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Austrian themes and the Cambridge capital theory controversies

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Abstract

While Austrian economists and their models were only indirectly involved in the Cambridge capital theory controversies that came to a dramatic head in 1966, certain ideas argued for by the Cambridge, UK side were prefigured in some work by Austrian economists, especially F.A. Hayek in his 1941, The Pure Theory of Capital, which he wote largely as a result of earlier debates with both Sraffa and Keynes. This paper recounts the roots of the capital theory debates coming out of the nineteenth century, the arguments among Keynes, Sraffa, and Hayek, Hayek’s analysis that undermined traditional Austrian views of capital, the Cambridge controversies themselves, and then how various groups followed up in the aftermath, including neoclassicals, neo-Ricardians and Post Keynesians, and various groups of Austrians, who were themselves slow to recognize the full implications of Hayek’s work and its relation to the Cambridge capital theory controversies. A final point is that among both those following Sraffa and Joan Robinson more as well as those following Hayek more, some have seen the issues leading to broader complexity approaches to capital theory and economic dynamics.

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Notes

  1. Petri (2016) provides a good discussion of the development of these ideas from Senior to Böhm-Bawerk through Jevons and Menger. Menger’s views on capital went through various stages with him at times emphasizing aggregate capital.

  2. While Sraffa was thinking through these ideas from the 1920s on, he would not publish his main argument until his famous 1960Production of Commodities by Means of Commodities: A Prelude to a Critique of Economic Theory. The record of the development of these ideas is kept in his papers, with Kurz (2013, pp. 59–60)) providing the citations from Sraffa’s papers for these key insights.

  3. Later Cowen (1983) would argue that Lachmann’s point held only in a monetary economy where there would be a common rate of return, whereas Sraffa’s point would hold in a strictly barter general equilibrium.

  4. It must be noted that Irving Fisher (1930) was also aware that irregular time patterns of net returns could complicate his analysis of the “rate of return” as such irregularities, notably negative net returns in future periods, could lead to “multiple roots” in his analysis and thus ambiguity.

  5. Steele (2014) notes that Hayek (1941) recognized priority of Frank Knight (1936) in making a similar argument. Among the first in the Sraffian camp to recognize what Hayek had done was Steedman (1994).

  6. Robinson would label this “the Ruth Cohen curiosum” after an actual student of hers, although it appears that the student did not have much to do with developing the idea, if any at all.

  7. That these phenomena generally involve comparing steady-state equilibria would later lead Robinson to dismiss the whole exercise as only mattering in “logical time” rather than the more important “historical time,” thus rendering reswitching to be “unimportant” (Robinson 1975).

  8. It must be noted that many neo-Ricardian Sraffians accept that they follow a classical approach (Kurz 2013), while still maintaining links to the British-based post-Keynesian group, who did not follow the Americans in this dispute.

  9. This paper received an award for being the best paper published in 1976 in Economic Inquiry. The editor (Robert Clower) was not pleased when it was discovered that the paper contained an error (Rosser 1978).

  10. While it was meant to apply to the making of obvious and unrealistic assumptions, Joan Robinson’s wisecrack made in numerous talks although never appearing in print about “a magician who put a rabbit into a hat in full view of the audience, and then expected great applause when he pulled it out again.”

  11. While at the time Rosser was unaware of it, Garegnani (1970) had previously constructed a different example that also exhibited the same phenomenon.

  12. While Lachmann and Shackle saw the subjectivity of heterogeneous capital in plans as crucial and also as drawing on both Hayekian and Keynesian traditions, some later Austrian followers of this strong subjectivism would reject Keynes as retaining an emphasis on aggregate capital (Horwitz 2011).

  13. Rosser (2006) shows that complexity based on nonlinear dynamics is central to the immediate post-Keynesian macroeconomics modeling done by Kaldor (1940), Goodwin (1951), and others, with this providing a possible unifying element across the contending schools of Post Keynesian thought.

  14. Samuelson (1966) noted that Solow showed both sides of this contradiction, accepting the critique of aggregate capital in theory, the “red wine” Solow, while using it in his empirical work, the “white wine” Solow. Samuelson said that he preferred the “red wine” Solow of theory, and that when Solow did his “white wine” empirical work he was on a “busman’s holiday,” even as most current neoclassical macroeconomists who rely on Solow’s empirical aggregate production functions are not even aware of his own acceptance of the theoretical critiques of this work.

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Rosser, J.B. Austrian themes and the Cambridge capital theory controversies. Rev Austrian Econ 33, 415–431 (2020). https://doi.org/10.1007/s11138-018-0431-6

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