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The article examines the uniqueness of the internal rate of return. In the September 1969 issue of the "Economic Journal," Professors J.K. Arrow and D. Levhari demonstrated in their article "Uniqueness of the Internal Rate of Return with Variable Life Investment" that for any project whose life can be costlessly truncated to maximize its present value (PV) at each discount rate there will be only one rate at which this maximized present value is zero, i.e., the internal rate of return is unique. More generally they prove that the maximized PV is a monotonic decreasing function of the discount rate. The authors result show that, whatever the previous pattern of the rates a change in expectations which causes them all to be revised in the same "direction " will alter the present values of all costlessly terminable projects including the residues of extant investment in a common direction.

This article presents the author's reply to the comments on his paper "Monopolies Commission and Rate of Return on Capital." The author says that the main thrust of the criticism is dependent upon a restatement of his own hypothesis which is so distorted as to invalidate the exercise almost in its entirety. The comment rightly centered attention upon the most significant section of the paper, namely that entitled "Does the Choice of Guidepost Make a Difference?," in which the author sets about testing the hypothesis at issue in this discussion. The paper was concerned with the use of rate of return on capital as a regulatory mechanism by the British Monopolies Commission in its investigation of positions of single-firm market power as defined by the British antitrust laws. The hypothesis attributed to the author in the criticism bears no relationship whatsoever to the null hypothesis set out in the paper. The commentator favors a more detailed cost-benefit analysis in antitrust investigations than that currently used by the Monopolies Commission. In this analysis, rate of return on capital criteria would play an important role. No doubt the results of the author's investigation, casting doubt on the general unambiguity of the criteria, were somewhat unpalatable. He has argued elsewhere, however, against the cost-benefit approach to antitrust on more general grounds.

ECONOMISTS are acquainted with the objections to and limitations of using internal rates of return as a selection criterion among investment projects. In a discussion of the uniqueness of the internal rate of return, a few economist (Soper [3], Karmel[1], McManus[2] and others) have proposed and proved the theorem that if it is possible and feasible to truncate investment projects at any moment of time, and if the investor chooses a truncation period which maximises the internal rate of return, then the truncated investment project possesses a unique internal rate of return. However, choosing a truncation period so as to maximise the internal rate of return is not using the proper criterion for the selection of a truncation period. [ABSTRACT FROM AUTHOR]

The implications of the phenomenon of reswitching of techniques for marginal capital theory appear to be the more serious the deeper one goes in uncovering them and bringing them out into the open. The initial result of no general relationship between rate of profit and value of capital goods per man came to contradict the marginal-theory interpretation of the rate of profit as a selector of capital intensity, i.e., as an "index of scarcity" of the "quantity of capital." Further investigation now reveals that another traditional notion, that of "rate of return," is devoid of any autonomous theoretical content. Of course, one can always attribute to the words "rate of return" a meaning. For example, one can choose to use the words "rate of return" as another term for "rate of profit." This has in fact been done in two different ways: by calling "rate of return" that rate of profit at which two techniques are equally profitable, and by following the enterpreneurs' practice of calling "rate of return" that rate of profit which is associated with a particular investment project, when all prices are taken as given. But if one does so, i.e., if one uses the words "rate of return" as a synonym for "rate of profit," one cannot obviously pretend to use the notion of rate of return to explain the rate of profit. The idea which had been basic to marginal capital theory was another and a deeper one. The idea was that, even at the simplest stage of a stationary economic system, there exists something--to be called the "rate of return "--which can be defined autonomously and independently of thc rate of profit; something which is higher or lower according to whether thc existing "quantity of capital" is lower or higher, and as such represents a general technical property of the existing "quantity of capital." Such a thing would justify and explain the rate of profit. It is this idea which has been shown to be an illusion; for, in general, such a thing does not exist. LU... [ABSTRACT FROM AUTHOR]

The article focuses on the concept of continuity and the rate of return. An economist describes the rate of return with the rate of profit at a switch point. With the same wage rate, net profit per man is higher, therefore the cost of capital equalizes the rate of profit. A more schematic treatment of continuity would allow to say that yet small, the difference between two adjacent wage-rates, there is always one method that is eligible to both, with the suitable pair of rates of profit and patterns of prices. A variation in wage rate brings a different set of prices into play. The difference between these two concepts arises from the difference in the arguments in which they occur. The one-commodity economy was devised to allow the neo-classical allegory in which the rate of profit equates to the marginal product of capital.

The article discusses the criterion of maximum profits in the theory of investment. To this end, the author notes that in the literature on capital and interest there is no agreement on the fundamental issue as to what an entrepreneur should maximize. The three logical possibilities, which exist, are as follows. First, it can be assumed that the entrepreneur maximizes the internal rate of return. An equation can be set up between these two streams discounted back to the present with a discount rate, which is the unknown in the equation, and then solve the equation for the discount rate. This discount rate is the internal rate of return. Secondly, it can be assumed that the entrepreneur finds the present value of the future gross revenue stream and the present value of the future cost stream by capitalizing at the interest rate ruling in the market, and maximizes the difference between these present values. Finally, it can be assumed that he maximizes the present value of the future income stream divided by the present value of the future cost stream.

