ABSTRACT

Our conclusions are somewhat negative. First, we can only claim that the tendency for the rate of interest to equal the marginal efficiency of capital will obtain under very restrictive assumptions. In point of fact, many variables will influence the businessman's attitude towards investment. While the present writer would not go so far as to assert that 'producer expenditures for capital equipment are insensitive to changes in the rate of interest'/ he would agree that on many occasions the influence of the interest factor is definitely swamped by other more obvious considerations. Moreover, in a capitalist (or quasi-capitalist) economy, investment opportunities rarely appear, unless surrounded by a penumbra of doubt and uncertainty. The expected rate of profit must take these risks and uncertainties into account and must exceed the interest rate by an amount sufficient to compensate for them. To the extent that the non-interest components of the discount variable outweigh the interest component, fluctuations in the interest rate will be of little importance.2 Furthermore, even though we may assume that the entrepreneur aims at an ex ante equality between the rate of interest and the expected rate of profit, in a dynamic situation there need never be an ex post equality. Second, it will often happen that no two entrepreneurs will have access to financial resources on exactly the same terms. Not only is there a whole range of interest rates, but also a whole range of conditions which may be attached to a loan. In these circumstances, we found that for each investment project there tends to be one interest rate which is particularly relevant and, to the extent that the entrepreneur acts rationally, he will try to secure an equation at the margin between this rate and his expected rate of profit. So that the neat formula with which we started has now become greatly obscured and we are left with no more than a murky suspicion of what the final result 1 L. R. Klein, op. cit., p. 64. 2 Cf. Klein, ibid.