Notes on capital theory: a comment on the economic basis of interest rates

Document description

In a recent article in this Journal, Professor Wilkie gave an account of the determination of the rate of interest in a Fisher–Hirshleifer model. In his analysis of a production economy, he appeared to take as intuitively reasonable, not to say axiomatic, the existence of an inverse monotonic relation between the value of investment and the rate of interest. ‘A reduction in the auctioneer’s rate of interest will stimulate capital investment.’ Now one of the conclusions to emerge from the capital theory debates in economics of the 1950s and 1960s is that the value of investment is not in general an inversely monotonic function of the rate of interest. The purpose of these notes is to alert actuaries to the existence of this conclusion and discuss some of its implications.