The Choice of Numeraire, Capital Intensity Uniqueness and the Reswitching of Techniques

Two types of numeraires have traditionally been used in the capital theory controversy. The price of consumption goods, the Hicks numeraire (1965), is the most widely used; another less well-known numeraire uses the value of net output as measurement unit, the Sraffa numeraire (1960). Since the choice between these 2 numeraires has generally been considered to be a matter of convenience, the implications of the Sraffa numeraire for capital theory have been ignored. Recent results have called into question 2 fundamental propositions of the neoclassical theory: the possibility of reswitching of technique and the relationship between the value of capital per man and the rate of profit. The condition for capital-intensity uniqueness and the phenomenon of reswitching of techniques are examined in a 2-sector linear capital model when the prices and wages are measured in terms of the Sraffa numeraire. When the Sraffa numeraire is employed, the capital-intensity condition is insufficient to guarantee a unique relationship between the value of capital per man and the rate of profit, and reswitching of techniques is possible even if there is only one capital good in the system. These results emerge only from the interaction between the price and composition effects in the model employing the Sraffa numeraire. A numerical example is provided as incontrovertible evidence that reswitching is possible.