The Theorem of Proportionality in Contemporary Capital Theory: An Assessment of its Conceptual Foundations

Bitros, Georgios C.

doi:10.2139/ssrn.1533705

Cited by 2 publications

(2 citation statements)

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“…Therefore, perhaps, research efforts aimed at falsification of the theorem by reference to "data" would have proved more successful in preventing its dominance in mainstream economics, if they had been oriented towards building a model leading to a more fruitful theorem. The answer to the last question is that certainly important issues do no have to remain unresolved and this explains my research in Bitros (2009a;2009b) regarding the replacement ratio. However, before economists acquire the mindset of scientists in the hard sciences, it will take a variety of changes along the lines suggested by Teixeira (2007).…”

Section: Inertia Of the Status Quomentioning

confidence: 97%

“…In particular, he established that a constant replacement ratio could be derived from renewal theory under quite general conditions (henceforth to be referred to as the "theorem of proportionality" or just the "theorem") and ever since this result has influenced economic theory and policy as if the arguments put forth by Feldstein and Rothschild (1974) were irrelevant or misplaced. Thus what I wish to do here is to revisit that very important debate and try to set the record straight in light also of the findings in Bitros (2009a;2009b), where I survey and assess the voluminous theoretical and empirical literature in this area.…”

Section: Introductionmentioning

confidence: 99%

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The Puzzle of the Replacement Ratio in the Context of Renewal Theory

Bitros

2010

SSRN Journal

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The models Feldstein and Rothschild (1974) and Jorgenson (1974) adopted to highlight the nature of the replacement ratio were identical. Yet, even though the theorems they derived from them were complementary and reinforced each other, the authors reached diametrically opposite conclusions. Digging deeper into the controversy that erupted, it emerges that the staying power of the theorem, according to which replacement is a constant proportion of the outstanding capital stock, may be attributed to the following reasons. The discernible shift from realism to instrumentalism in the methodology of economics; Its operational advantages; The data that accumulated, thus facilitating research without having to compute capital stock series from scratch; The inertia of the status quo, which is sustained by the absence of a process to decide when a theorem is in conflict with experience and should be set aside, and lastly the lack of a model leading to a more useful theorem than the one under consideration. In this light it is concluded that the time has come for research efforts to be directed towards constructing and testing models in which the useful life of capital is determined endogenously in the presence of embodied technological change. JEL Classification: E22

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Section: Inertia Of the Status Quomentioning

confidence: 97%

Section: Introductionmentioning

confidence: 99%