Prosperity and Depression.pdf

Chap~ 3 The Over-investment Theories 4 1If a certain plan of investment, which from the technologicalpoint ofview seems to be productive and useful, cannot be realisedfor the sole reason that the expected yield would not justify theinvestment at the existing rate of interest-i.e., because the profitrate is lower than the prevailing rate of interest-that by nomeans pr9ves the imperfection of our present pricing system,but simply shows that there exist other opportunities forimproving the productive process which hold out a higher rateof return and should rationally, therefore, be undertaken first.Ifthe rate ofinterest falls because ofincreased savings, the demandfor capital can be satisfied to a greater extent and the equilibriumpoint moves down along the curve of demand for capital.Investments which were extra-marginal under the higher rate nowbecome permissible. Factors of production are shifted from thelower to the higher stages of production. The production processis lengthened and eventually the 0l.!tput of consumers' goods perunit of input (in terms of" original factors" of production) israised. lFrom the point of view of the entrepreneur who" Artificial" wants to embark on new schemes ofinvestment, thelowering of situation is not changed if the lowering of the ratethe interest ofinterest is due to capital's having been made morerate. plentiful, not by an increase in voluntary saving, butby an expansion of bank credit. Such an artificialcheapening of capital will also lead to a lengthening of the process1 I t has been questioned whether this process of saving and investmentruns smoothly. A great number of writers believe that the processof saving is likely to· produce serious disturbances (a) because savingproduces depression in the consumption industries which then spreads tothe higher stages, (b) because money which is saved frequently disappearson the way and is not invested (deflation), (c) because increasedinvestments eventually bring about an increase in the production ofconsumers' goods, which cannot be sold at the prevailing prices unlessthe flow of money is increased. But it is not with these alleged frictionsand disturbances that we are here concerned. They will have to bediscussed at a later stage of our enquiry. The theorists now under reviewbelieve that ordinarily the process of saving and Investment runssmoothly. According to them, trouble,s arise only if voluntary savingis supplemented from" inflationary sources ", that is, by new bankcredit or by exp~nditurefrom money hoards (which is equivalent to by arise in the velocity of circulation of money).