Refuting Samuelson’s capitulation on the re-switching of techniques in the Cambridge capital controversy

Abstract

Paul A. Samuelson’s (1966) capitulation with his Austrian model during the so-called Cambridge controversy on the phenomenon of re-switching of techniques in capital theory had implications not only in pointing at the supposed internal contradiction of the marginal theory of production and distribution but also in the pursuit of vested interests in the academic and political world to this day. The present paper is aimed at demonstrating that Samuelson’s capitulation was logically groundless from the point of view of the economic theory of production by considering the interest rate in the role of the real price of capital goods instead of the stationary real rental prices as correctly suggested by Leon Walras, Knut Wicksell, John Hicks, and others. Because of the non-linear effects of the interest rate on relative input prices, the Sraffian re-switching of techniques noted in the range of the interest rate always disappears in the space of the corresponding real input prices in the stationary equilibrium.