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The paper presents a review article on capital theory and rate of return by researcher Robert Solow. The three lectures in the volume under review consolidate and extend Robert Solow's previous examination of the relationship between capital and economic growth. What is crucial is to know the social rate of return on investment. The first lecture begins by asking why capital theory is in a so unsettled state. One cause is that capital has many forms and several characteristics and different writers stress different aspects. There is no reason to suppose a single object called capital can be defined to sum up in one number all facts about time lags, gestation periods, and all the different kinds of capital goods. Solow's prescription for progress is to narrow issues by concentrating on causes and consequences of saving and investment. Because consequences are so important, the central concept in capital theory should be the rate of return on investment, which yields an unambiguous answer to almost any important planning question about the saving-investment process. Solow states that rates of return on investment can be calculated without measuring the capital stock.

This study proposes to examine empirically the determinants of the differences in rates of return on corporate equities. The rate of return employed is derived for each equity by dividing the weighted average of annual earnings of nine consecutive years by the market value of the corresponding equity in the ninth year, and will be referred to as the measured rate of return. This empirically derived rate is designed to represent the theoretical ratio of expected income to the market value of the equity, where expected income is the mathematical expectation of a statistical distribution whose values are earnings expected in future years. The method of investigation consists of tracing the relationship between each of the independent variables and the rate of return on equity while holding other independent variables constant in a multiple regression analysis. An explanation for a negative correlation between the pay-out ratio and the measured rate of return may be provided by examination of the effect of errors in the measurement of earnings. If measured earnings are an overestimate and dividends are a stable proportion of expected income, the rate of return is "too high" and the pay-out ratio "too low." The function of the growth variables was visualized as the correction of the measure of expected income in the numerator of the measured rate of return.

This article presents the result of examination on the cost and returns to graduate education in the United States. The finding of the study on a private and social rate of return on investments in undergraduate education needs to reallocate the educational expenditures by government from graduate education to undergraduate education. Furthermore, the researcher made measurements on the returns stream and cost and find out that the most of the resourced to be removed from investment process in graduate education should come from the humanities, education and certain of the social sciences. Moreover, pre-selection and immediate quality control measures should be given much attention to reduce the dropout rate in graduate school.

This article focuses on Alvin K. Klevorick's analysis of the graduated fair return proposal. The essence of his proposal was that regulation could be improved if the fair rate of return were converted from a constant into a decreasing function of capital. In attempting to prove that this modification of regulatory procedures would decrease the input inefficiency noted by Harvey Averch and Leland L. Johnson, namely, the divergence between the marginal rate of substitution of capital for labor and the factor-cost ratio, the comparison drawn between the constant and graduated fair return methods of regulation was invalid.

This article focuses on the behavior of a firm under regulatory constraint. It is assumed that the regulated rate of return exceeds the market rate of interest but is below the unregulated rate of return. If the ownership of the public utility were sold in a highly competitive securities market, the purchaser could not expect to earn the monopoly profits. Suppose that the sellers exchanged their ownership rights for bonds, which become the liabilities of the new owners. No change would occur in the scale of plant or rate of output, since quasi rents were already maximal. After the sale, the new owners of the firm earn no monopoly profits.

The article presents information on the rate of returns to the capital investments made in business enterprises. Recent efforts of the Interstate Commerce Commission and of the various state public service commissions to regulate rates have made this a vital question. Such a rate of return must be allowed as will attract capital in sufficient volume to develop and maintain the particular industry. Self interest dictates that the public should not restrict capital already invested to a rate of return too small to attract new capital. If rate regulation is applied consistently, experience will indicate with some measure of accuracy the rates that are adequate to attract capital to railroad and other public service securities. Many investors are inclined, to allow the regulating bodies to work out their experiments upon the other fellow while they place their money either where it will be as nearly safe as may be, as in a savings bank or in high grade bonds, or invest it where it will yield a larger return than it is likely to yield if invested in enterprises subject to regulation.

This article studies the returns to investment in the graduate education of doctor of philosophy degree (Ph.D.) academicians in the U.S. The alternative income of Ph.D. faculty is an estimate of the income of bachelor's degree holders taken from an extensive survey of salaries in occupations open to the degree holders. The economic condition of all faculty employed by institutions of higher education in the country, is discussed. Lastly, this study investigates the effects of graduate school dropouts on their computed social rates of return.

