Sen 1974

The Suntory and Toyota International Centres for Economics and Related Disciplines

On Some Debates in Capital Theory Author(s): Amartya Sen Source: Economica, New Series, Vol. 41, No. 163 (Aug., 1974), pp. 328-335 Published by: Wiley on behalf of The London School of Economics and Political Science and The Suntory and Toyota International Centres for Economics and Related Disciplines Stable URL: http://www.jstor.org/stable/2553047 Accessed: 01-02-2018 15:57 UTC

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[AUGUST

On Some Debates in Capital Theory

By AMARTYA SEN'

It is well known that the Venerable Subhuti had a conversation with Buddha on transcendental wisdom which was immortalized as the

Vajrachedikaprajn-dpdramitd, the so-called "Diamond Sutra", translated into Chinese around 400 A.D. by Kumarajiva from Kucha (Eastern Turkestan); indeed this was the first printed book in the world. What

has only very recently come to light is the fact that despite his virtuous

life, Subhuti had some lapses, and was born again in this century. Since the lapses were moderately serious, Subhuti was reborn as an economist,

and since he was what Buddha called "a hair-splitting Brahmin" (see

Kassapa-Sihanada Sutta), Subhuti was destined to specialize in capital

theory. One day Subhuti was sighing in his study after reading Venerable

Harcourt's survey and a hundred other books and papers on the subject,

overwhelmed by the loftiness of the thoughts revealed in these works,

when Buddha suddenly appeared, taking pity on his old acquaintance.

Subhuti promptly uncovered his right shoulder, knelt upon his right knee and raising his hands with palms joined, addressed Buddha thus:

World-honoured One, have you come to help me out of this mess of

measurement of capital?

Buddha said: Verily, I have come on a different purpose. To deflect

you from your studies. Do not, 0 Subhuti, spend your life on a problem

that is possibly trivial.

Subhuti said to Buddha: Trivial indeed, World-honoured One, from

the standpoint of the "Ultimate Principle of Reality". But it is a serious problem for economics which I have been fated to do in the great cycle

of rebirth, and I must do my duty this time. Enlighten me, 0 Enlightened

One.

Buddha said to Subhuti: Why do you want to measure capital, 0

Subhuti? What good will it do to you?

Subhuti replied: Despite early doubts I have lately become interested

in using an aggregate production function. And I would like to have the rate of profit in the economy determined by the marginal product of capital. I know from some of the books I have read that the difficulty in this arises from having more than one capital good and the problem of measuring capital. 0, how I wish that capital goods were homogeneous! Seeing you, World-honoured One, an idea occurs to me. Why

1 This paper has been written for Professor Amiya Kumar Dasgupta, a dis-

tinguished alumnus of the LSE, and is to be republished in the Festschrift in

honour of him edited by Dr Ashok Mitra. The paper was written when I was

visiting the Jawaharlal Nehru University in New Delhi.

328


1974] ON SOME DEBATES IN CAPITAL THEORY 329

don't you simply make all capital goods homogenous? So many economists will be grateful to you for this, 0 Tathagata. Then Buddha said: As I have said many times, I am not a magician. I cannot do the impossible, and my admiration is great for those who

can change reality at the stroke of a pen. But tell me, Subhuti, do you really believe that having only one homogeneous capital good will

permit you to derive a rate of profit purely from the technical relation-

ship between homogeneous capital and output?

Subhuti replied: Thus it is said in some venerable books. Buddha said: Revere them, Subhuti, but trust them not. Suppose

you do get the value of the marginal product of capital in terms of output of consumer goods. In what units will it be expressed? Physical units

of additional consumer goods per unit of additional homogeneous

capital. But the rate of profit is a pure number. Surely you will need

something more in going from the first to the second to reflect the relative

price of the capital good vis-a-vis the consumer good. But the equili-

brium price of capital in units of consumer goods depends on the rate

of profit used for discounting, and a variation of the rate of profit can

involve a variation of the value of the same physical capital in units of consumer goods. This difficulty is not eliminated by having one homo-

geneous capital good. Subhuti said: How does Venerable Solow do the whole thing so easily in his simple growth model? Has he then made a mistake, 0 Enlightened One? My heart aches badly. Buddha replied: Forsake fear, Subhuti. Venerable Solow may make peculiar assumptions, but he never makes a mistake. He not only assumed a homogeneous capital good but simply one good in the economy, which eliminates the problem of the relative price of capital and

consumer goods, which must be unity.

Subhuti asked: And Venerable Samuelson's model of surrogate production function? That does not assume one good in the economy,

if I have followed it right.

