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from Book IV - The Inducement to Invest
Published online by Cambridge University Press: 05 November 2012
We have shown in chapter 11 that, whilst there are forces causing the rate of investment to rise or fall so as to keep the marginal efficiency of capital equal to the rate of interest, yet the marginal efficiency of capital is, in itself, a different thing from the ruling rate of interest. The schedule of the marginal efficiency of capital may be said to govern the terms on which loanable funds are demanded for the purpose of new investment; whilst the rate of interest governs the terms on which funds are being currently supplied. To complete our theory, therefore, we need to know what determines the rate of interest.
In chapter 14 and its Appendix we shall consider the answers to this question which have been given hitherto. Broadly speaking, we shall find that they make the rate of interest to depend on the interaction of the schedule of the marginal efficiency of capital with the psychological propensity to save. But the notion that the rate of interest is the balancing factor which brings the demand for saving in the shape of new investment forthcoming at a given rate of interest into equality with the supply of saving which results at that rate of interest from the community's psychological propensity to save, breaks down as soon as we perceive that it is impossible to deduce the rate of interest merely from a knowledge of these two factors.
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