The article focuses on the attempt by E. Lerner and Willard T. Carleton to integrate the existing hypotheses of capital budgeting and stock valuation into one comprehensive theory. Lerner and Carleton developed a two equation model. The first is a valuation function and the second is an investment opportunities function. This model determines the optimal rate for two decision variables--the rate of return on assets and the earning retention rate which serves as a surrogate for the firm's investment budget. The optimal rates are defined as those which maximize the firm's market value. The basic error of the proposed model is that it is constructed to determine the optimal average rate of return rather than the marginal rate. Since the average rate of return does not reflect the specific form of the investment-opportunities function, it is not uniquely related to the marginal rate. Thus the average rate is ambiguous and is, therefore, an inappropriate variable on which to base capital investment decisions. Moreover, such a model is liable to lead to misinterpretations. However, the analysis of Lerner and Carleton's model proves that the implied marginal rate is lower than the cost of capital.

This paper, gives a brief summary of the major aggregative implications of the Modigliani-Brumberg life cycle hypothesis of saving. It also presents the results of a number of empirical tests for the U.S., which appear to support the hypothesis. The Modigliani-Brumberg model starts from the utility function of the individual consumer: his utility is assumed to be a function of his own aggregate consumption in current and future periods. The individual is then assumed to maximize his utility subject to the resources available to him, his resources being the sum of current and discounted future earnings over his lifetime and his current net worth. As a result of this maximization the current consumption of the individual can be expressed as a function of his resources and the rate of return on capital with parameters depending on age. The individual consumption functions thus obtained are then aggregated to arrive at the aggregate consumption function for the community. The most crucial assumptions in deriving the aggregate consumption function must be those relating to the characteristics of the individual's utility function, and the age structure of the population.

The purpose of this article is to examine the principal reasons for employing a definition of endowment income different from that implied by the conventional spending rule, to discuss the implementation of the new definition which was designed at Princeton University and contrast it with some alternatives, and to indicate the new spending rule's operation with the aid of some sampling experiment. The definition of endowment income should be consistent with some criteria. The definition should seek to make investment management independent of the spending decisions of the university. It should imply a spending rule that protects the real value of the corpus of the endowment fund and it should seek to make spendable endowment income for the university reasonably stable from year to year. Authors will show that the conventional definition fails to meet the first two requirements. The objective of investment management should be the maximization of total rate of return.

This article examines the relation between return and risk for securities and portfolios. The selection of an optimal portfolio may therefore be reduced to the allocation of wealth between an efficient risky asset and a risk free asset. The portfolio an investor considers optimal is considered a function of his risk aversion. If the amount invested in the risky asset increases (decreases) with wealth, the investor has decreasing (increasing) absolute risk aversion. If the fraction of wealth invested in the risky asset increases (decreases) with wealth, the investor has decreasing (increasing) relative risk aversion.

Tax incentives for investment have been in vogue in the U.S. since 1954 when firms were granted the opportunity to accelerate depreciation for tax purposes through use of the declining balance and sum-of-years-digits depreciation methods. More recently, firms have benefited from the 1 percent investment tax credit incorporated in the Revenue Act of 1962, the reductions in equipment lives for tax purposes permitted under the Treasury Department's Revenue Procedure 62-21, released in July, 1962, and the tax rate reductions provided by the Revenue Act of 1964. The purposes of this article is to determine the magnitude of the tax savings that manufacturing firms have enjoyed as a result of these policies and to determine the impact of tax incentives on plant and equipment expenditures in manufacturing. Tax incentives are thought to stimulate capital expenditures in two ways. First, by reducing the amount of taxes that must be paid on income from assets, or by changing the timing of the tax payments in favor of the future, tax incentives increase the after-tax rate of return on capital. Second, by reducing tax liabilities, tax incentives increase a firm's cash flow which is one measure of internal funds available for investment and is thought by some to be an important determinant of investment expenditures.

