THE NON-COMPARABILITY OF CRITERIA FOR THE CHOICE OF OPTIMAL TECHNIQUE.

There have been many discussions in the economics literature concerning the appropriate criterion for firms to use in choosing the optimal technique for investment. The two criteria which have figured most prominently in these discussions are the maximization of the internal rate of return on the amount invested, and the maximization of the present value of the investment. Wicksell's name has been associated with the former criterion and Fisher's with the latter. The technical aspects of these two criteria, the conditions in which they apparently give the same or different results, have been thoroughly explored. What appears to have been overlooked is the fundamental non-comparability of these criteria, since the rationale for each is based on a different model. The decision-makers in each of these models have different roles. Insofar as an economic model is supposed to reflect important features of the reality it is trying to represent, then each of these criteria refers to a different reality. The failure to appreciate this difference is due, perhaps to the absence ha much of current economic theory of specifications, even in very stylized forms, of the institutional settings for the analyses. This failure has led to confusion and disputes concerning such things as the effects of changes in corporate profits tax rates on optimal techniques, and the effects of changes in real-wage rates on these techniques. This paper does not represent an attempt to develop a realistic theory of how firms choose techniques of production in a capitalist economy. It examines aspects of the well-known literature on the choice of techniques, and indicates that the failure to allow for the social, as well as the technical, relations of production, has resulted in some meaningless comparisons. A necessary element in a theoretical model, if it is to be used to gain insights into the operation of actual economies, is the specification of the social relations of production which... [ABSTRACT FROM AUTHOR]

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