Buddha replied: No, that belongs to a higher tradition. It eliminates

the problem by assuming that the sectors producing the different goods have the same factor-intensity, i.e. the same ratio of physical capital to labour. This is essentially another way of eliminating the relative price problem. However, you must note, Subhuti, that the model accommo-

dates heterogeneous capital goods also, and the problem of relative

prices is carefully eliminated by the equal factor-intensity assumption.

Subhuti then spoke thus: I am worried by the equal factor intensity

assumption. Do we really require it, Enlightened One? Buddha answered: No, it is sufficient but not necessary, in the sense

that some rather special configurations of other things can almost accidentally yield a surrogate production function. But the closest we

come to the heart of the matter is with Venerable Samuelson's assumption about factor intensities.

Subhuti spoke now in sorrow thus: But the equal factor-intensity


330 ECONOMICA

[AUGUST

assumption is not really very close to reality. Is there no method of getting the rate of profit as the partial derivative of some value of

capital without going as far as Venerable Samuelson's assumptions? Buddha replied: For special cases, certainly yes. For an economy

in equilibrium growth with the rate of profit equal to the rate of

growth, one can get the equality of the profit rate and the marginal

product of capital value without much difficulty. But this covers only a

particular situation.

Subhuti asked: Is there then no measure of capital value such that the rate of profit equals the marginal product of capital irrespective

of the exact situation of the economy unless the Samuelsonian surrogate

model holds?

Buddha said: There is indeed. Venerable Champernowne's chain index gives a measure of capital such that one can use it as an argument in the production function and such that the equilibrium rate of profit will equal the partial derivative of output with respect to capital at its appropriate chain index value. Of course, the neoclassical model is not fully restored since Venerable Champernowne's cunning trick lies in his skilful revaluation of capital, which may differ from the market value

of capital.

Subhuti asked: Does this work always, World-honoured One? Buddha said: No, but it demands less than the surrogate production

function. However, if there are conditions that lead to multiple switch-

ing, i.e. a situation such that a technique that is more profitable than

another at a high interest rate and less profitable at a lower interest rate

could again become more profitable at a still lower interest rate, then,

O Subhuti, the Champernowne index may not work, as Venerable

Champernowne had pointed out in 1954 before the debate on multiple-

switching erupted between Brahmins of different traditions.

Subhuti said: Verily, multiple-switching is a matter of great import-

ance for the neoclassical aggregative model, I know that, 0 Enlightened

One.

Buddha replied: Not quite, Subhuti. Because indices like Venerable

Champernowne's index do not restore the neoclassical aggregative

model, and to get it fully you need Venerable Samuelson's surrogate

production function. And it is possible that while there may be no

multiple switches, nevertheless Samuelson's assumptions may fail to be

fulfilled. Furthermore, there are other assumptions in the neoclassical

model that are at least as important and disturbing as the absence of multiple switches. For example that of an equilibrium; that of expecta-

tions that are always fulfilled; the stereotype of institutional assumptions on the distribution of income according to the so-called competit-

ive demand and supply; and in some models that of malleability of past capital. In fact, despite the logical possibility of the existence of multiple-

switching, there is little empirical evidence as to how common an occurrence it is in reality. It is, in fact, possible that it may yet turn

out that far from being the most objectionable assumption in the



neoclassical aggregative model, the assumption of the absence of

multiple switching may be comparatively harmless in relation to the other assumptions, viewed from the empirical point of view. Subhuti then asked: You puzzle me, Enlightened One. Why then has

there been such a lot of interest in the multiple-switching debate? Why

have so many pundits spent so much time on it?

Buddha said: There are possibly two reasons for this, as for most

things. First, like Kurukshetra, Hastings or Waterloo, multiple- switching is famous as a battle ground. Here a group of Brahmins from the ashrama of Pundit Sraffa caught a group of Boston Brahmins

boasting in the dark, and caused serious injury by throwing real

numbers at them. People always enjoy battles, and verily that is why

multiple-switching causes so much interest.

Subhuti asked: Is the lore of multiple-switching, then, just a war

epic ? Buddha said: I said that there were two reasons for the fame of

multiple-switching. I speak now of the second: listen carefully, 0 Subhuti. For the pure theorist empirical plausibility is often a relatively minor question. What engages him most is internal consistency. Since multiple-switching rules out an aggregate measure of capital-like that of Venerable Champernowne-that can be used as an argument in a neoclassical production function, and since the neoclassical model cannot analytically rule out the possibility of multiple-switching, a pure theorist would be excited by it, especially if he is constructing a purely analytical case against a class of neoclassical models. The practical problem of measurement is not the main thing in this debate.

