Sen 1974

The Suntory and Toyota International Centres for Economics and Related Disciplines
On Some Debates in Capital Theory

Author(s): Amartya Sen
Source: Economica, New Series, Vol. 41, No. 163 (Aug., 1974), pp. 328-335
Published by: Wiley on behalf of The London School of Economics and Political Science and
The Suntory and Toyota International Centres for Economics and Related Disciplines
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[AUGUST
On Some Debates in Capital Theory
By AMARTYA SEN'
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", translated
into Chinese around 400 A.D. by Kumarajiva from Kucha (Eastern
Turkestan); 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 since he was what Buddha called "a hair-splitting Brahmin" (see
Kassapa-Sihanada Sutta), Subhuti was destined to specialize in capital
theory. One day Subhuti was sighing in his study after reading Venerable
Harcourt's survey and a hundred other books and papers on the subject,
overwhelmed by the loftiness of the thoughts revealed in these works,
when Buddha suddenly appeared, taking pity on his old acquaintance.
Subhuti promptly uncovered his right shoulder, knelt upon his right
knee and raising his hands with palms joined, addressed Buddha thus:
World-honoured One, have you come to help me out of this mess of
measurement of capital?
Buddha said: Verily, I have come on a different purpose. To deflect
you from your studies. Do not, 0 Subhuti, spend your life on a problem
that is possibly trivial.
Subhuti said to Buddha: Trivial indeed, World-honoured One, from
the standpoint of the "Ultimate Principle of Reality". But it is a serious
problem for economics which I have been fated to do in the great cycle
of rebirth, and I must do my duty this time. Enlighten me, 0 Enlightened
One.
Buddha said to Subhuti: Why do you want to measure capital, 0
Subhuti? What good will it do to you?
Subhuti replied: Despite early doubts I have lately become interested
in using an aggregate production function. And I would like to have
the rate of profit in the economy determined by the marginal product of
capital. I know from some of the books I have read that the difficulty
in this arises from having more than one capital good and the problem
of measuring capital. 0, how I wish that capital goods were homo-
geneous! Seeing you, World-honoured One, an idea occurs to me. Why
1 This paper has been written for Professor Amiya Kumar Dasgupta, a dis-
tinguished alumnus of the LSE, and is to be republished in the Festschrift in
honour of him edited by Dr Ashok Mitra. The paper was written when I was
visiting the Jawaharlal Nehru University in New Delhi.
328
1974] ON SOME DEBATES IN CAPITAL THEORY 329
don't you simply make all capital goods homogenous? So many

economists will be grateful to you for this, 0 Tathagata.
Then Buddha said: As I have said many times, I am not a magician.
I cannot do the impossible, and my admiration is great for those who
can change reality at the stroke of a pen. But tell me, Subhuti, do you
really believe that having only one homogeneous capital good will
permit you to derive a rate of profit purely from the technical relation-
ship between homogeneous capital and output?
Subhuti replied: Thus it is said in some venerable books.
Buddha said: Revere them, Subhuti, but trust them not. Suppose
you do get the value of the marginal product of capital in terms of out-
put of consumer goods. In what units will it be expressed? Physical units
of additional consumer goods per unit of additional homogeneous
capital. But the rate of profit is a pure number. Surely you will need
something more in going from the first to the second to reflect the relative
price of the capital good vis-a-vis the consumer good. But the equili-
brium price of capital in units of consumer goods depends on the rate
of profit used for discounting, and a variation of the rate of profit can
involve a variation of the value of the same physical capital in units of
consumer goods. This difficulty is not eliminated by having one homo-
geneous capital good.
Subhuti said: How does Venerable Solow do the whole thing so
easily in his simple growth model? Has he then made a mistake, 0
Enlightened One? My heart aches badly.
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 econ-
omy, 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? That does 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 accommo-
dates heterogeneous capital goods also, and the problem of relative
prices is carefully eliminated by the equal factor-intensity assumption.
Subhuti then spoke thus: I am worried by the equal factor intensity
assumption. Do we really require it, Enlightened One?
Buddha answered: No, it is sufficient but not necessary, in the sense
that some rather special configurations of other things can almost
accidentally yield a surrogate production function. But the closest we
come to the heart of the matter is with Venerable Samuelson's assump-
tion about factor intensities.
Subhuti spoke now in sorrow thus: But the equal factor-intensity
330 ECONOMICA [AUGUST
assumption is not really very close to reality. Is there no method of

