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Most of the debate is esoteric and mathematical, but there are some main elements that can be explained in relatively simple terms.
A core proposition in neoclassical economics, especially textbook neoclassical economics, is that the income earned by each of " factors of production" (essentially, labor and "capital") is equal to its marginal product. Thus, the wage is alleged to be equal to the marginal product of labor, and the rate of profit equal to the marginal product of capital. A second core proposition is that a change in the price of a factor of production -- say, a fall in the rate of profit -- will lead to more of that factor being used in production. A fall in this price means that more will be used since the law of diminishing returns implies that greater use of this input will imply a lower marginal product, all else equal.
Pierro Sraffa, who originated the Cambridge controversy, pointed out that there was an inherent measurement problem in applying this model of income distribution to capital. Capitalist income is the rate of profit multiplied by the amount of capital, but the measurement of the "amount of capital" involves adding up quite incompatible physical objects -- adding trucks to lasers, for example. That is, just as one cannot add heterogeneous "apples and oranges," we cannot simply add up simple units of "capital" (as a child might add up "pieces of fruit").
Neoclassical economists assumed that there was no real problem here -- just add up the money value of all these different capital items to get an aggregate amount of capital. But Sraffa (and Joan Robinson before him) pointed out that this financial measurement of the amount of capital depended in turn on the rate of profit. There was thus a circularity in the argument.
The traditional way to aggregate is to multiply the amount of each type of capital goods by its price and then to add up these multiples. Ideally, this sum would then be corrected for the effects of inflationFor alternative meanings see inflation (disambiguation). In economics, inflation is a fall in the market value or purchasing power of money. This is equivalent to a rise in the general level of prices. Inflation is the opposite of deflation. Zero or very. The problem with this technique is that as the distribution of demand between sectors changes, not only does the price of the product change, but the price of the each of capital goods changes. Because that leads to changes in the distribution of demand between sectors, this in turn means that the total amount of capital goods changes with the distribution of income. For example, a rise in property income at the expense of wages and salaries shifts demand away from basic consumer goods toward yacht production. Thus, the price of the capital goods used in producing yachts would rise and that of the capital goods used in producing basic consumption goods would fall. This would change the sum of the prices of the two types of capital goods.
In general, this says that physical capital is heterogeneous and cannot be added up the way that financial capitalFinancial capital or economic capital is any liquid medium or mechanism that represents wealth, i. other styles of capital. A contract regarding any combination of capital asset is called a financial instrument, and may serve as a medium of exchange, stan can. For the latter, all units are measured in moneyGeneral definition of money Money is an agreement, between a community, to use something as a medium of exchange, which acts as an intermediary market good. It can be traded and exchanged for other goods. The agreement can either be explicit or implicit, terms and can thus be easily summed.
Sraffa suggested a technique (stemming in part from MarxianMarxian theory is theory which intends to follow and expand upon Karl Marx's economic analysis or political philosophy, or at least from parts of it. To some, it is distinct from Marxism in that it does not lean entirely upon the work of Marx and other wi economics) by which an measure of the amount of capital could be produced: by reducing all machines to dated labor. A machine produced in the year 2000 can then be treated as the labor and commodity inputs used to produce it in 1999 (multiplied by the rate of profit); and the commodity inputs in 1999 can be further reduced to the labor inputs that made them in 1998 plus the commodity inputs (multiplied by the rate of profit again); and so on until the non-labor component was reduced to a negligible (but non-zero) amount. Then you could add up the dated labor value of a truck to the dated labor value of a laser.
However, Sraffa then pointed out that this accurate measuring technique still involved the rate of profit: the amount of capital depended on the rate of profit. This reversed the direction of causality that neoclassical economics assumed between the rate of profit and the amount of capital. According to neoclassical production theory, an increase in the amount of capital employed should cause a fall in the rate of profit (following diminishing returns). Sraffa instead showed that a change in the rate of profit would change the measured amount of capital, and in highly nonlinear ways: an increase in the rate of profit might initially increase the perceived value of the truck more than the laser, but then reverse the effect at still higher rates of profit. See " Reswitching " below.
This aggregation problem was thus a serious challenge to the neoclassical theories of income distribution and of production, which is why the debate was so important.
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