Cambridge capital controversy

The Cambridge capital controversy – sometimes called "the capital controversy" or "the two Cambridges debate" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate production and distribution. The name arises because of the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts. The two schools are often labeled "Sraffian" or "neo-Ricardian" and "neoclassical", respectively.

Most of the debate is mathematical, but some major elements can be explained in simple terms and as part of the 'aggregation problem'. That is, the critique of neoclassical capital theory might be summed up as saying that it suffers from the fallacy of composition, i.e., that we cannot simply jump from microeconomic conceptions to an understanding of production by society as a whole. The resolution of the debate, particularly how broad its implications are, has not been agreed upon by economists.

Much of the emotion behind the debate arose because the technical criticisms of marginal productivity theory were connected to wider arguments with ideological implications. The famous neoclassical economist John Bates Clark saw the equilibrium rate of profit (which helps to determine the income of the owners of capital goods) as a market price determined by technology and the relative proportions in which the "factors of production" are used in production. Just as wages are the reward for the labor that workers do, profits are the reward for the productive contributions of capital: thus, the normal operations of the system under competitive conditions pay profits to the owners of capital. Responding to the "indictment that hangs over society" that it involves "exploiting labor," Clark wrote:

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