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The Cambridge capital controversies (CCC) as market and firm structure controversies: modern neoclassical interpretation

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No xequg, OSF Preprints from Center for Open Science

Abstract: How dynamic stochastic general equilibrium (DSGE) models, widely used in mainstream macroeconomics, revive neoclassical capital theory parables and the uniform rate of interest is analyzed. While Arrow-Debreu-McKenzie (ADM) general equilibrium models disallow such a revival, DSGE has agents re-optimizing at each period, along with separate intra-period budget constraints, which then result in first-order conditions that lead to the resurrection of capital aggregation and the traditional neoclassical capital theory. Despite these initially positive results for neoclassicals, the Cambridge capital controversies (CCC) can be re-cast in form of market and firm structure: quasi-complete contract versus incomplete contract and ADM-style complete market versus DSGE-style incomplete market. In both a theory of the firm and 'ADM versus DSGE,' the question is: why do agents choose the inferior market structure (incomplete contract and DSGE-style incomplete market) that leads to lower expected time-discounted utility? In this sense, CCC is alive even in neoclassical macroeconomics.

Date: 2023-08-09
New Economics Papers: this item is included in nep-dge and nep-hpe
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DOI: 10.31219/

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