An examination of the regulated industries reveals a broad spectrum of rationales for government's deviation from the path of a laissez faire policy. One justification offered is that the industry is a "natural monopoly." A second rationale is the need to protect consumers in the sellers' markets of the services of public utilities. While these and other justifications for interference with the natural course of the market's operation are given, there still exists no precise line separating regulated from unregulated industries. Neither economists nor courts have drawn a strict line of demarcation. Despite this inability or unwillingness to delimit the two classes, the general goal of regulation is to improve the performance of the economy, in welfare terms, as compared with what it would be if the areas now regulated were uncontrolled. It would seem, then, that public regulation should take a form that would enable the economy to come as close as possible to the achievement of a welfare optimum. Economists Harvey Averch and Leland L. Johnson have demonstrated, however, that the regulatory control most commonly used today, the "fair rate of return" criterion, induces a serious deviation from the optimal allocation of inputs. A welfare optimum would require that the marginal rate of substitution between any two factors equal the inverse of the ratio of their marginal costs.

This article estimates the distributional impact of special income tax provisions relating to housing in the U.S. The article also discusses possible secondary effects of such tax factors resulting from adjustments in capital returns, investment shifts, and housing stock changes. Furthermore, the article looks into the adjusted gross income classes rather than broad income classes. The personal income tax is significant for it motivates people to hold larger stocks of all consumer goods including housing. On the other hand, market effects of homeowner tax subsidies affect homeowners to the extent that favorable tax treatment of homeowners causes demand for housing units. Moreover, income tax can give rental property benefits to a certain extent. Finally, at given tax rates, the tax scheme would cause the personal income tax to generate substantially larger revenues which could support direct expenditures for housing or reduction in tax and interest rates.

This article comments on E. E. Zajac's study on the relationship between the rate of return to stockholders and the returns earned from equity capital. The article argues that Zajac has made an error in claiming that maximizing the reward owners leads to an indeterminate solution. The article presents the equation identical to equation derived by Zajac for profit maximization because the return to stockholders must be computed with respect to the market value of the equity rather than the book value and must include any capital gains which may accrue. The article implies that Zajac conclusion on the firm is indifferent among all input combinations.

The article discusses about the second crisis of economic theory-is related to the first crisis-the great slump of the thirties. The main orthodox reaction to the slump was the argument that wages were too high. The strangest of all is to set up a model o

The article examines the effects of the general sales tax on the distribution of the economy's total capital between risky and sure industries. This article represents a modest attempt to construct a new model capable of analyzing the allocation processes of real capital among industrial sectors with different degrees of risk, assuming that the investors evaluate the investment returns in terms of the mean and standard deviations. Once the production functions, consumers' taste, the amount of capital and labor are given, allocation of capital between the risky and the sure industries is determined by the shapes of the indifference curves of all investors. At the post-tax equilibrium, capital investment in the sure industry, must be less than the amount of capital investment in that industry at the pre-tax equilibrium. The study suggests that the general sales tax causes a shift of real capital out of sure industries into risky industries. It is, therefore, concluded that at the post-tax equilibrium, capital investment in the sure industry must be less than the amount of capital investment in that industry at the pre-tax equilibrium.

The concept of neutrality in technological change has been found most useful in models of economic growth. Economist R.F. Harrod says that technological progress is neutral if it leaves the capital-output ratio unaltered at a given rate of profit. In principle this differs from the concept of neutrality given by economist J.R. Hicks, in which the capital-labor ratio remains unaltered at a constant ratio of factor prices. Since each classification has been widely used, the connection between the two has been analyzed. The purpose of this article is to show how relationships involving Harrod neutrality can be illustrated and proved by use of the isoquant diagram. Although such a diagram offers a natural means of illustrating the Hicks' classification of technological change, it does not seem to have been used to discuss the Harrod definition. It turns out to be simple to employ the isoquant map to illustrate Harrod neutrality in single and multi-sector models and thus also to illustrate certain key relationships in a neoclassical model in which growth proceeds at a constant rate of profit.

