Capital, Technical Progress and International Trade

Much has been written about the objection originally formulated by Piero Sraffa to the use of production functions and aggregate capital and of the disputes that ensued, but there seems to be no systematic explanation in one place of why this objection is crucial to the foundations of economic theory and why the various attempts to escape it fail. This paper is an attempt provide one. First, it presents the reasoning of the objection and shows how the arguments against it are either fallacious or too restricted to be useful. Second, it shows how technical progress and international trade give two more reasons for the same objection, which, though logically independent, only became apparent because of the first.From these it follows that neither technical progress nor international trade can be plausibly described or explained if capital goods are not treated as heterogeneous goods manufactured with the use of capital goods. This leads to a more realistic depiction of technical progress as the outcome of the R&D of competing firms. (For brevity, government activities are left out.) The implications for international trade are described briefly.This paper is not a survey; it is confined to the minimum needed to establish its contentions. Its discussion of the disputes has mostly been said before, but it covers some gaps that seem to have been overlooked. It adds to the discussion in that the disputes did not take up the implications of technical progress and international trade