The Cambridge Controversy
The battle for the definition of Capital
What is capital? Most people might say it is money. A fair guess but an economist would likely disagree. Economists might tend to say capital is a durable good that produce more goods — computers, manufacturing equipment, trucks, buildings etc. A physical quantity of something that can be counted up and produce things that can also be counted up. Another fair answer, these items can certainly be described as capital. But perhaps not the most precise definition. If we take the above property that capital is a physical quantity of something, then were slaves throughout history (and modern slaves) also considered capital? How about non physical institutions; like central banks, financial institutions or courts that enforce property rights? The waters have been muddied again (both morally and epistemologically).
This is not a novel question and has plagued economists (and thinkers generally) for quite some time. One relatively recent chapter in the story of what is capital, was the Cambridge Controversy (no it’s not that Cambridge controversy). Involving the Cambridges of both the US and UK, the Cambridge Controversy was a dialogue between Neo-Classical (US) and Post-Keynesian (UK) economists that fundamentally questioned the nature of capital. It is known as a controversy because, to varying degrees, it still remains an unresolved question in mainstream economics. This is despite the fact that one side basically admitted defeat. This story remains highly pertinent as to what is (and isn’t) consider relevant in the mainstream of economics today.
So, how did this story begin?
What happened in the Cambridge Controversy?
The story truly begins not with a person, but with a system — Capitalism. For something with “Capital” in it’s name, presumable theories describing this system might have a lot of evidence about what capital is, right?
It is probably a surprise to no one that mainstream economics at the time did not have a lot of empirical evidence, but rather a lot of theories. This is where the first players in the controversy enter, the Neo-Classicals. The two key players from Cambridge in the US where Paul Samuelson and Robert Solow. For those who have done an introductory macroeconomics course, Solow is likely a very familiar name. Their Solow-Swan model informed much of the theoretical foundations that supported the Neo-Classical arguments. This model is still widely taught in introductory macroeconomics today.
Ignoring the dubious assumptions underlying the Neo-Classical theoretical models, the basic insight is that through the interaction of Capital (K), Labour (L) and Technology (A); the process of output in an entire economy can be described mathematically via an aggregate production function. To simplify substantially, the basic idea is that by adding all different types of capital together at the micro level of the economy into a single input “Capital” (Represented by K); an aggregate production function can describe the process of output and capital accumulation at the macro level.
The key assumption underlying this insight is that despite significant differences in types of capital (trucks, spreadsheets, microchips, textile machines, coffee machines etc.), they can simply be aggregated together from the micro level (i.e. a company or industry) as a single nebulous “Capital”, put into an aggregate production function (usually a simple cobb-Douglas function), which then explains the output of production at the macro level (i.e. the entire economy).
This further assumes that the economy can be described by the production of only one good i.e. one output of production such as food or a house, typically represented by Q or Y. So on top of all the capital inputs being described as one singular thing known as “Capital”, this homogenous input can only explain the output of one good. So, in the production process of building houses, this process is described by a unified piece of “Capital” instead of heterogenous pieces of capital like cranes, trucks, cement mixers etc. Furthermore, the output of this process, i.e. houses, represents the entire economy.
Now, those are some quite the strong assumption, and indeed the next players in the controversy thought so as well. Enter, the Post-Keynesians. The two key Post-Keynesians were Joan Robinson and Piero Sraffa. Both engaged in dialogue with the US Cambridge Neo-classical economists, criticising the theoretical foundations of the Neo-Classical approach.
At a high level, their key critique can be understood through the frame of the “aggregation problem”. This actually falls under a common misconception known as the fallacy of composition i.e. when something is assumed to be true for the whole, when it is really only true for a part of that whole. You might have guessed, this arises specifically for the assumption that capital is homogenous and fits nicely into the aggregate production function as one aggregated homogenous input, K.
Among other critiques, the Post-Keynesians argued that the Neo-Classicals fell prey to this fallacy when they assumed they could simply add up all the different items of capital at the micro level, put that single input K into a production function, and explain the growth and accumulation of capital at the macro level.
The Post-Keynesians argued that the heterogenous nature of capital goods i.e. tractors, computers, buildings, hardware, software etc. cannot simply be added together as a nebulously defined conception of “Capital”. As we explored above, this would mean adding together disparate items that make goods and unify them all under the banner of “Capital”. At a logical level it is dubious to represent, say a sewing machine and spreadsheets, as a unified single piece of “Capital”.
This is the aggregation problem in a nutshell. It argues that unless capital can be rigorously defined as a physical object, it is not simply a matter of counting how many buildings, computers, tractors, data centres and large language models there are in an economy to describe the distribution of output that goes to Capital and Labour. Furthermore, the Neo-Classical approach cannot account for potential non-physical concepts of capital such as who has access and control of the means of production i.e. capital as a social relation.