This article focuses on the possibility of the rate of interest falling to zero short of free services. Cycles can be explained along lines such as those of Keynes and Schumpeter, by tendencies for innovations and hence investment to be bunched in near equilibrium situations, by increasing investment risk as a boom progresses by contagions of optimism and pessimism, and by principles, more or less well accepted from Keynesian theory, such as the multiplier and acceleration principles, inventory cycles, movements toward increased saving as a boom reaches its peak and so forth. These now familiar principles can be added to undoubted conditions of diminishing returns to investment caused by temporary fixities of factors of production in the short run, when possibilities of technical change are limited. As for the secular long run, it may well be that virtual diminishing returns to investment holds despite possibilities of technical change because of, laggard movements of consumption in an increasingly wealthy society, causing effective demand to be insufficient to make investment at rising levels profitable, combined with increasingly monopolistic and oligopolistic tendencies in maturing capitalism which may inhibit price adjustments, resource shifts, innovations and hence capital investment.

The purpose of this article is to show that Alvin K. Klevorick's analysis of the permitted rate of return as a decreasing function of capital contains a flaw which makes the graduated fair return proposal inoperative. Harvey Averch and Leland L. Johnson assert that rate-of-return regulation stimulates excessive use of capital so that the regulated firm produces inefficiently. To keep capital expansion down, Klevorick has suggested making the permitted rate of return a decreasing function of capital. This way, the firm cannot increase its use of capital without bringing down the regulatory ceiling and thus punishing itself.

Investment must be allocated to permit the simultaneous absorption by the industrial sector of a larger agricultural surplus and a greater proportion of the labor force. Since the allocation of investment between the two sectors is crucial to the growth and labor reallocation process, more should be said about the capital-allocation mechanism than the authors have already done. The labor-surplus assumption implies that the marginal social product of capital exceeds its marginal private product. Moreover, an exogenous rise in the labor force will drive down the private return to capital while its social product rises. Conversely, an increase in capital employed with a given labor force will raise its private return although its marginal social product fails. It would be hazardous to ascribe economic meaning to these results with out detailed knowledge of the micro decision-making units and their institutional environment. The crucial point is whether or not investment decisions are made with respect to the marginal social product of capital or its marginal private product.

This article presents the author's reply to a critique of his study on the relationship between the rate of return to stockholders and the returns earned from equity capital. The author stated that Robert Stonebraker argues that a model of the regulated firm should have management trying to maximize stockholders' total return. According to the author if one accepts Stonebraker's model it is clearly untenable to make assumption that the firm is guaranteed with earnings at an allowed rate. The author implies that without empirical studies, a profit maximand, an E/S maximand and rate of return maximand does not accurately describe the regulated firm.

This article suggests that the U.S. federal government should attach some urgency to the task of constructing government investment and capital accounts. The demand by economists for government capital data has not been very high in the past, because the absence of meaningful government output figures has precluded productivity studies of the government sector. But the article suggests that many government assets are important inputs in the private sector. Much of the apparent decline in the U.S. private capital-output ratio may have been due to the gradual replacement of privately owned railroad assets by government-owned highways and airports. The existence of a substantial stock of government financed assets used by private firms, particularly in manufacturing, suggests a number of interesting topics for further research. For instance, the rate of return on corporate assets in manufacturing during and immediately after World War II was considerably higher than in the 1950s and 1960s. While this was partly due to high utilization rates and the inflation of sales prices relative to asset values, a further factor may have been the substantial profits earned with government financed assets which did not enter into the capital base on which the rate of return was calculated.

The article presents an accounting analysis of the valuation of business capital. An important correlative effect of these characteristics is a tendency for the reported rate of return to be exaggerated in a period of rising prices and to be understated in a period of falling prices. A business concern is an entity formed for the purpose of obtaining revenues for its owners. This purpose is characteristically fulfilled through investment in types of assets which can be transformed into receipts from customers. Under the influence of conservatism, a restricted definition of cost has been employed by accountants. Cost is ordinarily limited to cash outlays made or promised to acquire the item in question, certain general effects of conservatism may now be indicated, costs assigned by accountants to inventories and fixed assets are likely to be understated because of the restricted definition of cost employed, conservatism also dictates that certain costs, even though explicit and verifiable, be denied status as investment in assets and tending to understate recorded capital, flows from a failure to record future cash receipts, except as they assume the form of enforceable contracts with outsiders.

