Prosperity and Depression.pdf

Chap. 8 Recent Discussions on the Trade Cycle 211This terminology does not appear to be in accord with everydaylanguage.Let us now consider how far Mr. KEYNES' liquidity-preferencetheory and the traditional demand-for-and-supply-of-loanable-fundstheory of interest are really at variance.Take, first, an increase ofthe demand for capital­How a rise in that is, in Mr. KEYNES' terminology, an upwardinvestment shift of the schedule of the marginal efficiency ofdemand capital, which is characteristic of the prosperityinfluences the phase of the business cycle. Suppose an increaseinterest rate. in consumers'expenditure (however broughtabout) or improved expectations or inventionsmake entrepreneurs eager to invest. They demand investiblefunds, and, according to the traditional·views, that will tend todrive up interest rates.In spite of the impression to the contrary, this is not in contradictionwith Mr. KEYNES' theory. We have only to translate whatwe have just said into his terminology. There are, in fact, twopossibilities. First, if an entrepreneur borrows additional moneyfrom the market in anticipation of a future increase in his expenditurefor investment purposes, 1 this represents an increase in hisliquidity preference, for his demand for money bas increasedwithout either a fall in interest rate or, as yet, a rise in the volumeof transactions. But, secondly, the entrepreneur may borrowadditional funds no quicker than he spends additional funds on theincreased investment. In this case, as indeed in the previouscase also, there will be a rise in the volume ofbusiness transactions,and this will lead, sooner or later, to an increased demand formoney to finance the larger turnover. This will involve a rise ininterest rates, according to Mr. I