CH. II THE MARGINAL EFFICIENCY OF CAPITAL 141

must exceed the rate of interest ”.1 “ This new magni-tude (or factor) in our study plays the central role onthe investment opportunity side of interest theory.”2Thus Professor Fisher uses his “rate of return overcost” in the same sense and for precisely the same pur-pose as I employ “the marginal efficiency of capital”.

III

The most important confusion concerning themeaning and significance of the marginal efficiency ofcapital has ensued on the failure to see that it dependson the prospective yield of capital, and not merely on itscurrent yield. This can be best illustrated by pointingout the efFect on the marginal efficiency of capital of anexpectation of changes in the prospective cost of pro-duction, whether these changes are expected to comefrom changes in labour cost, i.e. in the wage-unit, orfrom inventions and new technique. The output fromequipment produced to-day will have to compete, inthe course of its life, with the output from equipmentproduced subsequently, perhaps at a lower labour cost,perhaps by an improved technique, which is contentwith a lower price for its output and will be increasedin quantity until the price of its output has fallen tothe lower figure with which it is content. Moreover,the entrepreneur’s profit (in terms of money) fromequipment, old or new, will be reduced, if all outputcomes to be produced more cheaply. In so far as suchdevelopments are foreseen as probable, or even aspossible, the marginal efficiency of capital producedto-day is appropriately diminished.

This is the factor through which the expectation ofchanges in the value of money influences the volume ofcurrent output. The expectation of a fall in the valueof money stimulates investment, and hence employ-ment generally, because it raises the schedule of the

1 Op. cit. p. 159. 2 Op. cit. p. 155.