Capital Theory 1873–2019 and the State of Macroeconomics

The current understanding of capital theory suffers from insufficient clarity about the logic of the marginal/neoclassical approach. A central point remained unclear throughout the Cambridge controversies: the traditional versions of that approach needed a given ‘quantity of capital’ not because assuming an aggregate production function ‒ they were fully disaggregated ‒ but because aiming to determine long-period equilibria, centres of gravitation of time-consuming adjustments, and accordingly left the relative endowments of the several capital goods to be determined endogenously, but then needed a given ‘quantity of capital’ to render the equilibrium determinate. A simple model confirms this fact.This clarification allows further insights. Walras was simply contradictory because aiming at determining a long-period equilibrium while taking the endowments of the several capital goods as given. The derivation of the traditional interest-elastic investment function from the demand-for-‘capital’ function needs the continuous full employment of labour; without this assumption investment is indeterminate. The current reference to intertemporal equilibria as the microfoundation of mainstream macro is a smokescreen, hiding a continuing faith in the traditional marginalist adjustments refuted by reswitching. Finally, the neoclassical approach operates as blinkers, blinding mainstream economists to the adaptability of production to demand, which makes it obvious that output and growth are governed by aggregate demand.