1st slide - Foundations of the neoclassical theory of capital

2nd slide -A special feature of economic thinking in the late

nineteenth and early twentieth century is the view on capital,
elaborated especially by the Austrian Eugen von Böhm-Bawerk in his
Positive Theory of Capital (1889) and refined by the Swede Knut
Wicksell in his Value, Capital and Rent (1893) and Lectures on
Political Economy (1901), the American Irving Fisher in The Nature of
Capital and Income (1906), The Rate of Interest (1907) and The Theory
of Interest (1930), and various others. Prior to Böhm-Bawerk the
American John Bates Clark had published Capital and its Earnings in
1888, but Fisher was more inspired by Böhm-Bawerk and the Scottish-
born John Rae (1796–1872).

3rd slide - Böhm-Bawerk was born in Brno in 1851 as the youngest son
of an ennobled civil servant. He was professor first in Innsbruck in
1880 and from 1905 in Wien, but in between he was employed in the
ministry of finance and was during some periods minister of finance
Wicksell was born in Stockholm, in the same year as Böhm-Bawerk. But,
while the Austrian was well established in the high society of his
country, the Swede had the reputation of an enfant terrible, a
radical (though non-Marxist) iconoclast who defied the Church, the
military and everyone whose opinion he did not share. In personal
encounters he nevertheless came across as a most amiable and humble
man.
Fisher was born in upstate New York in 1867 and affiliated with Yale
University during his whole career, serving as full professor from
1898 to 1935. He was similar to Wicksell in at least four respects.

4 SLIDE- Wicksell and Fisher explicitly refer to Böhm-Bawerk’s

work as the foundation upon which they build. In relation to Böhm-
Bawerk, they modify and reject different points. Böhm-Bawerk’s and
Wicksell’s approach is sometimes called the Austrian theory of
capital, in which time plays a key wrote

5 SLIDE- Böhm-Bawerk adduced three causes for a positive interest

rate.
First, in a growing economy the supply of goods will be greater in
the future and their marginal utility consequently lower.
Second, there is a characteristic of human beings such that ‘we
feel less concerned about future sensations of joy and sorrow simply
because they do lie in the future’.
BöhmBawerk’s third cause is related to the production side: ‘time-
consuming roundabout methods of production are more productive.’
Instead of catching fish immediately with the hands, it is more
productive first to spend some time constructing a fishing-rod or a
net.
 6 SLIDE - In Irving Fisher’s approach, the willingness and the
possibility to reallocate income between different periods of time
provides the setting for the analysis of capital formation. This is
obvious from the full title of his 1930 book The Theory of Interest
As Determined by Impatience To Spend Income and Opportunity To Invest
It.

Imperfect competition, growth and capital controversies

The key contributions to this research were two books that appeared
simultaneously, but independently of each other:
 The Theory of Monopolistic Competition (1933) by Edward H.
Chamberlin (1899–1967) of Harvard
 Economics of Imperfect Competition (1933) by Joan Robinson
(1903–83) of Cambridge

7 sLIDE-Solow’s growth model gained great popularity in the

1950s and 1960s, when many former British and French colonies gained
independence and economic development was set on top of the agenda.
The charm of the model lay in two optimistic predictions about the
economic development of relatively poorer countries.
It increased again in the late 1980s and early 1990s when
models of endogenous growth were developed, in which technical
progress (and hence productivity and output growth) is generated
within the model. The main contributors to this literature were
Robert Lucas (b. 1937), Paul Romer (b. 1955), then both of Chicago,
and Philippe Aghion (b. 1956), then at MIT and Oxford, in cooperation
with Peter Howitt (b. 1946), then at Western Ontario

8 SLIDE - The name of the controversies is explained by the

fact that several of the critics of neoclassical capital theory –
most prominently Joan Robinson, Piero Sraffa and Luigi Pasinetti (b.
1930) – were affiliated with Cambridge University in England, while
the neoclassical camp – mainly represented by Paul Samuelson and
Robert Solow – had their base at MIT in Cambridge, Massachusetts.
The Cambridge controversies revealed that theoretical problems
easily appear when the value of capital is used as an argument in a
production function.The Cambridge controversies over capital theory
were not the only challenges to neoclassical economics.