ECONOMIC GROWTH CENTER YALE UNIVERSITY Box 1987, Yale Station New Haven, Connecticut CENTER DISCUSSION PAPER NO. 10 FINITE-HORIZON PLANNING AND OPTIMIZING THE RATE OF SAVINGS A. Rahman September 16, 1966 Note: Center Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Discussion Papers should be cleared with the author to Protect the tentative character of these papers.FINITE-HORIZON PLANNING AND OPTIMIZING THE RATE OF SAVINGS This paper follows up the recent debate between S. Chakravarty and A. Maneschi [2, 3, 4] in the International Economic Review on "Optimal Savings with Finite Plan- ning Horizon" with the following specific purposes: (1) To argue that, in spite of the arbitrariness involved in choosing the terminal capital stock, finite-hor- izon planning makes more sense than planning with an infinite horizon. (2) To enquire into the nature of the time-path of optimum rate of savings in the model in question, particularly as regards the bearing of the elasticity of marginal util~ ity from consumption, 'v', on the question whether optimum rate of saving falls, re~ mains constant, or rises over time. While doing so, the non-disinvestment constraint suggested by Maneschi in [3] is not interpreted, as Maneschi rather artificially does, 25 imposing a lover bound on the choice of the terminal capital stock (as iden- tified by the parameter 'g'); instead, the more usual and straight forward inter- pretation of the constraint as one delimiting the set of feasible programmes given any choice of 'g' is adopted. (3) To initiate, following the results obtained from (2) above, a discussion on social choice of the parameter! , without a meaningful rationalization of which optimum growth analysis may very well be regarded as a game in abstract theory only.1. The Case for Finite-Horizon Planning Neither Chakravarty nor anyone else has ever seriously presented the case for finite-horizon planning, and the general presumption in the theoretical 1it- erature has, it appears, remained against it, Now that Maneschi in particular launches @ determined attack on it, it has become necessary to present the case for finite-horizon planning at its strongest. Notwithstanding the presumption that a nation lives for ever} planning with a finite-horizon makes more sense than infinite-horizon planning because neither the production function nor the social welfare function can reasonably be antici- pated for all times to come.? Estimation of the production function within a reasonable level of significance is possible only for some finite plan-period. However conprehensive (e.g., with technical change built in) the specification of the production function may be, it is a naturel presumption to suggest that the margin of error from any estimation of the function would approach infinity as the time-argument approaches infinity. To put it differently, no estimation procedure exists that will give us the production function at "infinity" with any finite level of significance, Hence, any specification of the production function beyond some finite horizon would inevitably have to be arbitrary, and defensible only for ab- stract theoretical investigations but not for seeking guidance for planning actually to be put in operation, Even assuming that the production function could have been estimated with reasonable accuracy for all times to come, or -- to think of a more credible "if! + even if one could agree to some particular specification as a working "null- hypothesis", social planners are neither in a position to know, nor to dictate, the other major argument in the issue, i.e., the utility function of society for all