Anti-deflationary monetary policy, where it can be made effective, results in a large private investment and a low real rate of return, compared to a smaller volume of private investment and a higher real rate of return when deflation is checked by budgetary policy. If the antideflationary budgetary policy is carried out by increased expenditure there is more real government expenditure, either on current account or on investment account, while if it is carried out by decreased taxation the chief effect is increased Individual expenditure. Ideally, one would like to determine the volume of government expenditure, both on current account and on capital account, in accordance with an appraisal of the productivity of the public expenditures compared with that of expenditures in the private sector. One would also like to determine the degree to which government outlays are financed by taxes by a deliberate policy decision as to how much of a total capital heritage should be accumulated for future generations in the form of public assets in excess of the public debt. With budgetary policy thus determined, it would fall to monetary policy to handle the stabilization of the economy. Unfortunately, it appears that monetary controls alone will be insufficient unless our economy is subjected to some drastic overhauling in the direction of establishing a long-term rising trend of prices and high money interest rates as a permanent norm.

The article presents a discussion on economic aspects of war. According to economist Earl L. Hamilton modern wars tend to raise the marginal productivity of capital and the rate of return upon investments after the cessation of hostilities. Since a cumulative need for most consumers goods arises, a restoration of consumer purchasing power and of effective demand are identical phenomena. According to G. Heberton Evans Jr., the general subject-which for present purposes is cast essentially in monetary terms seems to be divisible into five broad queries on investment decisions. According to him the size and location of potential investable funds depend upon physical factors such as the richness of natural resources and the state of technology, upon business factors such as the efficiency with which the factors of production are united and applied to the resources, the individuals who control business enterprises, the banking system, and the distribution of earned income and upon social factors such as the distribution of property government taxation and expenditure, and the extent to which institutions are available for collecting or uniting the savings of the community, particularly the savings of the financially obscure.

The article presents information on the trends in the capital investment in the manufacturing industry. Manufacturing companies are planning to cut their capital expenditures substantially in 1958. The cutback in capital expenditures is also related to the widely held belief that excess capacity will lead to a squeeze on profits. The problem of economic growth and stability revolves around maintaining a rate of investment that will equate the increased production resulting from the new investment to the increased incomes generated by it. If investment exceeds the "equilibrium rate," excess capacity will develop and vice versa. At the same time, there is implicit an "equilibrium rate of profits" on invested capital which should call forth an equilibrium rate of investment. Capacity represents the output that can be produced by the existing stock of capital operating under normal working conditions. Excess capacity should be measured, not in relation to actual output, but to the "Ratchet level," which is generally the highest level of output achieved in the recent past. The Ratchet concept is also important in evaluating the level of earnings at any given time. A certain amount of excess capacity seems to be a long-standing characteristic of the U.S. economy. Businessmen find it desirable to have enough elbowroom to handle orders efficiently and promptly in periods of high level demand. In this sense the U.S. economy may be different from other industrialized nations.

This article investigates the capital deepening response in an economy with heterogeneous capital goods. The authors of this article see that within each sector their definition of capital deepening response may or may not be satisfied. However, the authors stated that even if each sector is regular, this does not ensure the model will be regular in the aggregate that will depend upon the relative capital intensities of the different industries and how labor shifts between them in response to interest rate changes.

Responds to comments made by George Jaszi on the author's article concerning the misappropriation of the $45 billion private investment by the Office of Business Economics (OBE) in the U.S. The author disputes the arguments made by Jaszi regarding: (1) gross investment in government surplus capital; (2) gross stocks of government surplus capital; (3) capital input in production function analysis; and (4) "where-owned" vs. "where-used" criteria. Furthermore, the author asserts the Jaszi made serious flaws in the statistical treatments he employed. Finally, it is notable that no one at OBE know about the existence of government-owned, privately-operated capital.

A new approach to the public debt arose from the budgetary implications of the great depression and the Keynesian revolution in economic thought. Central to this approach, which remains the current orthodoxy, is a fundamental conceptual distinction between internal and external debt. The internal debt is not burdenless because of the transfer difficulties, but aside from these it places no aggregate pressure on the economy. The fundamental error in accepted debt theory is methodological. It consists in a failure to define properly the alternatives subjected to comparison. A typical way of stating these alternatives is the following: if a given state or community could be confronted with two alternative situations identical in all respects save that in one an internal debt service charge is present while in the other such a charge is absent, the first is obviously to be preferred. The difference in the desirability of the two situations is widened if the debt is held externally rather than internally. It is equally clear that if a debtor community were to be faced with one of two alternative situations identical in all respects save that in one the public debt instruments are externally owned while in the other these instruments are domestically owned, the second of these alternatives is deemed preferable. On this simple logic the external debt would seem more burdensome on the community as a whole than the internal debt of like amount.

