On Some Unresolved Questions in Capital Theory: an Application of Samuelson's Correspondence Principle*

In the mid-1960's two quite separate but fundamental questions in capital theory were first debated in this Journal. On the one hand, the original paper by Levhari (1965) gave rise to the widely cited series of papers published jointly in November, 1966, as "Paradoxes in Capital Theory: A Symposium," which has since spawned dozens of articles and several books.1 This debate now constitutes a crucial part of "The Cambridge Controversy." On the other hand, that same November, 1966, issue of this Journal also contained Hahn's seminal paper on the dynamic properties of heterogeneous capital good models, and subsequent research on "the Hahn problem" has been voluminous, continuing to this time.2 The issues are different. The fundamental aspect of the Cambridge controversy we are concerned with in this paper centers on comparisons of alternative steady-state equilibrium positions when the profit or interest rate is varied as an exogenous parameter. Thus, for example, if we confine our attention to interest rates above the Golden Rule value (the exogenous rate of labor force growth g), it is possible that a fall in the rate of interest results in a fall in steady-state per capita consumption (measured in the per capita number of fixed consumption baskets). In this case the economy is said to exhibit "paradoxical consumption behavior," the "paradox," of course, being that this consumption behavior contradicts the neoclassical parable.