THE VALUATION OF NET INVESTMENT

Abstract

1. In 1941, just at a time when the nation's capital must have been depreciating at an unprecedented rate, there was carried on in the pages of Economica a fascinating debate between Professors Pigou and Hayek on the theoretical problems involved in the notion of maintaining capital intact.' In the following year Professor Hicks joined in,2 with the declared purpose of provoking the two contestants to another round, and because in his view the question of maintaining capital intact just could not be left where they had left it the summer before. The challenge was not taken up, and Professor Hicks's short article remains, as far as I know, the last word on the subject.3 It is now perhaps time for us to ask in our turn whether the question of maintaining capital intact ought to be left where he left it over twelve years ago. This article suggests that the answer is 'no', and attempts to grapple once again with this very difficult problem. In this task I am conscious of a handicap, in that I am unfortunately incapable of understanding what is the positive contribution of one of the contestants, namely Professor Hayek, though I think I have grasped some of his critical arguments. I shall have therefore to substitute for his analysis an analysis of my own, though one which I think has some features in common with his. In so doing I may be doing him a serious injustice; but my sense of guilt is tempered by a comfortable feeling that I am sinning in company. Professor Pigou already stands accused of having misunderstood Professor Hayek's position in one not unimportant respect ;4 and I am not altogether sure that Professor Hicks is correct in interpreting him as wishing to define net income in terms of a 'constant income stream '. Professor Hayek is clearly a difficult writer. I propose to begin at the wrong end and to discuss Professor Hicks's solution of the problem first, because this will bring us most quickly to