‘Supply’

Abstract

Capital has a ‘cost’ to management because it is needed for growth, and because management has only limited resources in profits for obtaining it. In this chapter, therefore, we consider more carefully the relationship between maximum growth rate of capacity — as limited in time by the supply of finance — and the internal rate of return. On the severest type of neo-classical assumptions, no such relationship exists, or, more precisely, exists only in the sense that where the internal rate of return exceeds some exogenously given value, the supply of capital is infinite, but otherwise is zero. We have repeatedly indicated that, along with many other reasonable persons, we find this particular neo-classical position hopelessly unrealistic. We believe that in varying degree all economic institutions face partly inelastic capital-supply curves, a fact of life from Adam and Eve to the present day. The expected return to the investor required to call forth a given supply to a given institution within a given period is in general some rising function of the amount required, and since we are mainly studying the growth rate of the institution, if the elasticity increases with the length of the period, we are little concerned.

‘Durand … would seem to be concerned with the cost of capital to management, whatever that might be’ — Franco Modigliani⁽¹⁾