Capital Measurement
Capital is conventionally regarded as the aggregation of capital goods. This heterogeneity means that capital goods cannot be aggregated in...