getting the rate of profit as the partial derivative of some value of
capital without going as far as Venerable Samuelson's assumptions?
Buddha replied: For special cases, certainly yes. For an economy
in equilibrium growth with the rate of profit equal to the rate of
growth, one can get the equality of the profit rate and the marginal
product of capital value without much difficulty. But this covers only a
particular situation.
Subhuti asked: Is there then no measure of capital value such that
the rate of profit equals the marginal product of capital irrespective
of the exact situation of the economy unless the Samuelsonian surrogate
model holds?
Buddha said: There is indeed. Venerable Champernowne's chain
index gives a measure of capital such that one can use it as an argument
in the production function and such that the equilibrium rate of profit
will equal the partial derivative of output with respect to capital at its
appropriate chain index value. Of course, the neoclassical model is not
fully restored since Venerable Champernowne's cunning trick lies in his
skilful revaluation of capital, which may differ from the market value
of capital.
Subhuti asked: Does this work always, World-honoured One?
Buddha said: No, but it demands less than the surrogate production
function. However, if there are conditions that lead to multiple switch-
ing, i.e. a situation such that a technique that is more profitable than
another at a high interest rate and less profitable at a lower interest rate
could again become more profitable at a still lower interest rate, then,
O Subhuti, the Champernowne index may not work, as Venerable
Champernowne had pointed out in 1954 before the debate on multiple-
switching erupted between Brahmins of different traditions.
Subhuti said: Verily, multiple-switching is a matter of great import-
ance for the neoclassical aggregative model, I know that, 0 Enlightened
One.
Buddha replied: Not quite, Subhuti. Because indices like Venerable
Champernowne's index do not restore the neoclassical aggregative
model, and to get it fully you need Venerable Samuelson's surrogate
production function. And it is possible that while there may be no
multiple switches, nevertheless Samuelson's assumptions may fail to be
fulfilled. Furthermore, there are other assumptions in the neoclassical
model that are at least as important and disturbing as the absence of
multiple switches. For example that of an equilibrium; that of expecta-
tions that are always fulfilled; the stereotype of institutional assump-
tions on the distribution of income according to the so-called competit-
ive demand and supply; and in some models that of malleability of past
capital. In fact, despite the logical possibility of the existence of multiple-
switching, there is little empirical evidence as to how common an
occurrence it is in reality. It is, in fact, possible that it may yet turn
out that far from being the most objectionable assumption in the
neoclassical aggregative model, the assumption of the absence of

multiple switching may be comparatively harmless in relation to the
other assumptions, viewed from the empirical point of view.
Subhuti then asked: You puzzle me, Enlightened One. Why then has
there been such a lot of interest in the multiple-switching debate? Why
have so many pundits spent so much time on it?
Buddha said: There are possibly two reasons for this, as for most
things. First, like Kurukshetra, Hastings or Waterloo, multiple-
switching is famous as a battle ground. Here a group of Brahmins from
the ashrama of Pundit Sraffa caught a group of Boston Brahmins
boasting in the dark, and caused serious injury by throwing real
numbers at them. People always enjoy battles, and verily that is why
multiple-switching causes so much interest.
Subhuti asked: Is the lore of multiple-switching, then, just a war
epic ?
Buddha said: I said that there were two reasons for the fame of
multiple-switching. I speak now of the second: listen carefully, 0
Subhuti. For the pure theorist empirical plausibility is often a relatively
minor question. What engages him most is internal consistency. Since
multiple-switching rules out an aggregate measure of capital-like that
of Venerable Champernowne-that can be used as an argument in a
neoclassical production function, and since the neoclassical model
cannot analytically rule out the possibility of multiple-switching, a pure
theorist would be excited by it, especially if he is constructing a purely
analytical case against a class of neoclassical models. The practical
problem of measurement is not the main thing in this debate.
Subhuti asked: But, World-honoured One, would the Brahmins of
Pundit Sraffa's ashrama accept this? Why has Pundit Sraffa himself not
written on this distinction, which-if correct-should be very important
in understanding the motivation of his school?
Buddha replied: As you know, Pundit Sraffa finds it immoral to
write more than one page per month, but on the banks of the Mediter-
ranean in the Province of Corfu he gave an oral discourse on this as
early as 1958, reported by Venerable Lutz and Hague (pp. 305-6). He
spoke thus:
... one should emphasize the distinction between two types of measure-
ment. First, there was the one in which the statisticians were mainly
interested. Second, there was measurement in theory. The statistician's
measures were only approximate and provided a suitable field for
work in solving index number problems. The theoretical measures
required absolute precision.... The work of J. B. Clark, Bohm-
Bawerk and others was intended to produce pure definitions of capital,
as required by their theories, not as a guide to actual measurement. If
we found contradictions, then these pointed to defects in the theory,
and an inability to define measures of capital accurately.
Subhuti said then: All right, I accept the motivation of Pundit Sraffa,
and I am convinced that the neoclassical aggregate model as a piece
of "theory", in his sense, is a disaster. This is important for the disputes

