Legacy
As is well known, Keynes pointed out in his General Theory that “Professor Fisher uses his ‘rate of return over cost’ in the same sense and for precisely the same purpose as I employ ‘the marginal efficiency of capital’” (Keynes 1936 [1971]: 141), “nor is there any material difference...
between my schedule of the marginal efficiency of capital or investment demand-schedule and the demand curve for capital contemplated by some of the classical writers” (ibid.: 178). As has been demonstrated, however, by Alchian (1955) and Garegnani (1978, 1979) from different perspectives, it is impossible to construct an investment demand curve exclusively by varying the rate of interest, holding all other prices constant.Fisher’s theory of investment, interest and capital has been elaborated in modern economic theory by Hirshleifer (1970) who has shown that the two alternative criteria developed by Fisher for an investment decision, the net-present-value rule and the internal-rate-of return rule, only lead to identical results in the two-period case or the perpetuity case. The two criteria may lead to different results in the multiperiod case where the net-present-value should be applied, because of the reinvestment problem and the possibility of multiple internal rates of return (see also Hagemann 1987).
Solow (1963) has taken up Fisher’s concept of the rate of return on investment and modified it as the “social rate of return” which is defined solely in terms of changes in consumption streams: the perpetual gain in consumption is compared to the sacrifices in consumption during the transition period. Solow’s aim was to formulate “a theory of interest rates, not a theory of capital” and to present the social rate of return as “the central concept in capital theory” (ibid.: 16) which was intended to form a surrogate for the marginal productivity of capital in a world with heterogeneous capital goods.
The parallels with Samuelson’s attempt to construct a surrogate production function to rescue vital results of the Clark-Ramsey parable in a world of heterogeneous capital goods are close at hand, and caused a major controversy between Pasinetti and Solow within the two Cambridge controversies on the theory of capital. The debate stimulated Dougherty (1980) to come to the defence of Fisher, to elaborate the Fisherian analysis and to provide a comprehensive account of interest and profit in a modern setting, giving credit to Fisher even for phenomena such as capital reversing and reswitching.The continuous relevance of Fisher’s analytical contributions for modern debates in economics is indicated by Tobin (1985), the publication of a 14-volume edition of The Works of Irving Fisher (Fisher 1997), edited by William J. Barber on behalf of the American Economic Association, or the more recent collections edited by Loef and Monissen (1999), Dimand and Geanakoplos (2005), Dimand (2007), and the special issue of the European Journal of the History of Economic Thought (20 (2), April 2013) on The Purchasing Power of Money.
Harald Hagemann
See also:
Capital theory (III); Macroeconomics (III); Monetarism (II); Money and banking (III); Milton Friedman (I); Knut Wicksell (I).