Others, including Tom Hickey, Robert Vienneau and Lord Keynes, have already mentioned this, but Matias Vernengo has provided an educational post on the content and significance of the capital debates. For those who are unfamiliar with the debates or remain uncertain of what was involved, Vernengo’s post is well worth reading. It is both informative and accessible.
I won’t summarize the post here, because it is better to follow the link to Vernengo’s actual post. I will simply highlight some of the key aspects that make the topic a significant one.
As Vernengo discusses, the implications of the capital debates for the analysis of market economies are far-reaching. Distribution is not determined by relative scarcity, nor can it be said to reflect productive contribution. There is no automatic tendency to full employment. There is no monotonic inverse relation between private investment and the rate of interest (implying, among other things, that the ‘liquidity trap’ is not a valid explanation of our current predicament). There is no monotonic inverse relation between the real wage and employment. Aggregate production functions are not a valid modeling construct (undermining both new keynesian and new classical macroeconomics.)
Vernengo also points out the empirical relevance of the results. Consistent with the theoretical conclusions drawn from the capital debates, there is a lack of evidence for any significant relationship between investment and the rate of interest, or between real wages and employment, and income effects have been found to be more important than substitution effects.