Prosperity and Depression.pdf

Nature and Causes of the CyclePart IIsoon have to speak of shifts of these curves in time--that is,betvleen successive points or short periods of time.Let us now enquire about the factors which determine theshape of these curves.The demand curve for investible funds bearsThe demand a close relationship to the curve of the marginalcurve for profit rate. By profit rate· we understand the rateinvestible of profit in. terms of money which an entrepreneurfunds. expects to derive from a concrete piece of investment.We may conceive the varibusinvestmentopportunities existing at a given moment oftime as being arrangedin order of decreasing profitability, and construct a schedule orcurve sloping down from left to right. If, now, we suppose thatall the risks of investment are borne by the suppliers of investiblefunds-and it is convenient to allocate all risks to one or the otherside of the· market-this schedule is identical with the demandschedule for investible funds and the lowest or marginal profit ratefor a given amount of investment is identical with ... the demandinterestrate for that amount of investible funds. 1The reader will have noticed that this description of the capitalmarket is substantially the same as Professor OHLIN'S and ProfessorROBERTSON'S market for credit or loans which was discussed inChapter 8, §2, above (pages 177etseq.). Theonly difference betweenProfessor OHLIN'S scheme (as represented by the graph on page 185)and ours is that we choose to take on the demand side only demandfor purposes of real investment. Demand for cr~dit (loans) forotherpurposes-e.g.,for thepurposeofstrengthening cash resources1 It will be seen that we do.notspeak of the profit rate obtaining in acountry. Naturally, for different investment plans different profit ratesare expected. We speak of the marginal profit rate aJ;ld we do not saythat there is a difference (or equality) between the interest rate and theprofit rate, but we say that the interest rate is equal to the ma,ginalprofit rate.An alternative way of dealing with the risk factor would be to definethe profit rate so as to include the risk. There are further complicationsabout the risk. The same risk may be counted twice over, by theborrower and lender, or it may not be counted at all. These complicationswe ignore for the time being. Compare, however, footnote I onpage 328 below.