----------------- HES POSTING ----------------- I noted in a previous mail that the economics profession as a whole had lost interest in reswitching (and capital reversal and the like). It may be worth noting that the profession also (a bit later) lost interest in formal, fully-disaggregated, intertemporal, general equilibrium theories, probably for much the same reason. On an abstract level one can show that reswitches may occur in a certain sort of model, just as one can show that general equilibrium in a certain class of model may or may not exist, be unique and be stable. But this doesn't seem to yield any useful insights into significant real-world issues (like: can growth with low inflation continue? Can the US balance of payments deficit be sustained? Why has inequality increased in many countries? What are the effects of monetary union in Europe?). There is a case, of course, for working on theoretical issues, but there is a point at which diminishing returns set in. Something related to reswitching might perhaps cause important phenomena (market crashes, say). So might non-existent or multiple equilibria, which we know could occur for reasons which have nothing to do with capital theory (non- convexities of preferences or technology, say). But that doesn't help, does it, unless you can do the real work of explaining actual cases and providing robust supporting evidence. Mat Forstater thinks that it is a matter of logical inconsistency, but there is nothing logically inconsistent about an aggregate production function. Technology might be such that an aggregate production function is a good approximation, or it might not. The test is empirical. Similarly, aggregation of labour inputs might work or it might not. It probably depends on the question asked - homogeneous labour is not going to help explain widening wage inequality, for example. (Many of those who insist on capital heterogeneity happily assume homogeneous labour.) Incidentally, reswitching is a particular case of a general result: a discounted cash flow comparison of two alternative streams of net income can exibit reswitches, that is, the internal rate of return to the difference between two alternatives can exibit mutiple roots (up tothe number of sign reversals in the stream of dated differences betweenthe two streams of cash flows, if memory serves). Hence alternative A may be preferred at high and low discount rates but not at intermediaterates. They can even switch in and out many times. That may be the point behind the reference that Mat cites. Tony Brewer ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]