Reswitching

Reswitching is a concept in economics and economic theory that describes a counterintuitive phenomenon in capital theory and the analysis of technological change. It occurs when the general rate of profitability does not move monotonically with changes in the productivity of capital or technology, leading to the possibility that an investment project that was previously unprofitable becomes profitable again as conditions change.

The term was notably discussed in the context of the Cambridge capital controversy during the 1960s and 1970s. Reswitching challenges the traditional neoclassical assumption that higher rates of return on investment always correspond to more advanced or more capital-intensive techniques. Instead, it demonstrates that certain techniques can be "reswitchable," meaning that they become optimal at multiple different rates of return depending on specific technical or economic conditions.

This phenomenon has implications for the understanding of capital and interest rates, suggesting that the relationship between capital intensity and profitability is more complex than a straightforward trade-off. Reswitching questions the idea that a single marginal rate of profit can determine the choice of technique and complicates the concept of a stable, supply-driven interest rate.

Reswitching is closely associated with debates over the nature of capital and the potential flaws in traditional neoclassical models. It highlights the importance of considering the non-linear and dynamic relationships between technological innovation, profitability, and resource allocation in economic analysis. These insights have contributed to ongoing discussions about the foundations of economic theory and the validity of certain classical assumptions.