Many of the key players such as Robinson and Sraffa passed away in the early 1980’s. This left the next generation of Neo-Classical economists no one to engage in a dialogue about these issues. Such that the controversy never really resolved. It more shrunk into the background of academic discourse, just as Neo-Liberalism was sinking its claws into the global economy with Reagan and Thatcher coming to power.
What was the outcome of the Cambridge Controversy?
The outcome likely depends on your position.
There was certainly admission that some of the key retorts of the Neo-Classical school to the Post-Keynesians critiques were indeed wrong:
“‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false” (Levhari, D. and Samuelson, P.A., 1966).
However, the record of the controversy is almost unknown to most of the mainstream economic profession. Indeed, despite the unresolved critiques from the Post-Keynesians, future economic research on endogenous growth theories have uncritically adopted aggregate production functions as a key component of it’s theoretical foundations.
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It is worth noting that the Post-Keynesians also did not have a unified view on alternative explanations to the Neo-Classical models. For example, Sraffa was more predisposed to Ricardian explanations, whilst Robinson tended to prefer a class analysis along Marxian lines. In fact, some have argued that the lack of an alternative Post-Keynesian causal theory that could offer a Kuhnian paradigm switch for economics is a key reason why the controversy remains unresolved (Cohen, A.J., 1984).
However, what is more certain is that without a conception of a physical quantity of capital, a homogenous input K, an aggregate production function insufficiently describes the process of capital accumulation. Without K, the aggregate production functions cannot be identified. Because the Neo-Classical market supply curve (the horizontal sum of each firms marginal cost curve above it’s average marginal cost curve) relies on a production function to identify output, Q, the market supply curve is undefined. Therefore its intersection with the market demand curve is also undefined. Goodbye equilibrium.
“The implication was nothing short of dramatic: without equilibrium, neoclassical economics fails its two basic tasks of explaining and justifying prices and quantities.” (Nitzan, J. and Bichler, S., 2009, pg. 80)
As the quote above highlights, this is a significant problem for Neo-Classical theory. If it cannot describe how capital is accumulated, what good is the theory in describing Capitalism?
Attempts have been made to repair Neo-Classical theory via General Equilibrium explanations as well as attributing the unmeasurable proportions of output to a concept known as “Total Factor Productivity” — yet another unobservable quantity. However, the mainstreams most effective strategy thus far has been to simply ignore that the controversy exists.
What does this say about economics?
As mentioned, most of the mainstream acts as if the controversy never happened. In fact, I went through a Bachelors and Masters degree without ever having heard of the Cambridge Controversy (it’s only cause I’m a nerd that I know about it at all).
This is really handy for mainstream economists who want their positions of power to remain unchallenged (Häring, N. and Douglas, N., 2012). The Cambridge Controversy highlights this pervasive relationship between the mainstream and heterodox schools of economics.
In the face of critique from heterodox angles, the mainstream of economics can drown out noise from any discourse it disagrees with on an opaque ideological basis. Mainstream economics does this instead of updating theories and beliefs that can account for structures that impact economics and challenge power.
“ … the economics field itself can be considered a hegemonic modernising discourse, which adopts a particular vision of modernity based on a Eurocentric understanding of capitalism and rationality” (Dutt, D., et al, pg. 145)
In other words, the mainstream of economics does not want alternative understandings of how an economy might function other than Homo economicus, Markets and Capitalism. This is the mainstreams ideological foundation within existing power structures.
Just as the Neo-Classicals brushed the Post-Keynesian critiques of their theories under the rug, any discussion of alternatives are sidelined in favour of the mainstream explanations. Instead of analysing class, racial, colonial or gender hierarchies; economics analyses only market power, instead of exploring commons as an economic alternative; it only explores markets or states, and instead of understanding care as the foundation of an economy; it only seeks to understand efficiency and growth.
Just as it is easier to imagine the end of the world than it is to imagine the end of capitalism (Fisher, M., 2009), it is easier to imagine the end of economics than it is to imagine an alternative economics.
Alternatives that seek to decolonise economics are branded as “ideological”. Entirely ignoring the ideological and value laden underpinnings of mainstream economics within Eurocentric concepts of the economic man as well as colonial and capitalist hierarchies.
The Cambridge Controversy is a stark example of this glaring relation within economics. It is easier for the mainstream to simply ignore critiques and use its hegemonic position to push the status quo that maintains capitalist and colonial relations.
References
Fisher, M., 2009. Capitalist realism: Is there no alternative?.
Nitzan, J. and Bichler, S., 2009. Capital as power: A study of order and creorder. Routledge.