This study examines empirically the determinants of the rate of return on common stocks for ten cross-sections of 86 common stocks for the years 1958-1967 in a multiple regression analysis. Theoretically, the common stock rate of return under investigation, y, is defined as the ratio of the expected income associated with a particular equity to the market value of that equity. Empirically, this rate is represented by the logarithm of the ratio of a weighted average of past annual share earnings to current market value of the share, r = log y. The empirical rate of return, r, is postulated to be a linear function of two groups of variables: a corrective group and an explanatory one. (1) The corrective variables are employed to attenuate errors involved in the measurement of the empirical representation of expected income in the numerator of the rate of return. (2) The explanatory variables are presumed to represent factors which exert a real influence on the relative desirability of stocks. They are employed to provide an explanation of the rate of return based on preferences and aversions of people in the market to various attributes of common stocks. [ABSTRACT FROM AUTHOR]

This article discusses the use of social rate of discount to calculate present values or benefit-cost ratios in the U.S. The short-run effect of reduced government spending or increased taxes is surely to dampen business expectations. The effect of monetary constraint is to reduce the real rate of interest. The interest rate at which the benefit-cost ratio equals one is called the internal rate of return. Benefit-cost ratios are sometimes defined as net benefits per dollar of initial investment.

This article discusses the regulation of natural monopolies by making a comparison between control of investment versus control of return. To elaborate its point, the article concentrates on the regulatory body, Interstate Commerce Commission. It states that the regulatory body should succeed in fixing the charges of a monopoly in such a way as not only to eliminate discrimination but also to make the property in the monopolized enterprise realize on its actual or reproduction cost' the same rate of return as is realized over the general field of competitive investment, the regulation of the monopoly would none the less be, from an economic point of view, radically unsound. In other words, the undesirable effect of monopoly upon distribution can be overcome by regulating investment in such a way as to bring the productive aspect of the monopoly into conformity with the conditions of free competition. It also throws light on the concept of competitive production and competitive distribution, which in sense is related to monopolistic production.

The article analyzes the durability vs. construction period aspect of project selection. The author argues that the standard recommendation on the calculation of present-value maximization or internal rate of return in project selection is seldom fulfilled in actual planning situation. A particular situation (suppose alternative projects producing roughly the same commodity are available and projects with longer durability or technical life-time also take a longer period to construct) so as to depict a clear picture on the topic is cited. The problem that can be derived from this particular situation is to ascertain the economic advantages of longer durability of fixed capital assets against disadvantages of longer construction period in the installation of such assets.

The article focuses on the degree of monopoly in the Kaldor-Mirrlees growth model given by Kahn Kaldor and James A. Mirrlees. The Kaldor-Mirrlees model of economic growth seems to contain an inconsistency between the assumption of imperfect competition and the relation it postulates between the wage rate and the marginal productivity of labour. Kaldor-Mirrlees state explicitly that "It may be assumed that each entrepreneur operating in imperfectly competitive markets, aims at the maximum attainable growth of his own business (subject as we shall explain below, to the maintenance of a satisfactory rate of return on the capital employed) and for that reason prefers to maintain an appreciable amount of excess capacity so as to be able to exploit any chance increase in his selling power either by increasing his share of the market or by invading other markets. However, when gross investment per period is in excess of the number of workers becoming available to "man" new equipment, the degree of excess capacity must steadily rise." Excess capacity, selling power, share of the market, inelastic factor supply are familiar connotations of imperfect competition. Furthermore, one of the boundary conditions of the model states that ". . . the share of profits resulting from the model must be higher than a certain minimum (the so-called "degree of monopoly" or "degree of imperfect competition")."

This article comments on a study which offered a set of risk-adjusted average rates of return for several industries based on a sample of firms drawn from Fortune magazine's list of the 500 largest industrial firms as of August 1971. Differences in historic rates of return among firms or among industries can be explained by many economic factors. One line of research pursues the influence of elements of market structure, technological change and innovation, rate of growth of the market, and the like. Another investigates the effects of adjusting observed profit rates for factors that cause them to diverge by varying amounts from a hypothetical common opportunity cost of capital--factors such as differing exposure to risk or unequal quantities of intangible capital resulting from past outlays on advertising and sales promotion. I. N. Fisher and G. R. Hall, pursuing the latter line, have recently offered a set of "risk-adjusted" average rates of return for 11 industries. For each industry they calculate an average risk premium that is appropriate for each of two types of risk: intertemporal risk, reflected in the dispersions of firms' profits for a series of years (with trend removed) about their mean values; and intra-industry risk, reflected in the dispersion of firms' average profits about the mean for their industry.