between different schools of theory, and I can see that this links up with
Venerable Garegnani's analysis of the history of economic thought. But
I am, in fact, also interested in actual measurement.
Buddha said: Many people from good families seem to be these days.
The picture there is also a bit depressing as far as the neoclassical
aggregate model is concerned. For example, Venerable Fisher's
examination of this question from the point of view of econometric
analysis and empirical predictions brings out the limitation of the neo-
classical aggregate model especially when widely diverse industries are
included. Note, Subhuti, that Venerable Fisher's motivation is quite
different from that of Venerable Sraffa, and to quote the findings of the
former as vindication of the position of the latter does not get one closer
to enlightenment.
Subhuti then addressed Buddha in this way: 0 World-honoured One,
these difficulties of the neoclassical aggregative approach fill me with
profound depression. I shall tell you why this is so, Enlightened One. I
devoted myself to development economics before I took to the path of
capital theory. I had convinced myself that in some cheap labour
economies like India and China it makes sense to recommend choosing
relatively less capital-intensive techniques of production, but I now rea-
lize that this is not the enlightened way in view of the difficulties in the
conception of capital as a factor of production. What sense can there be
in talking of the ratio of capital to labour, or of capital to output? How
naive have I been! I shall never again recommend choosing low capital-
intensity in cheap-labour economies.
Buddha said: Why not, 0 Subhuti, why not? When you say you were
recommending less capital-intensive techniques, you were suggesting
specific technical alternatives over others. Perhaps recommending that
in constructing an irrigational dam, the earth may be moved in a surplus-
labour economy by men with baskets rather than by bulldozers. And
other similar recommendations. The fact that you call the former a less
capital-intensive technique, when recommending it, is strictly speaking
quite incidental and does not affect the wisdom of your recommendation.
Subhuti then spoke thus: I see the point, World-honoured One. But
surely this makes the whole thing completely ad hoc. We just say
4'Choose this and this over that and that". There is in this ad hoc
approach no argument for preferring, in a surplus-labour economy,
techniques that we recognize, in some real sense, to be less capital-
intensive. It is not only that I had called these techniques less capital-
intensive, but also I had arrived at the recommendation to choose them
by a general argument in favour of using more labour and less capital.
Such general arguments surely must be regarded as erroneous in view
of what you have explained to me, Enlightened One.
Buddha replied: First of all, such general arguments are in fact quite
doubtful, and one cannot choose between alternatives until one has
looked into the details of each alternative. Secondly, the question of
what constitutes cheap labour is itself a difficult one and the existence of
surplus labour does not mean that it is costless, as has been argued by
Venerable Dobb, among others. Thirdly-and for our purpose most
importantly-in so far as your elementary reasoning indicates a general
presumption in favour of techniques that can be called less capital-
intensive, that general presumption is not much affected by the diffi-
culties we discussed in capital theory.
Subhuti asked: How can that be, 0 World-honoured One? In view
of the difficulties in the conception of capital that you have already
opened your holy mouth on, surely it makes no sense whatever to talk
of lower or higher capital intensity?
Buddha replied: That thought of yours is so complicated and
involves so many different colours that you may well be born as a
chameleon in your next incarnation. First, the fact that it may be
unenlightened to hold that the rate of profit is determined by the marg-
inal productivity of capital, need not in the least disturb the argument
that at a given rate of profit, one technique may have a higher capital
intensity than another. Second, when one recommends choosing less
capital-intensive techniques in a surplus-labour economy, one is usually
making a statement about investment and not about the existing capital
stock. Therefore, the problem of ex post fixity versus malleability on
which-as you point out in your humble Buddhist style-I have
opened my holy mouth, is not relevant. I take it that you are not
recommending that you scrap your already installed mechanized mach-
inery and change them into baskets and such. Third, when one recom-
mends a lower capital-intensity it is not a question of treating capital
as one factor of production but of economizing on the use of the class of
non-labour means of production vis-d-vis the use of labour, which is
relatively abundant. Where is your commensense, Subhuti?
Subhuti replied: In my incarnation as a modern economist I have
learnt how deceptive commonsense can be. I prefer rigorous arguments.
As you concede, the non-labour means of production are heterogeneous.
How can we talk about an overall capital intensity? Are there fixed
relative prices among the different non-labour means of production?
The debate on capital theory is not irrelevant to this question.
Buddha said: It is not, of course. But it may not make a difference
when we are talking of sharp contrasts as we are doing when we
recommend moving earth by hands and baskets rather than by bull-
dozers in building an irrigation project. We may not be absolutely
certain of the correct relative price of baskets vis-a'-vis bulldozers, but
within the limits of variations that may be relevant the former may
involve a lower capital intensity than the latter in each case. And when
one is making a general recommendation in favour of less capital-
intensive techniques in cheap-labour economies, one has in mind
something of this kind. For less clear cases, one would, of course, need
to do a detailed cost-benefit analysis, and comparison of overall
capital intensity will not be the right way of going about it. But just
because one cannot rank overall capital intensities in some cases, one
should not rule out the rankings that one can do.
Subhuti said: I do not like unrigorous presentations. State precisely
please, 0 Enlightened One.
Buddha said: Let (ql, . . ., ql) be the amounts of n types of capital
good inputs needed per unit of output under technique 1 and (q,. . ., q2)
those under technique 2. We refer to them as vectors ql and q2 re-
spectively. The appropriate shadow prices may depend on many things
and might not even be known with very great precision. They may even
depend on the choice of q. Suppose the planner only knows that the price
vectors pl and p2 in the two cases would belong to some set ir. Then we
would be able to say that ql is more capital-intensive than q2 if for every
pair of price vectors pl and p2 (not necessarily distinct) taken from I7, we
have:
pq >p2q2
We know, of course, that for any -a the ranking of the vectors of

