MAINSTREAM ECONOMIC THEORY OF CAPITAL-LABOR SUBSTITUTION - ITS CRITIQUE FROM THE NEORICARDIAN POINT OF VIEW, MICRO AND MACRO CONTEXT

The paper focuses on the not well-known critique of neoclassic capital theory. This critique was made with the help of Professor Ian Steedman. Steedman concentrates himself on the problematic conclusion about the capital/ product ratio dependence on the interest rate evolution. The neoclassic approach assumes that the higher interest rate is a reason for substitution of labor for capital in the production process. The mainstream economics speaks of a higher amount of the negative substitution effect than the amount of the prospective positive income/production effect. The Steedman critique weakens the conclusion about the efficient management of the interest rate to provide an optimal structure of the inputs of the firms. Although this critique is achieved with the neoclassic technique, it weakens the general solution of any firm or industry, which is proposed with the economic theory. The recommendation based on this critique is to concentrate on the industry specification and to think about potential individual industry policy. The Steedman critique belongs to both microeconomics and macroeconomic theory. Steedman in the way of modern neoclassic approach, which builds macroeconomy models (DSGE) based on the individual optimizing agents, argues against the whole macroeconomic policy based on the representative agent/representative firm approach. His arguments are based on the most simple models.