The aim of this paper is to study the relationship between reverse capital deepening and instability of the equilibrium between investments and savings. It is shown for a model with n commodities, infinitely many linear technique of production, and overlapping generations that a badly behaved real Wicksell effect, as in the case of a ‘reswitching of techniques’, can involve instability.

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The theory of value has been based ever since Adam Smith on the idea that the market prices of commodities, those at which actual trade takes place, gravitate around a central position known as natural prices. This article seeks to develop a statistical idea of the process in question and suggests in particular that market prices can be said to gravitate around natural prices if the probability of their means being very close to natural prices after t observations tends to 1 as t tends to infinity. A set of possible conditions leading to that result is also presented.

We consider a model of production with a continuum of linear techniques and examine the related choice of technique and shape of the demand for capital schedule. The primary conclusion regards the possibility of a decreasing demand for capital schedule combined with reswitching and reverse capital deepening.JEL: B21, D24, D33, D46. ACKNOWLEDGMENTSThe author wishes to thank E. Bellino, G. Bloise, M. Corradini and J. Duffy for their useful comments and suggestions. The usual disclaimer applies for any remaining errors.

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