Subhuti asked: But, World-honoured One, would the Brahmins of

Pundit Sraffa's ashrama accept this? Why has Pundit Sraffa himself not

written on this distinction, which-if correct-should be very important

in understanding the motivation of his school? Buddha replied: As you know, Pundit Sraffa finds it immoral to write more than one page per month, but on the banks of the Mediter- ranean in the Province of Corfu he gave an oral discourse on this as

early as 1958, reported by Venerable Lutz and Hague (pp. 305-6). He

spoke thus:

one should emphasize the distinction between two types of measure-

ment. First, there was the one in which the statisticians were mainly interested. Second, there was measurement in theory. The statistician's measures were only approximate and provided a suitable field for work in solving index number problems. The theoretical measures

required absolute precision

The work of J. B. Clark, Bohm-

Bawerk and others was intended to produce pure definitions of capital,

as required by their theories, not as a guide to actual measurement. If

we found contradictions, then these pointed to defects in the theory,

and an inability to define measures of capital accurately.

Subhuti said then: All right, I accept the motivation of Pundit Sraffa,

and I am convinced that the neoclassical aggregate model as a piece


332 ECONOMICA

[AUGUST

of "theory", in his sense, is a disaster. This is important for the disputes

between different schools of theory, and I can see that this links up with

Venerable Garegnani's analysis of the history of economic thought. But I am, in fact, also interested in actual measurement.

Buddha said: Many people from good families seem to be these days.

The picture there is also a bit depressing as far as the neoclassical

aggregate model is concerned. For example, Venerable Fisher's examination of this question from the point of view of econometric analysis and empirical predictions brings out the limitation of the neoclassical aggregate model especially when widely diverse industries are included. Note, Subhuti, that Venerable Fisher's motivation is quite different from that of Venerable Sraffa, and to quote the findings of the former as vindication of the position of the latter does not get one closer

to enlightenment. Subhuti then addressed Buddha in this way: 0 World-honoured One, these difficulties of the neoclassical aggregative approach fill me with profound depression. I shall tell you why this is so, Enlightened One. I

devoted myself to development economics before I took to the path of

capital theory. I had convinced myself that in some cheap labour economies like India and China it makes sense to recommend choosing relatively less capital-intensive techniques of production, but I now rea-

lize that this is not the enlightened way in view of the difficulties in the

conception of capital as a factor of production. What sense can there be in talking of the ratio of capital to labour, or of capital to output? How

naive have I been! I shall never again recommend choosing low capital- intensity in cheap-labour economies. Buddha said: Why not, 0 Subhuti, why not? When you say you were

recommending less capital-intensive techniques, you were suggesting specific technical alternatives over others. Perhaps recommending that in constructing an irrigational dam, the earth may be moved in a surplus- labour economy by men with baskets rather than by bulldozers. And

other similar recommendations. The fact that you call the former a less

capital-intensive technique, when recommending it, is strictly speaking

quite incidental and does not affect the wisdom of your recommendation.

Subhuti then spoke thus: I see the point, World-honoured One. But surely this makes the whole thing completely ad hoc. We just say

4'Choose this and this over that and that". There is in this ad hoc

approach no argument for preferring, in a surplus-labour economy,

techniques that we recognize, in some real sense, to be less capital-

intensive. It is not only that I had called these techniques less capital-

intensive, but also I had arrived at the recommendation to choose them by a general argument in favour of using more labour and less capital.

Such general arguments surely must be regarded as erroneous in view

of what you have explained to me, Enlightened One.

Buddha replied: First of all, such general arguments are in fact quite doubtful, and one cannot choose between alternatives until one has looked into the details of each alternative. Secondly, the question of



what constitutes cheap labour is itself a difficult one and the existence of

surplus labour does not mean that it is costless, as has been argued by

Venerable Dobb, among others. Thirdly-and for our purpose most

importantly-in so far as your elementary reasoning indicates a general

presumption in favour of techniques that can be called less capital-

intensive, that general presumption is not much affected by the diffi-

culties we discussed in capital theory.

Subhuti asked: How can that be, 0 World-honoured One? In view of the difficulties in the conception of capital that you have already opened your holy mouth on, surely it makes no sense whatever to talk

of lower or higher capital intensity?

