CH. II THE MARGINAL EFFICIENCY OF CAPITAL 143

stimulating effect is to that extent offset), but to itsraising the marginal efficiency of a given stock ofcapital. If the rate of interest were to rise pari passuwith the marginal efficiency of capital, there would beno stimulating effect from the expectation of risingprices. For the stimulus to output depends on themarginal efficiency of a given stock of capital risingrelatively to the rate of interest. Indeed ProfessorFisher’s theory could be best re-written in terms ofa “real rate of interest” defined as being the rate ofinterest which would have to rule, consequently on achange in the state of expectation as to the futurevalue of money, in order that this change should haveno effect on current output.1

It is worth noting that an expectation of a future fallin the rate of interest will have the effect of loweringthe schedule of the marginal efficiency of capital; sinceit means that the output from equipment producedto-day will have to compete during part of its life withthe output from equipment which is content with alower return. This expectation will have no greatdepressing effect, since the expectations, which are heldconcerning the complex of rates of interest for variousterms which will rule in the future, will be partiallyreflected in the complex of rates of interest which ruleto-day. Nevertheless there may be some depressingeffect, since the output from equipment producedto-day, which will emerge towards the end of the lifeof this equipment, may have to compete with the out-put of much younger equipment which is content with alower return because of the lower rate of interest whichrules for periods subsequent to the end of the life ofequipment produced to-day.

It is important to understand the dependence ofthe marginal efficiency of a given stock of capital onchanges in expectation, because it is chiefly this depend-

1 Cf. Mr. Robertson’s article on “Industrial Fluctuations and the NaturalRate of Interest”, Economic Journal, December 1934.