A Controversial Model

The Walras-Morishima model is here reconsidered in the perspective of the Cambridge Debate on the theory of capital. This is a preparatory exercise in a specific context. On the one hand, it is related to the attempt to demonstrate that the Cambridge critique concerned not only the surrogate production function but also general equilibrium as well (Garegnani, 2011; Schefold, 2008 and 2011). On the other hand, the contribution is related to the attempt to investigate the conditions under which a surrogate production function can be approximated despite the occasional occurrence of reswitching and reverse capital deepening (Han and Schefold, 2006; Schefold, 2013). I hope that a later work will build on the foundations laid here and that this focus will fit in with the interests of the group of friends of Alessandro Roncaglia who dedicate this Festschrift to him in appreciation of his distinguished academic career.

Walras's model of capital formation has always been controversial (for an overview of the debates, see Roncaglia, 2005, 342). The observation that Walras's model of capital formation links up with the problematic of the production function goes back to Piero Garegnani (1960). A pointed application of Garegnani's analysis was made in John Eatwell's (1987) contribution to The New Palgrave Dictionary of Economics on Walras's theory of capital: Eatwell endeavored to show that in general the production of only one capital good was compatible with normal profits on the cost of production and the availability of endowments in arbitrary proportions. But, with only one capital good available in the subsequent period, the system could not reproduce itself. He linked this insight to the broader claim that, apart from narrow exceptions, the neoclassical theory of distribution can explain the rate of return on capital only, if only one capital good is available. For the amount of capital and the rate of profit are needed to determine the cost of production in the long run and to derive normal prices, but normal prices also serve to measure the amount of capital as the aggregate value of capital goods.