This article relates the authors' response to criticisms regarding their study on risk-adjusted rates of return and risk premiums.

This article discusses the relationship between private and social rates of discount and the concern with a special instance of a very general problem, being an extension of the two-person non-zero-sum game known as the prisoners dilemma. The application of the general framework to the question of optimum savings and the social rate of discount will be examined, particularly in the light of some controversies. Moreover, the argument for the inoptimality of market savings is based on the assumption of a situation of the type of the isolation paradox.

The following discussion tries to explore further and extend Arrow's analysis of learning by doing; in particular, it tries to clarify the nature of the divergence between social and private returns and to determine explicitly the "golden rule" path of maximum maintainable consumption. [ABSTRACT FROM AUTHOR]

The article discusses the effects of the method of privilege subscription for obtaining capital commonly used by U.S. railroad companies. Acquiring new capital is easy through the use of the following methods including appropriating the needed funds from current earnings, creating a floating debt, sale of new stock and increasing the funded debt. Each of these is especially adapted to certain specific purposes, while for other purposes several alternative courses are open. For that class of expenditures known as betterments that are considered common source of funds. There are also courses of action available for shareholder to dispose his privilege and methods for calculating extent of privileged benefits of stockholders.

The article examines the marginal social time preference rate versus social opportunity cost in investment criteria. In their impressive survey in the journal "Economic Journal" of December 1965, two researchers summarise some recent writings on investment criteria with the statement that no single rate of interest can serve both to compare benefits and costs of different dates and to measure the opportunity costs of private investment displaced by public investment. This is so, the argument runs, because the marginal social rate of time preference is unlikely to coincide with the marginal social rate of return from investment. The implication is that investments cannot be ranked in an order of preference using a rate of interest equal to the opportunity cost of capital. This conclusion does not seem to hold in a fully employed economy in which the estimated risk-adjusted marginal rate of return from investment differs from the estimated social time preference rate. In such a situation there must be presumed to be at any time a number of unexploited investment opportunities offering risk-adjusted rates of return closely similar to the marginal productivity of capital.

The article provides various clarifications on the previous study about investment criteria and capital intensity. The author intended to clarify the issues on the right method of allocating investment which is to choose the investment pattern that would be selected by the market mechanism, the model presented in the previous study that divided wage and profits, establishing reinvestment as an independent criterion wherein assumption that all profits are reinvested must be discarded, the reliability of the reinvestment criterion, the emphasis on reinvestment which yielded an argument for investment in more capital-intensive industries than would be indicated by a pure market calculation, the implications of the thesis for another investment criterion and social marginal productivity.

The National Product of a growing economy can be looked upon as the weighted sum of consumption and the rates of growth of the various capital stocks which the economy uses and produces. Likewise, its National Income (= product) is the weighted sum of the real wage and the rates of return on the same capital goods. The respective weights in both expressions are the same, namely the set of imputed (or market) values of the various capital stocks. This looks an almost trivial accounting statement but is an example of a duality relation which is nonetheless of great help in the full understanding of the structure, valuation and dynamic behaviour of general capital and growth models. In a very specialized context both the von-Neumann model and the Golden Rule have focussed attention on a duality relationship between the rate of growth and the rate of return, consumption and the real wage. What has never quite been realized, however, is the fact that such set of dual variables together with another set of duals, namely the quantity and price of each capital stock, combine in an intrinsic and much more general set of dual production and valuation relations. This set of relations, valid for a growth model with any constant returns technology and any number of capital goods, by far transcends the narrow confines of golden rule states, von-Neumann models or even balanced growth. As it turns out this can be best realized if we consider any such technology as built up from basic building blocks, namely discrete activity techniques. [ABSTRACT FROM AUTHOR]

This article describes a model of capital cost of occupational training. Thus, in an extension of standard optimal accumulation models, we do find a criterion which tells us when increasing the employment rate would lead to lower consumption per capita and, in this model, a lower rate of growth. Qualifying people to enter employment costs resources and probably more resources the higher is the present employment rate. Since, however, the cost is in the nature of a capital cost, and the benefits more like flows, care has to be taken to ensure that the asset evaluations are correctly made.

The article presents a critique on the concept of economic development by John Rae, a Scotch-Canadian brilliant scientist in the nineteenth century. According to the author, Rae's argued the former concept of economic development which stated that it enables man to overcome the tendency of returns to capital to fall as the stock of capital increases. To contradict, Rae stated that economic development depends upon capital accumulation and upon the extent to which man augments his store of technological knowledge and transform this knowledge into improvements and inventions. Thus, depends upon the degree to which man gives expression to the inventive principle and to the accumulative principle that prompts man to avoid waste, save lower rates of interest and form capital.