CH. II THE MARGINAL EFFICIENCY OF CAPITAL 139

legitimate except in a static theory, for which all the Q’sare equal. The ordinary theory of distribution, whereit is assumed that capital is getting now its marginalproductivity (in some sense or other), is only valid in astationary state. The aggregate current return tocapital has no direct relationship to its marginalefficiency; whilst its current return at the margin ofproduction (i.e. the return to capital which enters intothe supply price of output) is its marginal user cost,which also has no close connection with its marginalefficiency.

There is, as I have said above, a remarkable lack ofany clear account of the matter. At the same time Ibelieve that the definition which I have given above isfairly close to what Marshall intended to mean by theterm. The phrase which Marshall himself uses is“marginal net efficiency” of a factor of production;or, alternatively, the “marginal utility of capital”.The following is a summary of the most relevant pass-age which I can find in his Principles (6th ed. pp.519-520). I have run together some non-consecutivesentences to convey the gist of what he says:

“In a certain factory an extra £100 worth of machinery canbe applied so as not to involve any other extra expense, and so asto add annually £3 worth to the net output of the factory afterallowing for its own wear and tear. If the investors of capitalpush it into every occupation in which it seems likely to gain ahigh reward; and if, after this has been done and equilibriumhas been found, it still pays and only just pays to employ thismachinery, we can infer from this fact that the yearly rate ofinterest is 3 per cent. But illustrations of this kind merely in-dicate part of the action of the great causes which govern value.They cannot be made into a theory of interest, any more thaninto a theory of wages, without reasoning in a circle. . . . Sup-pose that the rate of interest is 3 per cent, per annum on perfectlygood security; and that the hat-making trade absorbs a capitalof one million pounds. This implies that the hat-making tradecan turn the whole million pounds’ worth of capital to so goodaccount that they would pay 3 per cent, per annum net for the