Solving the Reswitching Paradox in the Sraffian Theory of Capital

TL;DR

This paper demonstrates that the re-switching of techniques in Sraffa's model, traditionally seen as a paradox, can be explained within the neoclassical framework through sectoral interdependencies affecting relative prices.

Contribution

It shows that re-switching phenomena are compatible with neoclassical theory by analyzing sectoral interdependencies and their impact on relative prices.

Findings

Re-switching can be rationalized within neoclassical theory.

Sectoral interdependencies cause non-monotonic effects on prices.

Cost-minimizing choices lead to re-switching phenomena.

Abstract

The possibility of re-switching of techniques in Piero Sraffa's intersectoral model, namely the returning capital-intensive techniques with monotonic changes in the profit rate, is traditionally considered as a paradox 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 non-monotonic effects of progressive variations in income distribution on relative prices. The re-switching of techniques is, therefore, the result of cost-minimizing technical choices facing returning ranks of relative input prices in full consistency with the neoclassical perspective.