The Neoclassical Production Function: Comment
Abstract
The reswitching phenomenon brought to light the fact that the neoclassical production system need not be well behaved. This means that the central proposition in neoclassical production theory, namely the monotonic relation between the round-aboutness of production and the interest rate, need not always hold. There are two ways to cope with this situation. One is to accept what is true, however cumbersome it may be. The other is to look for conditions which rule out perverse phenomena in the hope that such conditions are empirically acceptable. Lowell Gallaway and Vishwa Shukla (abbreviated as G-S henceforth) have taken the second approach and claimed to have discovered a new sufficient condition that rules out the reswitching of techniques in a neoclassical production system, a condition which may be called the capital-intensity condition. Unfortunately, their claim is unfounded; their analysis is faulty. Rather than showing where it has gone astray, I shall present a counterexample that satisfies their capital-intensity condition and yet permits reswitching.1 Though there are conditions that warrant the neoclassical production svstem to be well behaved, the capital-intensity condition is not among them.
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