The article discusses various postwar surveys. From the late 1930's economists have been growing increasingly skeptical of the value of monetary policy for moderating swings of the business cycle or for controlling inflation. The main source of this skepticism lies, with regard to conditions other than deep depression, in the evidence provided by a number of empirical investigations showing that the interest elasticity of demand for investment is extremely small. The hypothesis of low interest elasticity of investment demand may in fact be correct, but a large part of the empirical foundation upon which it has been constructed seems unsound. In view of all their defects, no definite conclusion can be drawn from surveys of business attitudes toward capital costs. Surveys do indicate that investment is to some degree less interest-elastic than thought by the proponents of interest-rate policy. But they do not establish that the interest elasticity falls seriously below what its proponents claimed. Further investigation, taking account of the considerations outlined above, must be carried out before any reliable conclusions can be reached.

This article presents the diagrammatic representation of price discrimination under conditions of natural monopoly. Writers in the economics of transportation and public utilities have usually upheld the basic idea of discriminating prices implicit in the rate structures of those industries. The justification of the discrimination has generally been based upon the propositions that the firms supplying the services are natural monopolies in the sense that under present conditions, at least, they make more efficient use of resources than can firms operating smaller plants and the products sold on the various markets are joint, if not identical, products. So the increased production to serve the needs of one of its groups of customers has the effect of lowering the average cost of serving all of the customers of the plant, in the long run. Thus the use of monopoly powers to invoke price discrimination is justified on the ground that it so increases production as to result in lower prices for all classes of users and higher profits for the industry. Some writers go on to justify particular rates which are substantially below average cost on the basis of these facts. All of these conditions and conclusions are capable of diagrammatic representation which will make them more concrete and evident.

This article comments on professor Friedrich August von Hayek's article "The Pure Theory of Capital," which was published in 1941. Hayek defined capital as a congeries of heterogeneous resources, the only way to calculate an average is to weight these resources according to their values and their relative values. Professor Hayek assumed that all factors of production are fully employed in an absolute sense. In the equilibrium-over-time situation, however, full employment means that at the ruling prices, no more resources are obtainable than are actually employed. That is, equilibrium can occur at any level of employment in the ordinary sense of the term, and although general increasing supply prices are stipulated. The professor's analysis of stationary equilibrium involves the determination of the optimum time-distribution of a congeries of resources of given equilibrium value both in a simple economy ruled by a communist dictator and in a competitive price economy.

The article presents information on various books on capital management. Some of these books include "The Possibilities and the Dangers Inherent in Mergers, Consolidations and Acquisitions," by A. Andersen, "Massachusetts Business Corporations," by F.A. North, "Cases on the Federal Anti-Trust Laws of the United States," by J. A. McLaughlin and "Tabakmonopol und freie Tabakwirtschaft: ein Vergleich der Osterreichischen Tabakregie und der deutsehen Tabakwirtschaft," by H. Gross.

The article presents several abstracts related to studies on price and allocation theory. One of the studies suggests that mathematical programming may be used to estimate a traditional microtheory construct, the short-run, single-output deterministic production function for a firm. The frontier or industry production function is obtained from cross-section data by restricting the computed residuals for a linearized production function to be of one sign only. The opportunity cost criterion for the appropriate rate of discount on government investments is utilized to examine the implications of risk, taxes, etc. for the discount rate. While the opportunity cost of resources drawn from consumers may be, approximately, the corresponding rate on government bonds, that of resources drawn from the corporate sector is generally considerably higher because the corporation must at the margin earn enough to cover the (marginal) corporate income tax. A decision-maker who has to choose between risky prospects, can always select the prospect which offers the greatest expected gain. In practice, however, it seems as if most decision-makers find it necessary to make some corrections for risk.