Controversy continued, however in the 1950s and 1960s between economists based primarily in Cambridge, Massachusetts (including Solow and Samuelson, who defended the production function with substitutable factors) and economists working in Cambridge, England (including Joan Robinson, Nicholas Kaldor and Luigi Pasinetti), who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short-term fluctuations. (p. 231)Anyone who has studied this debate knows that this summary bears no relation at all to what was actually argued over. Piketty seems like a smart, open-minded guy, so I would have to assume that he hasn’t read the original documents; his take must have been formed by what he was told in grad school. If so, this passage can be read as a reflection of how the Two Cambridges battle has been turned into official history. That’s a discouraging thought.
As for myself, I think I disagree with both sides. The UK Cantabrigians said that the value of capital is determined by its cost of reproduction, which is a function of its composition, the technology of production and the division of income between labor and capital. Thus the value of capital depends on its return, and this circularity is what makes aggregate valuation underdetermined. The upshot is that this return is necessarily a political, not a technical factor. (Cue Marx.)
The Massachusetts Cantabrigians said that the value of capital is determined in general equilibrium, which encompasses cost of production and the productivity of capital goods. The reproduction constraint of the UK crowd doesn’t apply, because agents can rationally incorporate their expectations of capital’s productivity in market transactions that pertain to future economic states that differ from the present. (Cue Arrow-Debreu.)
On this issue I would side with Keynes, for whom profitability does depend on the future, but who viewed the future as truly, radically unknowable. The result is that there is a cost price for capital goods and a constantly fluctuating market valuation of capital-in-use, and there is no theoretically determinate relationship between the two.
Or to put it differently, the owl of realized capital valuation flies at dusk.