a quasi-ordering, and satisfy some systematic properties, e.g. transitivity.
Subhuti said: Ah, I see now. Maybe I could say a few more things
than I first thought. Both in positive and in normative spheres. To take
an example from the former, I may be able to say the following, which I
shall call Remark 1, to be rigorous. Remark 1: "When there is persistent
unemployment in a stagnant economy the redundant workers may take
to employing themselves with tiny quantities of capital (say as shoe-
blacks or pedlars)". Having said this, however, I feel a great relief in not
finding Venerable Joan Robinson within earshot. She would have
never forgiven me for referring to "tiny quantities of capital". Tell me
Tathagata, what will I do when I meet Venerable Joan Robinson and
feel a compulsion to make a Remark like this?
Buddha said: That, first of all, is your problem. Second, be bold.
And third, why do you think Venerable Joan Robinson will object to
your remark? She will not.
Subhuti said: She will of course. She does not like references to
"quantities of capital"-tiny or large. I shall surely run into her some
day. How will I defend Remark 1, then? Tell me, 0 Enlightened One.
Buddha replied: She will know, of course, that Remark 1 is a quota-
tion from pages 157-158 of her Accumulation of Capital. Curious that
you should have had the same thought.
Subhuti spoke then: I am now tired, World-honoured One. What
have I gained from studying all these debates on capital theory other
than debunking the neoclassical use of capital as a factor of production
and the determination of the rate of profit by the so-called marginal
product of capital, which I did not really believe in any way in the first
place ?
Buddha said: Do not underestimate the value of the rarified know-
ledge involved in capital theory. Do not judge an action by the fruit
of it. As has been said: "And do not think of the fruit of action. Fare
forward."
Subhuti asked: But, 0 Enlightened One, knowledge must lead to
some real gain?
Buddha said: Do you remember what I told you 2,500 years ago
in that park near Shravasti, when you asked me: "In the attainment of
the Consummation of Incomparable Enlightenment did Buddha make
no acquisition whatsoever?"
Subhuti replied: I have forgotten, but here is A. F. Price's translation
of the "Diamond Sutra", and I notice on page 61 that you replied to
my question thus: "Just so, Subhuti. Through the Consummation of
Incomparable Enlightenment I acquired not even the least thing:
wherefore it is called 'Consummation of Incomparable Enlightenment'."
Buddha said: Just so, Subhuti, just so.
London School of Economics
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The Suntory and Toyota International Centres for Economics and Related Disciplines

On Some Debates in Capital Theory

On Some Debates in Capital Theory

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

don't you simply make all capital goods homogenous? So many

assumption is not really very close to reality. Is there no method of

neoclassical aggregative model, the assumption of the absence of

of "theory", in his sense, is a disaster. This is important for the disputes

We know, of course, that for any -a the ranking of the vectors of

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