"Switches of Techniques and the “Rate of Return” in Capital Theory "

In the 1960s-70s, there was a well-known controversy in economics on capital theory. In broad terms, the controversy unfolded between the two Cambridges – one in the United Kingdom and the other in the United States (Massachusetts) – though it also involved economists of other nationalities (in particular Italian). The American economists (the most renown of whom was Samuelson) claimed that there exists a way – also within linear models – to build a neoclassical, aggregate (Samuelson called it ‘surrogate’) production function, in other words, a function that gives rise to an inverse monotonic relation (in income distribution) between the rate of profit and capital intensity (as was always claimed by the traditional neoclassical theory). Sraffa had in the meantime published his famous, and succinct, book, which discussed, to everyone’s surprise, the ‘return of previously discarded techniques’, on the scale of variation of the distribution of income between wages and profits. It was not clear at the beginning how all this was relevant to capital theory, until in 1965 a PhD student of Samuelson’s, David Levhari (from Israel), published an article in the Quarterly Journal of Economics where he claimed to have proved that a ‘return to previously discarded techniques’ in linear formulations is impossible. There followed a long discussion on this topic that involved many economists on both sides of the Atlantic. In this article, the reader can see the part of this general discussion that refers to the exchange between the Author and professor Solow.