The capital debates are associated with the very notion of capital. Classical political economy authors, from William Petty to Karl Marx, including Quesnay, Smith and Ricardo, treated the process of production as a circular one. In this context, capital is a produced means of production, rather than a factor of production used in the process of obtaining final goods. The most important result of the capital debates is that, once capital is defined as produced means of production, there is no direct relation between the relative abundance or scarcity of the means of production and its remuneration. Distribution, in other words, is not governed by supply and demand.
Even though the idea of intertemporal equilibrium, in which capital is treated as a vector of heterogeneous capital goods, was first developed by Eric Lindahl and then popularized by John R. Hicks in the 1930s, and used by Arrow and Debreu in the 1950s, it was only after the capital debates that it came to be dominant within the mainstream.
The problem with the use of heterogeneous capital goods is that it implies a change in the traditional method of economics. Normal equilibrium positions are associated to a uniform rate of profit; however, when dealing with heterogeneous capital goods that are not substitutable between each other, it becomes necessary to discard the notion of long run equilibrium.Although I don’t want to stray too far from the original question, this last sentence by Vernengo appears to offer support for monetary non-neutrality in the long run. When discussing the subject recently, the question was posed “is the long run therefore simply a series of short run periods?” Perhaps surprising to many of my Austrian colleagues, it appears the introduction of heterogeneous capital provides reason “to discard the notion of long run equilibrium.”
Returning to the main subject at hand, The Radical Subjectivist offers Lachmann’s Quick Comment on The Cambridge Capital Debate:
The second reason rests on the fact that the purpose of all capital, hence also of the current maintenance of existing capital goods, is to secure a future income stream. But the future is unknowable, though not unimaginable, and men have to use knowledge substitutes in order to evaluate future income streams, viz. expectations. Experience shows that different persons will typically hold different expectations about the future income to be expected from the same resource, and that the same person may hold different expectations about the same future event at different points of time. The inevitably subjective nature of all ‘forward looking’ views renders the measurement of capital impossible.Lachmann was seemingly critical of the capital debates for ignoring subjectivism and not giving credit to earlier authors, including Hayek, that discussed the impossibility of measuring capital. While these points may be correct, they don’t appear to undermine the deeper critiques of neoclassical (mainstream) economics laid out by Vernengo.
Summing up the current discussion, here is a straightforward answer from Lord Keynes (my emphasis):
Post Keynesian economics agrees with Austrian economics that capital goods are heterogeneous.
But heterogeneous capital can also have a significant degree of durability and substitutability. A capital structure in a capitalist economy where we find some important degree of adaptability, versatility and durability in the nature of capital goods means that the Austrian business cycle theory of Hayek, as propounded in Prices and Production, is not a realistic vision of modern economies.
Subjectivism and Economic Analysis: Essays in memory of Ludwig Lachmann
Revisiting the Cambridge Capital Theory Controversies: A Historical and Analytical Study
(Special thank you to Payam Sharifi, Gauchito Gil, and Pablo Bortz)