Fabio Petri on non-substitution theorems
Sometimes there is simple and right
New paper by Professor Petri, which is always worth reading, titled "Nonsubstitution Theorem, Leontief Model, Netputs: Some Clarifications." From the abstract:
The nonsubstitution theorem concerns long-period technical choice and relative prices, and was so understood in its first (1951) formulations, but the modern advanced micro textbooks that present it do not make this clear, rendering the theorem impossible to understand for students. These modern presentations derive from a reinterpretation of the Leontief model as a ‘timeless’ economy in Walrasian equilibrium, capable of positive production in spite of zero initial endowments of all inputs except labour: an unacceptable interpretation, made possible by a use of netputs, to describe the economy’s production possibilities, that is illegitimate in this case even from a strictly neoclassical perspective. The notion of a ‘timeless’ economy disappears from the textbook presentations of the Leontief model and of the nonsubstitution theorem, but the result is that the nature of the model and of the prices to which the theorem refers is not clarified, inevitably leaving students utterly confused. This note remembers the true nonsubstitution theorem, points out that it had been correctly enunciated by Samuelson (1961), and suggests that the current inability to present it in a correct way is due to the absence of the notion of long-period prices from the theoretical horizon of contemporary neoclassical value theory. The paper opens with clarifications on the meaning of the Leontief model which prepare the ground for the discussion of the problem with netputs.Read full paper here.