CH. II THE MARGINAL EFFICIENCY OF CAPITAL 137

point on the investment demand-schedule where themarginal efficiency of capital in general is equal to themarket rate of interest.1

The same thing can also be expressed as follows.If Qr is the prospective yield from an asset at time r,and dr is the present value of £ 1 deferred r years at thecurrent rate of interest, ΣQrdr is the demand price of theinvestment; and investment will be carried to the pointwhere ΣQrdr becomes equal to the supply price of theinvestment as defined above. If, on the other hand,ΣQrdr falls short of the supply price, there will be nocurrent investment in the asset in question.

It follows that the inducement to invest dependspartly on the investment demand-schedule and partlyon the rate of interest. Only at the conclusion ofBook IV. will it be possible to take a comprehensiveview of the factors determining the rate of investmentin their actual complexity. I would, however, ask thereader to note at once that neither the knowledge of anasset’s prospective yield nor the knowledge of themarginal efficiency of the asset enables us to deduceeither the rate of interest or the present value of theasset. We must ascertain the rate of interest fromsome other source, and only then can we value the assetby “capitalising” its prospective yield.

II

How is the above definition of the marginal efficiencyof capital related to common usage? The MarginalProductivity or Yield or Efficiency or Utility of Capital arefamiliar terms which we have all frequently used. Butit is not easy by searching the literature of economics to

1 For the sake of simplicity of statement I have slurred the point that weare dealing with complexes of rates of interest and discount corresponding tothe different lengths of time which will elapse before the various prospectivereturns from the asset are realised. But it is not difficult to re-state theargument so as to cover this point.