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Joan Robinson, The production function and the theory of capital, Review of

Economic Studies,Vol. 21, 1953-54, pp. 81-106.

the production function has been a powerful instrument of miseducation. The student

of economic theory is taught to write

O = f(L,C)

where L is a quantity of labour, C quantity of capital and O a rate of output of

commodities.

He is instructed to assume all workers are alike, and to measure L in man hours of labour;

he is told something about the index-number problem involved in choosing a unit of

output; and then he is hurried on to the next question, in the hope that he will forget to

ask in what units C is measured. Before ever he does ask, he has become a professor, and

so sloppy habits of thought are handed on from one generation to the next.

Stock of capital and capital accumulation

When we know the future expected rate of output associated with a certain capital good,

and expected future prices and costs, then, if we are given a rate of interest, we can value

the capital good as a discounted stream of future profit which it will earn. But to do so,

we have to begin by taking the rate of interest as given, whereas the main purpose of the

production function is to show how wages and the rate of interest are determined by

technical conditions and factor ratio.

Capital when it consists of as yet uninvested finance is a sum of money, and the net

receipts of business are sums of money. But the two never co-exist in time. While the

capital is a sum of money, the profits are not yet being earned. When the profits are being

earned, the capital has ceased to be money and became a plant. All sorts of things may

happen which cause the value of the plant to diverge from it original cost change in the

value of money, fall in prices.

Sen, Amartya , (1974). On some debates in capital theory, Economica, 328-335.

It is well known that the Venerable Subhuti had a conversation with Buddha on

transcendental wisdom which was immortalized as the Vajrachedikaprajn-dpdramitd, the

so-called "Diamond Sutra", indeed this was the first printed book in the world.

What has only very recently come to light is the fact that despite his virtuous life, Subhuti

had some lapses, and was born again in this century. Since the lapses were moderately

serious, Subhuti was reborn as an economist, and Subhuti was destined to specialize in

capital theory.

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Buddha replied: Forsake fear, Subhuti. Venerable Solow may make peculiar assumptions,

but he never makes a mistake. He not only assumed a homogeneous capital good but

simply one good in the economy, which eliminates the problem of the relative price of

capital and consumer goods, which must be unity.

Subhuti asked: And Venerable Samuelson's model of surrogate production function? Thatdoes not assume one good in the economy, if I have followed it right.

Buddha replied: No, that belongs to a higher tradition. It eliminates the problem by

assuming that the sectors producing the different goods have the same factor-intensity,

i.e. the same ratio of physical capital to labour. This is essentially another way of

eliminating the relative price problem. However, you must note, Subhuti, that the model

accommodates heterogeneous capital goods also, and the problem of relative prices is

carefully eliminated by the equal factor-intensity assumption.