The Unique "Rent Defined" Capital Input Assumption in Investment Theory

Jorgenson [14; 15; 16; 17; 18; 19] and associates [10; 11; 12; 22], along with others [1; 2; 3; 6; 8; 9] have discussed a neoclassical investment theory in which there is a unique input of capital services. Investment is a function of the difference between the capital stock required to provide these services (usually considered proportional to the services to be provided) and the actual capital stock. The idea that there is an optimal capital input is derived from neoclassical factor demand theory in which profit maximizing firms constrained by a regular or strictly quasiconcave production function employ a single unique capital input for a particular set of factor prices and output. While the neoclassical investment theory is subject to many objections [1; 27]), this paper will concentrate on a very simple one that has not been discussed. It will be argued that there is not a single desired capital stock or input of capital services for the rent-based definition of capital services neoclassical writers use. This simple observation makes irrelevant both the research on the lag structure for the adjustment of the rent measured capital stock to its desired value and the research on the costs of adjusting the rent measured aggregate capital stock to the desired value.