140 THE GENERAL THEORY OF EMPLOYMENT BK. IV

use of it rather than go without any of it. There may bemachinery which the trade would have refused to dispense withif the rate of interest had been 20 per cent, per annum. If therate had been 10 per cent., more would have been used; if ithad been 6 per cent., still more; if 4 per cent, still more; andfinally, the rate being 3 per cent., they use more still. When theyhave this amount, the marginal utility of the machinery, i.e. theutility of that machinery which it is only just worth their whileto employ, is measured by 3 per cent.”

It is evident from the above that Marshall was wellaware that we are involved in a circular argument if wetry to determine along these lines what the rate ofinterest actually is.1 In this passage he appears toaccept the view set forth above, that the rate of interestdetermines the point to which new investment will bepushed, given the schedule of the marginal efficiencyof capital. If the rate of interest is 3 per cent., thismeans that no one will pay £100 for a machine unlesshe hopes thereby to add £3 to his annual net outputafter allowing for costs and depreciation. But weshall see in Chapter 14 that in other passages Marshallwas less cautious—though still drawing back when hisargument was leading him on to dubious ground.

Although he does not call it the “marginal efficiencyof capital”, Professor Irving Fisher has given in hisTheory of Interest ( 1930) a definition of what he calls“the rate of return over cost” which is identical withmy definition. “The rate of return over cost”, hewrites,2 “ is that rate which, employed in computingthe present worth of all the costs and the present worthof all the returns, will make these two equal.” Pro-fessor Fisher explains that the extent of investment inany direction will depend on a comparison between therate of return over cost and the rate of interest. Toinduce new investment “the rate of return over cost

1 But was he not wrong in supposing that the marginal productivitytheory of wages is equally circular ?

2 Op. cit. p. 168