Capital Theory: Paradoxes

The idea that capital theory might lead economists to discover forms of ‘paradoxical’ behaviour has emerged in the economic literature of the 1960s largely as an outcome of developments in the field of production theory (theory of linear production models). What happened in capital theory is in fact a special instance of a more general phenomenon. Economists sometimes tend to examine a large domain of economic phenomena by adapting theoretical concepts that had originally been devised for a much narrower range of special issues. The discoveries of ‘paradoxical’ relations derive from the fact that their process of generalization often turns out to be ill-conceived and misleading , if not entirely unwarranted. For a long time, in capital theory, it has been taken for granted that there is a unique unambiguous profitability ranking of production techniques in terms of capital intensity along the scale of variation of the rate of interest. The discovery that this is not necessarily true has induced many economists to speak of ‘paradoxes’ in the theory of capital. But the roots of apparently paradoxical behaviour are to be found, not in the economic phenomena themselves, but in the economists’ tendency to rely on too simple ‘parables’ of economic behaviour. In this article it is shown that the traditional belief about the decreasing capital intensity of capital at a decreasing level of the rate of profit is incorrect. EXTENSIVELY ENLARGED as: "Capital Theory (paradoxes)", The New Palgrave Dictionary of Economics, Second Edition, Steven N. Durlauf and Lawrence E. Blume (eds.), London: Palgrave Macmillan, vol.I, pp. 675-684, 2008; online edition 2009.