Recent trends: a paradox

Only brief hints can be given on trends after 1990. Garegnani’s criticisms (1), (2) and (3), then taken up by numerous other economists (for example, Petri 2004), have remained unanswered so far by neoclassical economists, a continuation of the attitude started by Hahn (1982), who had taken no notice of Garegnani (1976).

Neoclassical capital theory continues to be based on intertemporal equilibria (temporary equilibria without perfect foresight have been abandoned owing to grave difficulties with formalization and existence), extended now to cover the infinite future, with display of impressive mathematics but little discussion of the legitimacy of such a step. A debate on whether reswitching and reverse capital deepening cause problems of instability and multiplicity of intertemporal equilibria has been started by Garegnani (2000), but with unclear results for the moment (Petri 2011b). Complaints about the lack of realism of intertemporal equilibria are frequent; furthermore the Sonnenschein-Mantel-Debreu results, and problems of equilibrium indeterminacy with overlapping generations, have greatly increased discomfort among general equilibrium specialists, with instances (for example, Alan Kirman) of outspoken rejection of general equilibrium theory as a positive theory. However, paradoxically neoclassical macroeconomic theory has become dominated by continuous-full-employment equilibrium models (real business cycle models and dynamic stochastic general equilibrium models), often one-good models, that are justified as simplified intertemporal general equilibrium models. Among neoclassical macroeconomists there seems to be little doubt about the legitimacy of assuming continuous equilibrium, with perfect foresight (or “rational expectations”) in place of the obvious absence of complete futures markets. The so-called “Hahn problem” (Hahn 1987), that points out that, with heterogeneous capital, correct myopic foresight leaves room for a continuum of alternative equilibrium paths, is set aside through an assumption of coincidence of equilibrium path and optimal path, obtained by assuming an infinitely lived representative consumer with perfect foresight over the infinite future, an incredible assumption (for example, how can one foresee technical progress?).

The key to explaining this paradox would appear to lie in recognizing that the same a priori certainties pointed out apropos Lindahl, Hayek and Hicks still rule among neoclassical macroeconomists.

Evidently, a faith remains strong in the existence of the tendencies traditionally postulated by the marginalist approach: since in real economies there is no auctioneer and no perfect foresight, the implicit view of these theorists must be that time-consuming disequilibria do not cause the actual path of the economy to differ drastically from the one traced by intertemporal equilibria, because there are adjustment mechanisms that bring the economy back toward a full-employment equilibrium path when it strays away from it. What seems to be missing is consciousness of the fact that neo-Walrasian general equilibrium theory, owing to its inability to indicate actual paths, offers no support to such views. Rather, one must believe in the time-consuming adjustments, involving actual disequilibrium productions and exchanges, originally postulated by the marginalist approach and crucially relying (also in their reformulation by the “neoclassical synthesis” after Keynes) on a decreasing demand curve for labour and on an interest-elastic investment function, notions developed on the basis of the conception of capital as a single value factor, and lacking foundation outside that admittedly indefensible conception.

In conclusion, in the light of the historical evolution of the marginalist/neoclassical approach to capital, its problems appear insurmountable: the conception of capital as a single factor is unacceptable; the treatment of each capital good as a distinct factor brings sterile notions of equilibrium, silent on the behaviour of actual economies. As these are the two possible treatments of capital in the approach, what seems to emerge is the impossibility of the marginalist approach to distribution satisfactorily to insert produced means of production in its analytical structure. The surplus approach to capital, with its different, socio-political determination of income distribution, appears to encounter no comparable difficulty.

Fabio Petri

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Source: Faccarello G., Kurz H.-D.. Handbook on the history of economic analysis. Volume III, Developments in major fields of economics. Edward Elgar,2016. — 659 p. 2016

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