Solow's attempt to revive the concept of ‘social rate of return’ and Pasinetti's critique

Abstract

The paper deals with Robert Solow's attempt to revive the concept of the ‘social rate of return’ and Luigi Pasinetti's critique of it. By means of this concept Solow thought to be able to circumnavigate the capital theoretical attack on the marginalist theory by claiming that the rate of interest is an accurate measure of, and can be seen as being determined by, the ‘social rate of return’. His analysis focused on a switch‐point between two techniques, in which, alas, the rate of interest is already fixed. Pasinetti objected that, by construction, Solow established the opposite of what he thought he had done. Since in a switch‐point also the prices of capital goods are known, the ‘quantity of capital’ employed is fixed: it depends on the rate of interest and therefore cannot be taken as given independently of it and the corresponding system of prices.