Solving the Reswitching Paradox in the Sraffian Theory of Capital

Abstract

The possibility of the reswitching of techniques in Piero Sraffa’s intersectoral model, namely the recurring capital-intensive techniques with monotonic changes in the interest rate, is traditionally considered as a paradoxical violation of the assumed convexity of technology putting at stake the viability of the neoclassical theory of production. It is argued here that this phenomenon can be rationalized within the neoclassical paradigm. Sectoral interdependencies can give rise to the well-known price Wicksell effect, which is the revaluation of capital goods due to changes in relative prices triggered by monotonic variations in income distribution. The reswitching of techniques is, therefore, the result of cost-minimizing technical choices facing returning ranks of relative input prices in full consistency with the pure marginalist theory of factor rewards. The theoretical analysis proposed in this article is applied empirically to the counterexamples of various case studies presented in the literature.