Buddha replied: That thought of yours is so complicated and involves so many different colours that you may well be born as a chameleon in your next incarnation. First, the fact that it may be unenlightened to hold that the rate of profit is determined by the marg-

inal productivity of capital, need not in the least disturb the argument

that at a given rate of profit, one technique may have a higher capital intensity than another. Second, when one recommends choosing less capital-intensive techniques in a surplus-labour economy, one is usually making a statement about investment and not about the existing capital

stock. Therefore, the problem of ex post fixity versus malleability on which-as you point out in your humble Buddhist style-I have

opened my holy mouth, is not relevant. I take it that you are not recommending that you scrap your already installed mechanized mach- inery and change them into baskets and such. Third, when one recom-

mends a lower capital-intensity it is not a question of treating capital

as one factor of production but of economizing on the use of the class of non-labour means of production vis-d-vis the use of labour, which is relatively abundant. Where is your commensense, Subhuti?

Subhuti replied: In my incarnation as a modern economist I have

learnt how deceptive commonsense can be. I prefer rigorous arguments.

As you concede, the non-labour means of production are heterogeneous.

How can we talk about an overall capital intensity? Are there fixed

relative prices among the different non-labour means of production?

The debate on capital theory is not irrelevant to this question.

Buddha said: It is not, of course. But it may not make a difference when we are talking of sharp contrasts as we are doing when we recommend moving earth by hands and baskets rather than by bulldozers in building an irrigation project. We may not be absolutely

certain of the correct relative price of baskets vis-a'-vis bulldozers, but within the limits of variations that may be relevant the former may

involve a lower capital intensity than the latter in each case. And when

one is making a general recommendation in favour of less capital-

intensive techniques in cheap-labour economies, one has in mind something of this kind. For less clear cases, one would, of course, need

to do a detailed cost-benefit analysis, and comparison of overall

capital intensity will not be the right way of going about it. But just


334 ECONOMICA

[AUGUST

because one cannot rank overall capital intensities in some cases, one

should not rule out the rankings that one can do.

Subhuti said: I do not like unrigorous presentations. State precisely please, 0 Enlightened One.

., ql) be the amounts of n types of capital

Buddha said: Let (ql,

good inputs needed per unit of output under technique 1 and

those under technique 2. We refer to them as vectors ql and q2 re-

spectively. The appropriate shadow prices may depend on many things and might not even be known with very great precision. They may even

., q2)

depend on the choice of q. Suppose the planner only knows that the price

vectors pl and p2 in the two cases would belong to some set ir. Then we

would be able to say that ql is more capital-intensive than q2 if for every

pair of price vectors pl and p2 (not necessarily distinct) taken from I7, we

have:

pq >p2q2

We know, of course, that for any -a the ranking of the vectors of

a quasi-ordering, and satisfy some systematic properties, e.g. transitivity.

Subhuti said: Ah, I see now. Maybe I could say a few more things

than I first thought. Both in positive and in normative spheres. To take

an example from the former, I may be able to say the following, which I

shall call Remark 1, to be rigorous. Remark 1: "When there is persistent

unemployment in a stagnant economy the redundant workers may take to employing themselves with tiny quantities of capital (say as shoe- blacks or pedlars)". Having said this, however, I feel a great relief in not finding Venerable Joan Robinson within earshot. She would have never forgiven me for referring to "tiny quantities of capital". Tell me Tathagata, what will I do when I meet Venerable Joan Robinson and feel a compulsion to make a Remark like this?

Buddha said: That, first of all, is your problem. Second, be bold.

And third, why do you think Venerable Joan Robinson will object to

your remark? She will not.

Subhuti said: She will of course. She does not like references to

"quantities of capital"-tiny or large. I shall surely run into her some day. How will I defend Remark 1, then? Tell me, 0 Enlightened One.

Buddha replied: She will know, of course, that Remark 1 is a quota- tion from pages 157-158 of her Accumulation of Capital. Curious that you should have had the same thought.

Subhuti spoke then: I am now tired, World-honoured One. What

have I gained from studying all these debates on capital theory other than debunking the neoclassical use of capital as a factor of production

and the determination of the rate of profit by the so-called marginal

product of capital, which I did not really believe in any way in the first

place ?

Buddha said: Do not underestimate the value of the rarified knowledge involved in capital theory. Do not judge an action by the fruit



of it. As has been said: "And do not think of the fruit of action. Fare forward." Subhuti asked: But, 0 Enlightened One, knowledge must lead to some real gain? Buddha said: Do you remember what I told you 2,500 years ago

in that park near Shravasti, when you asked me: "In the attainment of the Consummation of Incomparable Enlightenment did Buddha make no acquisition whatsoever?"

Subhuti replied: I have forgotten, but here is A. F. Price's translation

of the "Diamond Sutra", and I notice on page 61 that you replied to

my question thus: "Just so, Subhuti. Through the Consummation of

Incomparable Enlightenment I acquired not even the least thing:

wherefore it is called 'Consummation of Incomparable Enlightenment'."

Buddha said: Just so, Subhuti, just so.

London School of Economics

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