THE BLACK BOX RATE OF RETURN.

SOLOW and NUTI have argued that a neo-Classical general equilibrium model, based on intertemporal substitution in production and consumption, is free of the 'Cambridge' difficulties that arise from ambiguity in the concept of capital. In particular both hold that the rate of profit at which two methods of production are equi-profitable always equals the rate of discount that makes the gain in future consumption from switching from one method to another equal to the consumption foregone in order to make the switch. But 'intertemporal substitution' is not examined in detail; it is left in the Black Box. When the structure of production is brought into the open, two quite different concepts of the 'rate of return' emerge, neither of which, in general, equals the switching rate of profit, except in the special case of a Stationary State, with only one capital good. When a market socialist setting is considered, the rate of return will again be different, but here also two distinct concepts can be defined. The conclusion must be that it is hopeless to try to interpret the rate of profit as an efficient price in an intertemporal allocation problem. [ABSTRACT FROM AUTHOR]